The Council of Mortgages Lenders insists the UK will not succumb to the sub-prime traumas experienced in the US.
The trade body is adamant that the two markets are different enough not to suffer similar stress. It says up to a quarter of US loans are subor near-prime compared with 5 to 6 per cent in the UK, as the US definition of sub-prime is wider.
Around 80 per cent of US sub-prime lending is on variable rates, which the CML says exposes borrowers to greater volatility. Other problems it highlights include the greater popularity in the US of discounted deals, that then create a big payment shock when they revert to the variable rate.
Between 2004-06, the US base rate increased by 4.25 percentage points to 5.25 per cent. The UK base rate has grown to to 5.25 per cent cent since August but has risen less sharply.
The CML’s comments come after the battered US sector suffered another setback after sub-prime giant New Century Mortgages filed for Chapter 11 protection this month.
Tremors have been felt in the UK as Kensington Mortgages has been forced to issue repeated profit warnings over the past few months. Some commentators, most notably rating agency Standard and Poor’s, have complained of stress in the market due to relaxed criteria.
The CML says: “We agree with what Bank of England governor Mervyn King told the Treasury select committee two weeks ago that UK lenders are not seeing the same default experience as their US counterparts.”
Hamptons Mortgages technical director Jonathan Cornell says: “Rumours of a UK demise are exaggerated. The two market are completely different.”
Analysis, p23, p25