Sub-prime semantics

Sub-prime lending -- allowing borrowers with a less than ideal credit record to gain access to credit -- is not a practice confined to the United States. Semantics cloud the prevalence of lending to bad debtors elsewhere, particularly in the United Kingdom.

Europe has myriad virtuous euphemisms for its own sub prime lending: Self-Certification Mortgages, Maximum Borrowing Mortgages, Graduate Mortgages, 125% Mortgages, Key Worker Living Programmes, Socially Directed Lending, Special First Time Buyer Finance. They are all camouflage for extortionately priced loans taken out by poor homebuyers with low credit ratings. 

Many of these borrowers are now being dubbed "ninjas" (no income, no job, no assets), which underlines the risk -- and possible foolhardiness -- of handing out interest-only mortgages at more than 100% of a property's value to those least likely to meet financial commitments.

As a percentage of disposable income, household debt stands at nearly 160% in the UK. In the United States, it is just over 130%. Yet 125% mortgages -- where lenders offer borrowers nearly the full value of their property, with an extra 25% in an unsecured loan to cover the costs of buying a house and any improvements that need making -- have been available for years in the United Kingdom.  

• Among the lenders is Northern Rock, the company that recently asked the Bank of England for an emergency funds facility to replace maturing money market borrowings.
• Abbey National, Alliance & Leicester, Mortgage Express and BM Solutions also lend or have lent 100% plus on mortgages.

These are also the markets that have seen the strongest increases in property prices over the past ten years. It is unlikely that UK lenders will provide finance in the way they did before, which is sure to have an adverse effect on the housing market. All this could mean that Europe is still in "phase one" of its housing bubble and the worst is yet to come.