The high number of sub prime mortgages issued in recent years – both in the US and the UK – is now causing havoc in the global financial system.
Due to rising interest rates, falling property values and other macro-economic factors, individuals are rapidly defaulting on their mortgage payments on a wide scale.
Disturbingly, these people were originally flagged as having poor credit histories, but that didn’t stop mortgage lenders from handing out massive loans to fuel the property boom.
What’s more, the mortgages were passed on by the banks in the guise of complex financial products, which were then re-sold to investment funds.
The net result is that the general public is now exposed to this excess of bad debt – mostly unknowingly – through pension and investment funds. When the mortgage payers default, these funds will suffer the fallout.
Banks to Come Clean
Debt can be circulated for a long time in the financial system without being noticed. However, with mainstream institutions due to publish their annual accounts in coming months, the initial impact of bad debt will finally be clear.
It is unlikely that another Northern Rock episode will emerge, since it had an unusual business model that left it particularly exposed to the credit markets. However, mass panic and media hype could scare bank customers into withdrawing their life savings.
A run on a bank can destroy it. Unless the government steps in to guarantee the savings – which is not a viable solution on a large scale.
The Credit Crackdown
Another problem that consumers must now face is the difficulty of obtaining loans and mortgages. Banks are acutely aware of the potential bad debt held within the business and can’t afford any extra exposure.
Personal loan power will come down to having a spotless credit history.
Jonathan Correll, of the mortgage broker Hamptons International, was quoted in an interview with The Times: “Borrowers today have to make sure they are whiter than white. If you have so much as a wrinkle on your record the lenders will say no.”
It is therefore incredibly important that consumers keep on top of credit cards, store cards, utility bills, mobile phone bills, loan and mortgage repayments. The loan provider will search individual records going back three years.
People with poor credit histories must now dig themselves out of an even deeper hole. It may still be possible for them to attain a loan, but the limit will be capped and they will pay through the nose in interest.