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Sub-prime shutters are coming down

Tanya Powley looks at the sub-prime crisis unravelling in the US, with more firms joining the fallout and asks how UK firms will be affected

As the US sub-prime mortgage crisis deepens, even more US firms on a daily basis are making dramatic cutbacks and closing parts of their business.

Last week, Lehman Brothers said it would be closing sub-prime mortgage unit BNC Mortgage, cutting 1,200 jobs across 23 US locations.

Accredited Home Lenders is also shedding 1,600 jobs from its retail arm and has stopped taking loan applications.

Further evidence of the worsening US situation saw the second-biggest US banking group, Bank of America, pour $2bn of capital into US mortgage firm Countrywide which has been beset by a funding crisis.

John Charcol senior technical manager Ray Boulger says there is no doubt that there will be a string of further announce-ments over the next few months from even more US mortgage firms and even some UK firms.

Savills Private Finance director Melanie Bien says the problem is still unravelling in the US and it will be a while before things calm down.

She says: “We still do not know the extent of the exposure. It is a very tangled web at the moment.”

Lehman Brothers said: “Market conditions have necessitated a substantial reduction in resources and capacity in sub-prime.”

However, it says it will be keeping second-mortgage business Aurora which focuses on Alt-A mortgages which are closer to meeting prime mortgage standards.

Amid speculation over the fate of Lehman Broth-ers’ UK operations SPML, Preferred and London Mortgage Company, a spokeswoman says it is committed to its European business despite the tough market in the US.

She says: “At the moment, we are committed to our mortgage business in Europe. We are planning to install new technology this year for our UK operations and we will be opening new facilities in the Netherlands. It is a time of commitment from us.”

The spokeswoman says the US and UK are two separate businesses for the group but it would be monitoring the market and its products.

Brentchase Financial Services mortgage specialist Mike Fitzgerald says: “I do not think SPML or Preferred will have major problems. I think they will be fine and they have a good future ahead.”

Boulger agrees but says that Lehman Brothers might take the opportunity to merge a couple of its brands if the tough market conditions continue. He says: “The big question is can they continue to fund these businesses at a competitive rate? SPML has been one of the most competitive lenders in recent months and especially in the heavy-adverse market.

“SPML and Preferred would probably be the two that would make the most sense if they were merged. But a lot would depend on how their distribution models work as they might have some packagers that are extremely loyal to one of the brands more than the other.”

Boulger says that rather than tamper with its own brands, Lehman Brothers might look to cut back its arrangements with Northern Rock and Alliance & Leicester.

He says: “Northern Rock is at the mercy of Lehman Brothers. It will basically have to do what they say in terms of rates and criteria.”

The impact on Northern Rock may have already started, with the firm increasing its sub-prime fixed rates by up to 1.25 per cent and withdrawing all its sub-prime tracker products.

In an email to brokers, Rock confirmed that it will be reducing procuration fees within its niche prime and light-adverse product categories to 0.75 per cent.

Bien says lenders will be able to absorb the impact of the crisis in the short term but will struggle if it continues much longer.

On its decision to cut 1,600 jobs, Accredited Home Loans chairman James Konrath says: “These difficult decisions were made with a heavy heart out of necessity in light of the continued and widely publicised turbulence in the mortgage and financial markets.”

Consultancy firm Challenger,Gray & Christmas says the housing industry has announced 87,962 job cuts so far this year, 75 per cent more than for all of 2006, with 41 per cent linked to housing market troubles.

The firm says nearly a quarter of the year’s cuts were made in August alone.

Fitzgerald says if he were an investor in the UK mortgage market, he would be more concerned about the newer, smaller entrants than the more established players.

He says: “It is an interesting time. Confidence is like oxygen. You only notice it when it has gone.”

But Fitzgerald says: “We are not in the same situation as the US. Everywhere you go there, you have so much oversupply of houses. It is going to take a few years to recover from this really.”


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