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FSA warns again of US-style sub-prime downturn

The FSA has reinforced its warning that the UK sub-prime market could go the same was as the US market and that lender vulnerability is beginning to show through.

Speaking at the BSA Annual Conference in Bournemouth today, FSA managing director of retail markets Clive Briault warned that all lenders, including building societies, should ensure they are ready for a possible market downturn.

He said: “”The last UK housing boom and bust at the end of the 1980s/early 1990s and the fall-out that we are currently witnessing in the US sub-prime mortgage market are indications of what could happen.”

Whilst Briault said he recognised the UK sub-prime market worked differently to the US, he said the industry cannot completely ignore the parallels.

He went on to say the recent favourable economic conditions in the UK have enabled and encouraged many consumers to take on additional debt, with much of it secured against property.

However, he warns many consumers will be “unprepared” and “ill-equipped” should the market suffer a downturn, especially considering sub-prime mortgage arrears are currently 20 times the rate of arrears on prime mortgages.

He said: “The sub-prime arrears also raises some important questions about the extent to which lenders have taken affordability into account when undertaking this lending.

“Our rules require both lenders and advisers to make an assessment of a borrower’s ability to afford the mortgage, so high default rates should be prompting lenders to review their affordability models and to understand the root cause of high arrears.”

Briault urged all mortgage lenders to undertake regular stress testing of credit risks against shifts in external conditions, including movements in house prices, interest rates and unemployment.

“Where lenders have significant exposures against sub-prime, buy-to-let and other specialist sectors of the market they should take account of potential changes in economic conditions specific to these sectors.”

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