Although just three years ago irresponsible subprime lending caused huge losses and is even blamed to be a driver for the financial crisis mortgages are now available to people who did not qualify by mainstream lenders.
This week’s article “The return of sub-prime: mortgage firms target ‘overlooked’ market” in the guardian sparked my interest as it reveals an interesting development in the British property market that I would like to share with you.
Despite an increasing GDP the UK is facing tremendously bad conditions in its property market. As reported two days ago in the telegraph the housing market has not grown since May and has even experienced “the largest quarterly decline since April 2009”. Martin Gahbauer, Nationwide’s chief economist, explains in an interview with BBC News some main reasons for this situation. According to him many sellers who did not want to offer their property during the recession just returned to the market but at the same time buyers still feel uncertain about spending and in combination with difficulties getting mortgages a shift in the demand supply curve is caused weakening the British property market.
As big banks are unwilling to risk doing business with many people as a consequence of the financial crisis the guardian reports that Precise Mortgages and other non-bank lenders, like the Kensington Mortgage Company, see their opportunity to make profit by giving housing loans to those turned away due to a bad credit history. The Financial Service Authority (FSA) just gave their approval for those so called subprime mortgages this week and Precise Mortgage will be starting to grant their loans this November.
This can be very profitable for those companies as high interest rates are going to be charged. Nevertheless, Precise Mortgage is also claiming to improve the housing market conditions with their business by pushing more liquidity into the market. Critics, on the contrary, worry as there will probably be a high demand in those new mortgages they could inflate house prices and just create another bubble.
By giving loans also to people with poor credit records the demand for property along with market conditions could be improved. But Companies like Precise Mortgage should be cautious whom to lend on the one hand, to prevent inflation and on the other hand, there has been a reason why people were not rated creditworthy by the big banks. Having to pay high interest rates borrowers could fail to pay off their mortgages and with housing prices falling the UK could run towards another crisis rather than boosting its economy.
What do you think? Will subprime lending spur the improvement of current market conditions in the UK?