About six months ago, driving out of London on the A40, I saw an advertisement saying “Lost your payslip? Call us to get another.” I found this confusing. Surely, I thought, if you lose your pay slip and you need some proof of income you simply ask your employer to supply it. Silly me. It turns out that the firm concerned wasn’t actually offering to provide replacement or ‘duplicate’ pay slips to prove the existence of an income its clients actually had, but to provide fake ones to allow them to apply for loans based on incomes they didn’t have.
What’s more, this advertisement wasn’t a weird one-off: there is, I now find, a thriving business in the production of fake pay slips. Want one that says you make £50,000 working at a blue-chip firm when you are actually unemployed? Yours for £10. Just type ‘duplicate pay slip’ into Google and choose your “discreet and confidential” provider. P60s come a little pricier, but if you are after a loan you can’t afford anyway, what’s another £60 thrown into the mix?
Welcome to the world of the subprime mortgage, a world where proof of income is rarely required, where not being able to afford a mortgage is no barrier to having one and where responsible lending means offering loan-to-value ratios of 100%, rather than 125%. The subprime market barely existed in the UK until a few years ago. Now 8% of outstanding mortgages are owed by those with less than perfect credit ratings.
It’s easy to see how this has happened. Subprime has worked for lenders for years: with the margins on traditional mortgages being tiny (it’s a very competitive market), but subprime rates being at least 2% higher, it’s been a great way to make money with relatively low risk (when house prices are rising you don’t lose money on repossessions). And it has worked for borrowers too: they have long stopped caring how much it costs them to borrow, or how high their monthly payments are, on the basis that if things get tight they can remortgage and if things get really tight they can sell up.
The problem with this win-win game is that it only works when property prices are rising. When they aren’t, the remortgage and sale options disappear, repossessions rise and lender profits dwindle accordingly. And that’s why I’m worried. In a radio interview this week I was asked if I think there is trouble ahead in the housing market. I think it is already here. Ten per cent of subprime mortgages are already three months in arrears and the majority of our fast-rising number of repossessions are subprime-related. With the rate of house-price growth falling even on Halifax numbers (4.4% in the last quarter of 2006, 3% in the first quarter of 2007 and a mere 2% in the last quarter); prices falling in Wales, the South West and in the West Midlands; and rates still rising, this is hardly a situation that’s going to improve. No one is showing much interest in our subprime market at the moment (everyone’s more interested in the US), but I reckon it won’t be long before it starts making the headlines.