US Mortgage Crisis To Hit The UK

By Stewart Douglas

A former advisor to the Bank of England has today warned that the US sub-prime crisis will impact upon UK mortgages, as a result of widespread UK bank exposure to the US sub-prime sector.

Professor Willem Buiter, a former member of the Monetary Policy Committee, has today advised that UK lenders could find themselves in some difficulties given the extent of their exposure to US sub-prime loans.

He added that as a result of tightening credit conditions, banks across the globe were lending to each other at less favourable rates, currently around 6.9%, which could see the price of standard mortgages increase for the consumer, as well as dramatically increase the cost for UK sub-prime loans. 

The 6.9% rate is far beyond the current Bank of England base rate, which stands at 5.75% after it voted to maintain rates at that level yesterday, placing pressure on banks forced to borrow from their competitors, and having the potential to lead to a more widespread unrest in the UK financial markets.

The US sub-prime sector, which lends to those with patchy credit histories, was once seen as a good investment for banks from foreign shores. 

As the sector expanded and loans were offered to more high yield high risk borrowers, banks were seen to be increasing their investment in the sub-prime sector.

However, with the Federal Reserve raising interest rates, the number of defaults and repossessions across the sector have skyrocketed, tying up bank liquidity and forcing many to retract credit from otherwise viable business and consumer customers.

With the extent of the sub-prime crisis far from defined, this situation is likely to continue for the foreseeable future.  According to Professor Buiter, the longer this situation goes on the worse it will inevitably be for borrowers forced to pay over the odds for their loans.