Subprime lenders in the US are struggling to survive, and their demise has a significant impact on the world’s financial markets. In London, the FTSE has suffered a series of significant falls, suffering its biggest single-day drop in seven years on Friday August 10, wiping out most of this year’s gains. As a result, there is now a real fear that the housing market crash in the US could be repeated here in the UK.
Panic selling and lack of confidence in stock markets date back to the collapse of the US subprime market. The rise in delinquencies and defaults among US subprime borrowers. The US have led to a reassessment of the value of such holdings by investment bankers who bought stocks largely for the risk. They are seeing the potential paper value of their investments virtually disappear overnight as US house prices collapse, triggering panics and consolidation attempts in almost equal measure.
Subprime mortgages are typically awarded to those who cannot prove income or have poor credit, or perhaps even both. In exchange for receiving higher interest rates from borrowers, lenders are willing to take the risk of this type of bad credit loan. When home prices are rising, the risk is minimal because if the borrower defaults, the lender takes a charge on the property and can therefore force the property to be sold, recovering the initial investment, interest due, and recovery charges.
However, in a market where home prices are falling, such as in the US, the value of the property can become less than the outstanding liability, leaving the lender with a significant loss. Because US subprime lenders have the least ability to absorb defaults, since most of their borrowers get 100% mortgages, they are more likely to collapse if it all goes wrong.
The largest subprime lender in the US New Century issued $33.9 billion in subprime loans last year alone. He is now being investigated by federal investigators to establish whether there were any wrongdoing in his business practices. It is the bad debts recorded by lenders like New Century that are causing extreme jitters in financial markets around the world, leaving analysts wondering if the situation will repeat itself in the UK. That has led many UK lenders to assess their riskiest loans to determine their exposure and ensure they have an adequate amount of capital to cover potential losses. Fortunately, the UK market is believed to be less exposed to subprime loans than the US market. Also, as long as UK house prices continue to rise or remain stable, lenders who have issued such bad credit loans [http://www.blackandwhite.co.uk] owners will not be affected. Any threat will materialize if UK house values fall, as the amount of equity in properties will also fall, and that could lead to the kind of financial chaos seen in the US.