Sub-prime Mortgage Lending in the UK

Mark Stephens and Deborah Quilgars

European Journal of Housing Policy, 2008, vol. 8, issue 2, 197-215

Abstract: This article draws on a census survey of lenders and other published evidence to provide a critical overview of the sub-prime mortgage sector in the UK. Its origins and growth are identified as lying in a combination of changes in the structure of the economy and the introduction of automated credit scoring. The sub-prime market serves a diversity of needs with a clear function of credit repair being suggested by the high proportion of re-mortgages into the sector. Sub-prime borrowers are drawn from across the social and economic spectrum yet significantly higher levels of default are found among them. While much of this additional risk is inherent in the market the institutional structure that underpins sub-prime lending in the UK appears to amplify the levels of risk unnecessarily. Sub-prime lending is conducted disproportionately through centralised lenders reliant on securitization for funding and using brokers to originate loans. This builds a series of information asymmetries into the system and has exposed borrowers to volatility in rates and credit supply that occurred from the fall in world-wide liquidity in 2007. It is suggested that in principle risks could be better handled by integrating the sub-prime market within the mainstream market and applying a graduated approach to risk-based pricing.

Date: 2008
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DOI: 10.1080/14616710802037458

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