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FSA warns sub-prime market to beware US threat

The Financial Services Authority has warned the sub-prime sector it could go the same way as the troubled US market if it fails to tighten-up lending criteria.

FSA managing director of retail markets Clive Briault told delegates at today’s Council of Mortgage Lenders annual lunch that while the two markets are different, there are worrying signs that the woes that have led to countless lenders going bust in the States could spread across the Atlantic if the warning signs are left unchecked.

He also says borrowers are taking on too much debt secured against their property, and that continued house price inflation may be hiding the sector’s difficulties.

The regulator is currently investigating the sub-prime sector amid fears consumers are borrowing too much and poor advice is being given.

Briault says: “I accept that the UK sub-prime market is not the same as in the US. Loan to value ratios have been less aggressive in the UK, and in the UK we have less of an issue with the low start adjustable rate mortgages with interest roll-up that seem to be causing particular problems in the US.

“However, we cannot completely ignore the parallels with our own market. For example, lenders are in some cases taking on substantial risks through a combination of high loan to value ratios and high income ratios, in part because borrowers are using additional borrowing against property as a means not only of debt consolidation but also of increasing their debt at regular intervals by taking as much advantage as possible of rising house prices.

“Continued house price appreciation may therefore be masking some severe difficulties in some sectors of the housing market.”

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