Charity Slams Sub-prime Mortgage Market

A leading charity has criticized lenders who supply secured loans to people with low credit ratings.

A Citizens Advice Bureaux report said irresponsible lending decisions and aggressive arrears management by sub-prime lenders were driving the current increase in mortgage arrears, court action and repossessions.

David Harker, chief executive of Citizens Advice, said: “Our research suggests that many aspiring home owners have been miss-sold unsuitable and costly home loans that are doomed to fail from the start.”

The Council of Mortgage Lenders responded by pointing out that borrowers who are receiving help from the charity are more likely to be the ones that have the more serious credit problems.

A spokesperson for the group said: “The vast majority of mortgage customers receive a high level of help and care from lenders of all kinds if they fall into difficulties, in accordance with the rules set out by the Financial Services Authority.”

However the Intermediary Mortgage Lenders Association (IMLA), a group representing the interests of lenders, is sympathetic to the Citizens Advice.

Peter Williams, executive director of IMLA, said: “We do agree with Citizens Advice that the different regulatory regimes for first and second charge loans has created complications.”

When a secured loan is taken out it can be a first, second and third charge. If it is the first charge it means the loan company is first in line to claim the equity (usually the borrowers home) if there are any defaults.

If the lender is the second charge they are second inline to the home and this can be reflected in a higher interest rates and more punitive measures following default.

“Many sub-prime lenders are flouting the rules on responsible lending by granting loans when it’s clear the borrower will not be able to afford to repay it from the very outset, then getting tough immediately things go wrong,” said Mr Harker.

Research by the BBC showed that sub-prime lenders make over 50% of repossession orders in the UK but only supply 6% of the mortgages.

A spokesperson for Southern Pacific Mortgage Limited, said: “The figures are based on possession claims hearings and are therefore not representative of actual repossessions which are a lot lower.”

Secured loans are usually chosen by those with poor credit history because the lender has the guarantee that they will claim the owners home if they default. They are not only used for mortgages and can be taken out for many purposes but all secured loans need assets attached to them. This ensures that the lender has equity and helps keep the interest rate lower.

Unsecured loans do not have any equity secured against them but this results in a higher interest rate because the lender is not guaranteed they will have items to claim should the borrower fall into arrears. If a borrower fails to make payments on an unsecured loan there will tend to be court action.

Those with bad credit ratings often find they are not offered unsecured loans and therefore take the secured loan option.