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Trouble In The Adverse Credit Mortgages Market

Jun 3, 2008
There are signs in the financial markets that it may soon become more difficult to obtain adverse credit mortgages. For several years now lenders have been issuing adverse credit mortgages to people with low documentation and adverse credit histories almost at will.

Many adverse credit mortgages are also issued with high loan-to-value ratios and expensive interest rates. Some products also leave the borrower with no equity at stake in their home and therefore little personal risk. However, the softening housing market coupled with a blip in the US stock market may prompt lenders to change their ways.

Several finance companies in the USA recently experienced large dips in their share prices as they revealed losses caused by holding on to portfolios of adverse credit mortgages that have been experiencing unexpected levels of defaults. Several big lenders have also made public the news of massive write offs in their loan books due to sub prime mortgages.

Recent increases in interest rates have put financial pressure on borrowers that previously did not exist when they obtained their mortgages. This has lead to an increase in the level of arrears and the number of defaults on adverse credit mortgages.

Recent events in the share market have shown that punters are unwilling to invest in finance companies that carry portfolios of high risk mortgages. Because of this sub-prime lenders have to reassess their lending criteria for adverse credit mortgages. Some lenders have pulled the products completely from the shelves while others are merely reconfiguring their criteria for successful applications.

While it is likely that adverse credit mortgages will not disappear completely, the criteria on which they are assessed may be tightened. This should help stem the tide of defaults and arrears as mortgages will no longer be approved for people who simply cannot afford the repayments.

Because of the recent glitch in the US stock market being caused by adverse credit lending, many analysts are providing opinions as to whether they believe the same scenario could occur in the UK. Most analysts are convinced that the recent problems experienced on the stock market in America are not going to be replicated across the pond.

The UK's market for adverse credit mortgages does not exactly mirror its American counterpart. Lending criteria are different and loan-to-value ratios are lower and therefore less risky to the lenders. In addition to this, the underlying assets of UK adverse credit mortgages, namely the properties over which they are secured, belong to a property market that is continuing to perform very well. Many local property markets in the USA were greatly exaggerated during the property boom and now they are being left virtual ghost towns as their true values emerge.

The strength of the property market in the UK means that there is little chance of borrowers' falling into negative equity, which means that the situation experienced in the US regarding adverse credit mortgages will probably not be replicated in the UK. As long as the property market does not experience too much of a decline, the finance market will regain strength and adverse credit mortgages will become readily available again.
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