The Council of Mortgage Lenders has questioned whether the sub-prime mortgage market could survive a recession or market downturn.
In its first major published set of data on the sector, it also reveals that the market could be half the size initially thought.
The CML says it is concerned that some firms moving into adverse lending may be underestimating the risks involved, particularly as the market did not exist during the last recession so its strength has not been tested.
Research from Alliance & Leicester shows that 39 per cent of brokers think the adverse sector could collapse after a recession or economic shock. Another 27 per cent believe lenders would suffer problems.
The CML’s report comes as sub-prime lender Rooftop suffered a blow after ratings agency Fitch last week put a negative ratings watch on three tranches of its second securitisation, Farringdon 2.
CML head of research Bob Pannell says: “No one can be entirely confident how adverse credit lending would perform in a significant or protracted downturn because the sector barely existed during the early 1990s recession.
“There is always a danger that individual firms could be tempted into less familiar territory and miscalculate the risks being taken.”
A&L head of intermediary mortgages Mehrdad Yousefi says: “I do not believe the sub-prime market will crash. The challenge will continue to be that lenders have appropriate lending criteria, policy and underwriting processes in place.”
The CML suggests the market in 2005 represented no more than £16bn of borrowing compared with a £30bn estimate from Mortgages PLC although both organisations use different definitions.
Research found that almost half of sub-prime lending is low adverse, a third is medium and the rest is heavy. Around 80 per cent is distributed via intermediaries compared with less than 60 per cent of non-adverse business.