Inside The Mortgage Massacre

There's a slaughter going on in parts of the mortgage market, and the turmoil is set to continue well into 2008.

Earlier this week, I was given the inside story on what's happening in the UK mortgage market -- and I have to say that it looks far from pretty!

By chance, I happened to meet a chap who has worked in the mortgage industry for more than fifteen years. At present, he works for a leading provider of subprime mortgages (home loans given to people with tarnished credit histories). His employer lends directly to members of the public and via mortgage brokers. Thus, he sees the full picture of how the subprime market is reacting to the ongoing seizure in worldwide credit markets, alias the `credit crunch'.

The bad news is that, away from the prime mainstream lenders on the high street, the mortgage market faces a grave crisis. Indeed, my contact warned that this was the worst environment he'd encountered in 1½ decades in the business. What's more, his veteran colleagues -- with thirty or forty years' experience behind them -- echoed his view.

My insider unveiled a tale of lenders withdrawing entire product ranges, hiking yearly interest rates by 2% or more for some subprime borrowers, or pulling out of subprime lending altogether. Mortgage brokers who have done very nicely advising subprime borrowers over the years are finding that business is grinding to a halt.

Like lots of homeowners, many in the mortgage industry have done very well from the housing boom and the growth in lending to `non-standard' borrowers (i.e. people who have a bad credit history, buy-to-let landlords and self-employed workers who cannot prove their income). Indeed, my interviewee admitted that some of his contacts now drive Aston Martins or Ferraris. Nice work if you can get it!

However, my acquaintance admitted that his firm was laying off employees by the dozen, and other lenders and brokers were following suit. Following our conversation, I did my own research and found that some have cut their workforce by 20% and a few have even gone into administration.

When I asked my contact how long he expected these problems to continue, he replied that he saw no respite before next spring. Furthermore, he worried that the subprime-mortgage meltdown could even continue into 2009. Thus, today's difficult conditions could last six months to two years, which would spell doom for a large swathe of borrowers who cannot get a mortgage on the high street.

My take on all this is that the subprime mortgage market is in complete turmoil, and that is no surprise to me: I've been warning of reckless lending, rising overspending and growing personal-debt levels for years. 

Until now, the housing and credit booms have continued regardless. However, I knew the bubble was set to burst when writing The Incredible Shrinking Mortgage Market last month.

In the above article, I revealed that over two in five (41%) of all mortgage products were scrapped between July and October. In other words, over 6,400 different home loans were pulled by nervous lenders, desperate to avoid throwing good money after bad. The worst-hit borrowers were subprime homebuyers and remortgagors, as more than seven out of every 10 sub-prime mortgages (72%) had been withdrawn.

Personally, I don't expect the ongoing credit tightening to stop at subprime mortgages. I believe that, after a decade of greed and excessive lending, lenders are genuinely fearful of what's yet to come. Therefore, I think unless you have a good regular income, a spotless credit history and a decent deposit, then you may find it more difficult to get a mortgage in the future.

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