CURRENT CREDIT CRUNCH AND GROWTH OF SUB-PRIME LENDING

Current Credit Crunch and Growth Of Sub-Prime Lending; Is This A Viable Business Model For Lenders? A UK Perspective



Table of Content

CHAPTER-I: INTRODUCTION3

Objectives of the Study4

Significance of the Study4

CHAPTER-II: LITERATURE REVIEW5

Sub-prime Mortgage Meltdown: A Global Context5

Why the Sub-prime Market Fell6

The Housing Market Slowdown7

Relaxed Underwriting Standards7

Early Payment Defaults10

Impact of the Sub-prime Meltdown14

Impact on Individual Borrowers15

Modifications of Defaulted Loans15

Regulatory and Legislative Responses16

Statement on Sub-prime Mortgage Lending16

Restructuring Loans17

Predatory and Abusive Practices18

Secondary Market Liability19

Regulatory Patchwork19

Is Sub-Prime Lending Is a Viable Model For Lenders?20

Changing Circumstances22

Understanding and Flexibility23

A Sharper Focus25

Incorrect and Insulting26

CHAPTER-III: METHODOLOGY28

CHAPTER-IV: RESEARCH FINDINGS AND DISCUSSION31

Market Size and Profile35

Institutional Structure38

Arrears and Possessions41

The Credit Crunch and the Sub-prime Market47

CHAPTER-V: CONCLUSIONS51

Future Diemensions53

References55

Appendices59

Figures59

Tables63

CHAPTER-I: INTRODUCTION

Throughout the first half of 2007, the growing crisis in the US sub-prime mortgage market received increasing attention in the UK, where a sub-prime mortgage market has also grown up since the mid-1990s. At this stage the interest arose from a concern that a similar meltdown in the sector with spiralling defaults, institutional failure and the exposure of widespread reckless, fraudulent and predatory lending might occur in the UK, so tipping the wider housing market into recession. [Springett (2007) provides a good example of this line of thought]. The subsequent impact of US sub-prime crisis on the liquidity of world money markets impacted on the UK mortgage market in a rather different way as higher costs of financing mortgages from the wholesale markets kicked in and the range of riskier mortgage products declined, reducing not only the supply and price of new mortgages, but threatening higher risk borrowers wishing to re-finance their mortgages.

The core evidence of risk in the sector is drawn from a census survey of members of the Council of Mortgage Lenders (CML - the trade body that represents some 98 per cent of the residential mortgage industry) that we conducted in 2006. In this survey we distinguished between 'prime' and 'non-prime' lending (the latter defined as 'impaired credit' and self-certificated). This is supplemented with evidence from other research reports, articles in academic and trade journals, published official and survey statistical data, web-based information provided by institutional players, as well as newspaper reports.

Objectives of the Study

The objective of the study is to discuss the current credit crunch and growth of sub-prime lending in the context of United Kingdom as well as overall in the world. The paper also discusses whether it is a viable business model for lenders or not.

Significance of the Study

The study is significant because in the previous as well as in the recent months, there have been almost daily reports on the looming economic crisis that may result from widespread delinquencies in sub-prime mortgage loans-loans with higher interest rates and fees that are made to borrowers with impaired or limited credit histories, or to first-time borrowers. After all the sound and fury, two questions remain: "How did this happen?" and "How will this end?"

The fascination with the sub-prime mortgage meltdown is partly due to the sheer size of the market, and partly to the ...