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Panorama reveals the real risk to the UK economy of mis-sold sub-prime mortgages

08 October 2007
The sub-prime crisis and subsequent Northern Rock meltdown might not be making headlines anymore now that the initial panic has died down, but both issues are still resonating in the UK economy and this isn’t likely to change in the near future, the BBC’s Panorama will reiterate tonight.

In a programme about mis-sold and sub-prime mortgages – those which have been sold to people with a less than perfect credit history – Panorama intends to show how the situation continues to pose a considerable threat to the strength of the UK economy and could lead to a repeat of the sub-prime crisis in the US.

Like that in the US, the UK situation is fast approaching crisis point, according to an investigation carried out by Panorama and Five Live, because of the number of people with sub-prime mortgages, such as those on benefits who were encouraged by lenders to exaggerate their earnings in order to get a mortgage that they would never be in a position to repay.

Sub-prime mortgages are sold to people who do not have access to more competitive deals because they have a bad credit history or a low income. Some lenders have been encouraging hopeful homebuyers to lie about their income and personal circumstances in order to borrow up to 16 times their salary; the IPP (Institute of Payroll Professionals) have reported that people are obtaining replacement copies of payslips that do not reflect their true incomes.

The market for high interest, bad credit mortgages such as these has been booming, as they give people the chance to own property who might otherwise not have had the opportunity. It has been spurred on by the Right-To-Buy scheme which encourages people to buy the council properties in which they live. The sub-prime sector now accounts for approximately eight per cent of the total UK mortgage market.

As a result of aggressive mortgage brokers and naïve consumers, a growing number of houses are being repossessed as people are unable to keep up with their mortgage repayments. The result in the US market was that many lenders ceased accepting sub-prime applications, put their rates up, and tightened their lending criteria, and UK mortgage providers have been following suit.

The Financial Services Authority has already found fault with and started enforcement action against five mortgage advice companies that were illustrating a lack of responsible lending practices and were not accurately assessing customers’ abilities to repay the mortgages which they were recommending to them.

In the wake of the Northern Rock crisis last month, the Royal Institute of Chartered Surveyors predicted a one in ten chance of a market crash in the next 12 months, and a quarter of mortgage brokers have admitted to seeing a drop in business since the sub-prime debacle began with 40 per cent saying they have lost faith in the sub-prime market altogether.

Learn more about the knock on effect of the US sub-prime mortgage meltdown on the UK marketand compare bad credit mortgages