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FSA warns lenders again of sub-prime crash

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

Speaking at the Building Societies Association annual conference in Bournemouth last week, FSA managing director of retail markets Clive Briault said 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 and early 1990s and the fallout that we are currently witnessing in the US sub-prime mortgage market are indications of what could happen.”

Briault said he recognised that the UK sub-prime market works differently from the US but the industry cannot ignore the parallels with its own market.

He said 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.

But he warned that many borrowers will be unprepared and ill-equipped should the market suffer a downturn, especially considering sub-prime arrears are 20 times the rate of arrears on prime mortgages.

He said: “The sub-prime arrears also raise 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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