The sub-prime mortgage market is peering into a bottomless pit.
The era of cheap money, which helped fuel the property boom and led many mainstream lenders to dip their toes in the waters of non-conformist lending, may be ending.
Most lenders have been forced to rein back their sub-prime lending as they can no longer afford to shoulder the risks. In early September, the rate at which banks borrow – three-month Libor – hit a nine-year high of 6.8 per cent.
Since early August, Alliance & Leicester has increased fixed rates on its sub-prime range by up to 1.16 per cent and has withdrawn its sub-prime variable rates.
Advantage, owned by investment bank Morgan Stanley, has withdrawn all its sub-prime rates.
Julia Harris, mortgage expert at comparison website Moneyfacts.co.uk, says the riskier the prospect, the higher rates have tended to be raised. Self-cert and the heaviest adverse forms of sub-prime have become most expensive.
Amber Homeloans has increased self-cert fixed rates by an average of 0.1 per cent and self-cert variable rates by 0.5 per cent.
Birmingham Midshires has lifted rates on its heaviest sub-prime loans by as much as 0.7 per cent, with sub-prime self-cert rates increased by up to 0.5 per cent.
Edeus has increased rates across the board while First National has withdrawn its 95 per cent loan to value sub-prime and first-time buyers’ range.
GMAC has reduced its exposure to the most risky sub-prime borrowers by withdrawing its unlimited and low-fix ranges and has cut its maximum LTV from 95 per cent to 90 per cent.
Harris is concerned that the credit crunch could increase cherrypicking.
She says: “We are seeing margins between prime and sub-prime residential mortgages starting to widen. Unfortunately, this will have more of an impact on those who are already struggling.”
London & Country mortgage adviser David Hollingworth believes this is only the beginning of a sustained period of mortgages becoming more expensive. He says: “Just because a lender has raised its rates does not mean it will not do so again.”
High Street Home Loans increased its rates by 2 per cent over two weeks in August and Hollingworth points out that Platform has repriced its range twice.
He says: “Lehman Brothers, which owns the sub-prime mortgage book of Northern Rock and Alliance & Leicester, has already warned it may have to raise rates again.”
Further restrictions on lending criteria are a certainty. Salt, the specialist lender of the Derbyshire Building Society, is no longer accepting applications with arrears in the last three months. Some of the lenders with a smaller sub-prime book may follow Victoria Mortgages and even quit sub-prime altogether.
Hollingworth warns that it will be the heavy-adverse criteria that will tighten the most. He says: “Where possible, we will always try and make sure our clients get a mainstream rate, although that is not always possible as some people have no choice but to take out a higher-rate mortgage.”
Edeus has repriced its sub-prime range and managing director Alan Cleary says there is no end in sight. He says: “Capital markets are still in turmoil. If this continues to December, we could see a full-blown credit crunch which will affect all lending, not just sub-prime but also mainstream, because liquidity will be hit hard.”
Cleary is dismissive of claims that lenders which fund their borrowing through securitisation will be hit harder than balance-sheet lenders. He says: “Lenders still have to borrow on the money markets.”
Alliance & Leicester, whose sub-prime book is securitised by Lehman Brothers, claims in its latest results that its policy of funding mainstream mortgages from customer deposits will not affect its earnings.
The Association of Mortgage Intermediaries believes that the US sub-prime problems will have an impact on the UK market but continued demand means the industry will continue to grow.
Director general Chris Cummings says the issues of supply and demand will prevent borrowing from dropping too low.
He says: “None of the US conditions in sub-prime exists in the UK market so we are not going to see the same kind of sub-prime credit crunch.”
However, he points out that with the increasing cost of borrowing, lenders may find their access to cheaper money even more restricted.
“The investors who finance the sub-prime lenders are becoming increasingly risk-averse and so expect a higher return for investing in sub-prime. However, there will always be a market for credit-impaired borrowers. The key is for the risk to be priced appropriately and the credit criteria to be strict enough to protect the customers,” says Cummings.
Cleary says: “If things continue, then all borrowers will be affected. I am not saying we are going to have a recession but borrowers will find mortgages, even mainstream ones, much more expensive and that is not good for the economy as a whole.”