And here we have it, the first sign of spread from the Sub-prime crisis in the US.

Northern Rock, the UK's 5th largest mortgage lender have had to borrow money from the Bank of England to ensure funds will be available for their customer's needs. This has arisen from investor's lack of confidence in the Northern Rock's exposure to sub-prime and possibly high loan to value loans.

The Bank have insisted this is a precautionary measure, and Simplicity have spoken to the mortgage department who have reassured thats its "business as usual". IF YOU HAVE A NORTHERN ROCK MORTGAGE YOUR CURRENT DEAL WILL CONTINUE AS NORMAL, PLEASE DO NOT BE ALARMED. What it does mean is that anyone coming off a fixed rate soon will find rates a lot higher than they are used too so please get in touch as you need the right advice.

So what actually happened in the U.S. to cause world-wide havoc in the markets, and why?

The situation now is essentially a credit crunch situation - where banks and lenders can't or won't lend, because investors can't or won't buy debt. This leads to a lack of available to money, meaning consumers and businesses have less to spend which could have serious ramifications for the economy.

Why did this happen? In short, the US mortgage market got a little over-excited by the sub-prime mortgage market. A lack of governement legislation and regulation in the mortgage market meant that a higher percentage of sub-prime loans could be approved. These products carry higher rates to offset the risk of low-credit borrowers, and as interest rate started to rise in the US more and more of these loans went into default. Throughout 2006, an escalating number of these loans fore-closing resulted in a number of sub-prime lenders having to file for bankruptcy. From July 2006, these filings have increased 90% ( August 22^nd 2007 USA Today).

The drastic effect on the stock market came as a result of the instability of these subprime loans. Big banks and wholesale lenders buy the debt from sub-prime lenders, repackage it and sell it on to Wall Street firms. Wall Street banks and investment houses further repackage these loans in mortgage-backed securities and collateralized debt obligations. Due to the high interest charged on sub-prime loans, these structured products yield high rates of return and are sold to pension funds, hedge funds and other investment institutions. However with the high default rate these investments have not performed as expected, having knock-on affects in the market, house prices, the strength of the dollar and economy overall.

No-one knows exactly what will happen, but we are seeing a tightening up of criteria in the adverse market in the UK, with many lenders withdrawing their "unlimited" and "heavy" adverse mortgage options. Stricter regulation means a more sensible lending policy and better advice given to clients so the same siutation is avoidable in the UK. Some effects are inevitable though with many fearing that mortgage will become harder to obtain, thus reducing purchasing power and curbing the house price increase as we know it. Bank's own variable rates are likley to increase in the short term, as the London Inter-Banking Offered Rate (Libor) is up near 7% meaning the rate at which banks lend money to each other is getting more and more expensive.

We shall have to wait and see for the long term impact, there has been cries of house prices falling for the last 4 years, and it has been steadily increasing all this time, but slowing long before the US credit-crisis happened.
 
Please get in touch with Simplicity if you have any concerns - 0114 2506161.

Sources:
http://www.creditcrunch.co.uk/home/index.php

http://www.thriftyscot.co.uk/Mortgages/082007/the-effect-of-the-subprime-crisis-on-uk-mortgages.html