Subprime Lending Returns to the U.K.
Now it's called "complex" or "almost" prime
(Correcting the fourth paragraph to make clear GE Money is not lending to people who have defaulted on mortgages.)
Three years after defaults on U.S. subprime mortgages sparked a devastating financial crisis, lending to borrowers with less-than-perfect credit histories is making a comeback in Britain. General Electric's (GE) GE Money unit and Investec's Kensington division have started lending to customers rejected by mainstream banks. This time they say their loans are for less money and are going to clients with better credit histories than during the housing boom. And they avoid the word "subprime" to describe these borrowers, preferring the terms "complex prime" or "almost prime."
"'Subprime' sends messages out that people are lending money to individuals who can't repay it," says Gerry Bell, marketing director for GE Money's U.K. mortgage unit. "Our customers have clear track records," though some may have had "minor credit blips."
Kensington, which stopped offering mortgages to customers with spotty credit histories in November 2007 and halted prime mortgage lending in August 2008, restarted lending to prime customers in November and reentered what it now calls the "complex prime" market at the end of March. The lender accepts borrowers with up to two court judgments for failing to pay debts of as much as $1,080, through a product called "Prime One." Before the credit crunch, Kensington would accept borrowers with existing arrears and with judgments of as much as $10,800, says spokeswoman Karen Agombar. Today it will lend only up to 80 percent of the value of a property, down from 90 percent before.
GE Money is lending to people who have defaulted on loans twice before and to borrowers with a single judgment. The loans are financed by GE, its parent. Bell says these loans are less risky than previous subprime mortgages: "It's very different from where we were in 2007."
Of course, "it's different this time" is a dangerous phrase. So far, though, there are few signs of a return to the excesses of the bubble years, according to British debt advisers. "We haven't come across inappropriate lending" in the nonprime mortgage market this year, says Beverley Budsworth, managing director of the Debt Advisor, which counsels consumers on debt issues.
Subprime has a long way to go to reach its 2006 level, when securitization, the process that saw loans packaged into bonds and sold to investors, helped fuel a lending boom. Bank of America (BAC) plans to sell off $1.1 billion worth of bonds backed by higher-risk U.K. mortgages in what would be the first public deal of its kind in the U.K. since August 2007.
The appeal of subprime lending is the same as ever: It is more profitable for banks (unless too many borrowers default). Subprime loans can be offered at more than double the interest rates of prime products. Kensington and GE Money offer mortgages to less-than-prime customers at 5.99 percent that convert to a floating rate after two years. The most creditworthy borrowers can get a similar product from HSBC's (HBC) First Direct bank for as little as 3.09 percent.
The bottom line: Although memories of the housing bust's losses are still fresh, lenders find it hard to resist the lure of high-interest-rate mortgages.
Jon Menon is a reporter for Bloomberg News. Crowley is a reporter for Bloomberg News.
More evidence that middle income Britain is a significant target market...