The return of sub-prime mortgage rates

If you thought sub-prime mortgage lending (to borrowers with a history of bad credit) was a thing of the past, think again. Sub-prime mortgage rates are back!

Sub-prime is back. Yes, you read that correctly. The sub-prime mortgage, which singlehandedly torpedoed the US housing market, turned the global banking system toxic and triggered the biggest financial crisis since the Great Depression, has been released from its cage. So exactly how scared should we be?

Oh my gosh watch out!

Specialist mortgage lender Kensington has just announced a range of “recession busting products” designed to help borrowers with modest credit problems recover from the effects of the recession. It denies they are sub-prime, but these deals look and smell very much like sub-prime to me.

Kensington is offering two-year and three-year fixed rate mortgages up to 70% loan-to-value (LTV) to borrowers who have defaults or County Court Judgements (CCJs) registered against their name.

Applicants can get a mortgage with two CCJs totalling a maximum £750 and two unsecured defaults in the past two years, provided they have been problem free for the last six months.

You might greet the news with the same delight as you would the return of the 125% mortgage, another toxic relic of the credit boom. You might also wonder why somebody with a history of defaults, arrears and CCJs should be able to get a mortgage, while plenty of first-time buyers with unblemished credit records don’t have a prayer.

But personally, I think it’s a good thing. Well, up to a point.

The mortgage from hell (financial services division)

Sub-prime mortgages may have led us down the road to hell, but they were designed with the best of intentions: to help people with past credit problems buy a home.

Not everybody with financial woes is a feckless spendthrift, many upstanding folk run into trouble after illness, divorce or redundancy, and sub-prime was designed to help them. Lenders charge slightly higher rates, to reflect the extra risk, but these loans allowed borrowers to rebuild their credit profile until they could remortgage to a cheaper mainstream deal. In the UK, default rates weren’t much higher than on mainstream mortgages, and the added risk was priced in.

It all went pear-shaped because sub-prime brokers and lenders, flush with cheap money during the credit boom, competed to offer ever-cheaper loans to ever-riskier borrowers, particularly in the US, where dodgy selling was rife. These high-risk loans were then parceled up and sold off as rock solid debt to financial institutions around the world. We all know what happened next.

Sub-prime isn’t a four-letter word

Sub-prime wasn’t naturally evil, but it was cruelly abused. That’s why I welcome its timid return, particularly now, when the need for legal, decent, honest and straightforward sub-prime mortgages is greater than ever. People who have taken a financial hit, thanks to global economic woes rather than their own recklessness, deserve the chance to get back on their feet and onto the property ladder.

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And if I trusted anybody to start offering sub-prime mortgages again, Kensington would be high on my list. It was a pioneer in lending to people with troubled credit histories before exiting the market (along with everybody else) in November 2007, and carefully avoided the excesses perpetrated by its imitators.

But I’m not totally convinced by its bizarre denial that its new offerings aren’t sub-prime, or that it has no intention of returning to the sector in the foreseeable future. It looks like it already has, if cautiously.

Sub-prime may be an eight-letter hyphenated word, but people still don’t like saying it in polite company.

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Innocent as charged

Some specialist home loans were plain bad, such as 125% mortgages, which encouraged first-time buyers to plunge into instant negative equity, and right at the top of a housing boom.

But others, such as sub-prime and self-certification mortgages, were valuable niche products that were rampantly and dishonestly sold by a grasping financial services industry under the nose of toothless regulators.

Everybody has suffered as a result, notably the honest borrowers for whom these products were designed in the first place, who can no longer get the loan they desperately need.

We’re all sub-prime now

Despite Kensington’s cautious return, most borrowers will struggle to find an affordable mortgage unless they have a spotless credit record and heaps of spare equity. There simply isn’t the funding available for riskier debt, and there won’t be until the securitisation market re-establishes itself, which could take years. Right now, anything above 90% LTV is effectively considered sub-prime.

But don’t blame sub-prime for the crimes committed in its name, the real villains are the lenders, brokers and regulators who let it run out of control. After all, specialist mortgages don’t kill economies…. people do.

What do you think?

Am I right or wrong? Should sub-prime mortgages be banned or welcomed back? Tell us your views using the comments box below!

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