LONDON — Britain's financial services regulator warned about poor sales practices in the domestic subprime mortgage market on Wednesday, raising the spectre of a U.S.-style collapse.
The Financial Services Authority says five unidentified firms face potential fines or other penalties after a review of the subprime market, which lends money to consumers with poor credit records.
The FSA said in a third of the files it reviewed there was an inadequate assessment of consumers' ability to afford the mortgage, while “significant numbers” of consumers were advised to re-mortgage — incurring early repayment charges — without any clear benefit.
“Poor sales practices in this market may lead to serious wider consequences,” said Clive Briault, the FSA's managing director of retail markets. “The high level of sub-prime arrears in a benign market raises some important questions about the consideration given to affordability by lenders and intermediaries when undertaking this business.”
More than 30 subprime lenders have gone bankrupt this year in the United States after borrowers began defaulting on their loans at a record pace.
The meltdown began in February, when New Century Financial Corp. and HSBC Holdings reported more borrowers missing payments.
Many mortgage lenders sell their home loans to banks, who pool the debt and sell it as mortgage-backed bonds. The spike in bad loans scared banks and investors away from risky debt, drying up much of the U.S. industry's financing.
In Britain, Mr. Briault said the FSA was “very concerned” about its findings.
The five companies facing potential fines have failed to show adequate improvement since their failings were identified in an earlier 2005 study, he said.
Mr. Briault said the FSA would investigate further in the second half of the year, with a keen eye on “self-certification” after its study indicated that the information being provided by borrowers is not being adequately checked.
“Consumers should make sure they understand the risks, costs and charges when taking out a sub-prime mortgage, particularly at a time when interest rates are rising,” he said. “They should also not be tempted to inflate their salary, which is a criminal offence. ”
Interest rates are at record levels in Britain and are expected to rise again when the Bank of England's monetary policy committee meets on Thursday amid ongoing concerns about the rapid pace of inflation and a robust housing market. The central bank is expected to lift its key interest rate by a quarter of a percentage point to 5.5 per cent.
© The Globe and Mail
