The Effects Of Sub-Prime Lending In The US

Over the last five years, people in the UK have enjoyed relative prosperity, with a booming economy amounting to large increases in private wealth. Salaries had been rising and the property market soaring, raising the standard of living and allowing many of life’s luxuries to become widely available. nnIn recent years it has been easier to get a loan or credit to fund a new car or whatever else you fancied. But now it's all changed and times are definitely harder. The change started when the number of repossession of homes in the US suddenly started to rise during autumn 2006. The effect of this has had a knock on effect across the world and sparked a global financial crisis in 2007.nnThe crisis came about when people in the States started to default on mortgage payments that they could no longer afford. Due to the relatively high level of prosperity banks had been lending money to people who had poor credit histories and were considered high risk. In order to minimise the risk banks, charged higher interest rates for these loans to ensure that they would get the cash back. Borrowers began realising that lenders were open to them, and were enticed by the rise in housing prices, so took out a mortgage to get on the property ladder. However in 2006-2007 housing prices in the US started to fall which has lead to a difficulty in re-financing homes for more favourable rates. People were therefore stuck with expensive mortgages that they just could not sustain over the long term. nnMortgage defaults were quickly responded to with repossessions, and people started to lose their homes. By October 2007 the rates of repossessions were three times higher than the number in the same month of 2005. By January 2008 this had risen even steeper by another 5%. During the whole of 2007 1.3 million homes in the US were repossessed, leaving the banks with a deficiency of between $200 and 300 billion dollars.nnThis all had a big effect on the American stock market which in turn negatively influenced economies around the world. The banks suddenly did not want to lend money any more to anyone that could be considered higher risk and heavy lending restrictions were put in place. This has transferred over to the UK where the number of house repossession in the last year has also risen. However sub-prime lender in the UK accounts for only 6% of all lending where as in the US it accounts for 20%. Despite this there have been heavy crackdowns who is eligible to be lent money.nnThe banks are in part to blame for this crisis, with the Financial Services Authority (FSA) taking action against 5 brokers, after their review of the mortgage market last year. In addition the FSA found out of the 34 brokers they monitored one third failed to properly assess if the consumer could actually afford the loan. Consumers were being asked to fill out self certification forms stating their income, but no further checks were made to validate these figures. Consumers wanting to borrow more money to keep up with the ever increasing prices of the house market may be tempted to inflate their earnings just to get on the ladder without thinking about the consequences. nnThe situation we have now been left with in the UK does look bleak. Mortgages are harder to obtain and have higher rates, however this may prompt a slowdown in house prices rising which would help more people actually be able to afford their own home.n