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The International Monetary Fund (IMF) has issued a warning that it believes that the UK’s sub-prime mortgage market is comparable to that of the US before it went into melt down. This was included in a warning that the sub-prime crisis is set to run for longer, and be more painful, than many bankers believe. Following the credit crisis, markets should expect a protracted slow-down with the likelihood that credit markets will change forever.
In its semi-annual report on global financial markets, the Global Financial Stability Report, the US-based IMF pointed a finger at the UK’s mortgage market as being a further potential source of risk in the financial system. On page 21 of the first chapter, the report says “The rapid deterioration in the US nonprime mortgage sector has also led to concerns about dislocations in non-US mortgage markets, especially in the UK nonconforming mortgage sector and, to a lesser extent, the Australian sub-prime sector. The UK nonconforming mortgage market is somewhat comparable to the US sub-prime market, though about one-half the outstandings.”
The report was critical of poor credit lending risk standards, poor underwriting and the lack of transparency due to the multiple layering of risk. The liquidity issues could be accelerated by generally falling house prices and the withdrawal of the more risky mortgage products, both of which will impact on the ability to sell houses and so realise underlying assets.
Market analysts have added alleged mis-selling and overvalued house prices to the contributing factors but point out that sub-prime mortgages have a lower market share in the UK than was the situation in the US. But they also point out that the IMF’s last report had been warning about sub-prime problems in the US and that its current comments should be taken seriously.
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