Lessons to be learnt from over the Pond?

Both Jim & I have previously commented upon the US housing market woes and the sub prime lending concerns that have arisen in recent months. This week’s Economist magazine highlights the ‘growing enthusiasm for subprime lending in Britain’ better known as “non-conforming” or “adverse credit” (those interested can subscribe and read the article here) and asks the question whether we are setting ourselves up for the same problems that US lenders are currently facing?

In a somewhat timely manner the article in The Economist points to a recent sale of bonds secured upon a pool of mortgages issued by the Kensington Group (the British mortgage group specialising in lending to those individuals with impaired credit profiles). The article points to demand outstripping supply in the bond markets, the relatively low premium demanded by such investors whilst at the same time witnessing a very precarious situation in the US. A mere matter of hours after reading the article on Friday my attention was brought to the 23% fall in Kensington’s share price on the back of a profits warning and the resignation of its CEO John Maltby. The bonds have also suffered but as you’d imagine to a lesser degree than the equity.

Clearly we aren’t in any immediate danger of finding ourselves in a US type scenario. Structural differences between the two property markets mean that UK borrowers remain in a position to re-finance and avoid defaulting on their obligations – house prices in the UK continue to rise strongly, in contrast to the recent US experience. However, the article, along with press reports over the weekend of a 102 year old pensioner being granted a £200k (interest only) buy to let mortgage do highlight the need to keep a close eye on loose lending standards on this side of the Pond too.

 

The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.

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