Oct 15 2007
A sub prime solution?
Today the talk from the markets is of a deal to refinance sub prime mortgages. This could be a good idea if it establishes a sensible new pricing level for this kind of debt, and if it leaves bank balance sheets in reasonable shape. It could take some of the sub prime worry out of the money markets.
If it establishes too low a price for sub prime, leaving more of it out there for people to worry about, or if it stretches bank balance sheets too much, then it will not be so helpful. It is one of those possible deals where the pricing and the small print matters.
Meanwhile, if the authorities want it to help avoid downturn they must keep the money markets liquid whilst these changes are put through. If they want to intensify their inflation fighting they can use it as a warning about future risky lending and keep markets short of funds.
The main equity markets have got over the wobbles of the summer, whilst the Asian economies continue to power ahead.
John Redwood has been the Member of Parliament for Wokingham since 1987. First attending Kent College, Canterbury, he graduated from Magdalen College...
So is this just US ’sub prime’ we’re talking about?
I still hear young people over here talk about taking a bank loan or maxing a credit card to get a mortgage deposit together. I just keep my opinions to myself unless they are solicitied.
There has been considerable criticism from many angles of information sharing/credit scoring in the UK. From where I am standing young people (and some ‘property developers’ and buy-to-letters) are still leveraging themselves substantially and betting on house price gains this side of the pond.
Myself, I ponder over whether there will be sufficient deflationary pressures from the Asian economies to cope with a further rise in oil prices and (as I read recently) a rise in shipping costs based on increased demand, to keep prices within CPI targets.
On the other hand a tightening in easy consumer credit might balance this off but it all looks like too much of a tightrope to be considering taking a loan to make a deposit and buy a house in today’s market to me.
Yet walk the tightrope they continue to do.
Is there a negaitive equity/subprime risk in the UK that is not being ‘refinanced’ and that nobody in their right mind will want ot refinance?
Reply: There will be some mortgages in the UK that are “sub prime”. The failure rate is rising from low levels. It is less likely there will be a bad bout of negative equity, as the monetary authorities are likely to cut interest rates before things get too bad. Any sign of a double digit percentage fall in house prices and I would expect interest rate cuts to be brought forward. Most forecasters expect slow growth or no growth in house prices, but are not forecasting big average house price falls. There could be sharp downwards moves in some of the more expensive and exposed locations, but probably not overall.
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