Sub Prime Fallout..... What does it mean for me?

Sept 07 - The current crisis in mortgages, driven by bad debt in the USA housing markets, mainly affecting the ‘Sub Prime’ sector are affecting global credit markets. For those who haven´t heard the term ‘sub prime’ as it is known in the States, it is the part of the market which deals with higher risk and ‘buy-to-let’ market. Where multiple increases in interest rates and over supply has lead to dramatic increases in ‘Default’ and ‘Foreclosure’ or in English, ‘mortgage arrears’ and ‘repossessions’.

This has lead to ‘distressed’ sales and wholwsale auctions of properties in parts of Florida and some Western states. Analysts now estimate the losses from these markets anyway between $400million - $600million, with one recently suggested it might even hit $1trillion!

But what does it mean to you, safely tucked away in the sanctuary of the UK and strong economy and safe housing market?

Well not much initially, but the knock on effect is that inter-bank lending has tightened up and Banks which where aggressively chasing the UK ‘Buy-to-Let’ debt market are reconsidering their positions.

Some Banks, in particular the Northern Rock, had been very active in the Buy-to-let market and are possibly the most popular UK Bank for Buy to Let mortgages. But how have they financed the debt? By borrowing from other Banks. When ‘Inter-Bank’ lending tightened, Northern Rock was left in a situation of not being able to borrow the money to service its mortgage debt obligations, hence the move to go to the Bank of England for emergency bail out, which of course led to the run on the Bank and now ´Nationisation´.

Part of the issue with debt is due to ‘securitising’, a way of grouping debts and selling them in the ‘Credit’ markets. Meaning, that whilst you might have a mortgage with Bank A, the actual debt is owned by Bank B, therefore it is very difficult to know who owns the debt and in particular the Sub-prime debt. No Bank wants to reveal their exposure to this higher risk debt, particularly after what happened with Northern Rock!

So we are now in that part of a poker game, where we all know there are bad hands out there, but we don’t know who owns them? So all the players are asking, are they bluffing or are holding a ‘good debt’ hand?

The full extent of the housing crisis in the USA won’t be known for some time, interest rates dropped significantly with more reductions possible in the near future, but how does that help the poor unfortunate property owners who can’t rent out their property and can’t afford the repayments? The simple answer is there is no simple answer.

If they decide to sell the property now, as many are attempting at the moment, then there is the possibility that they will not be able to sell for what they paid and will still be left with a debt! The dreaded ‘negative equity’ situation.

Alternatively they can sit tight continue paying their mortgage and take whatever rent they can get, until the market returns to what has been considered normality.

Either way, the good days of the Buy-to-let boom in the UK appear to be over.

Should you as a UK buy-to-Let investor worry about this? .... Click Here