By Matthew Chapman
Sub-prime mortgages: A house of cards?
Sub-prime mortgage lenders who give loans to people with bad credit records account for more than 70% of all repossessions, a BBC investigation has found.
The market for high interest sub-prime mortgages has been booming and it now accounts for about 8% of the total UK mortgage market.
But a survey of more than 7,000 court hearings over the past three months - carried out jointly by BBC programmes Panorama and Five Live Report - has found that lenders who specialise in these mortgages or offer them as part of their business disproportionately make up over 70% of all repossession cases.
Sub-prime loans are marketed at people with poor credit records. Unexpected numbers of repossessions among such borrowers in the United States triggered a global financial crisis over the summer.
In the US, sub-prime loans account for just 55% of foreclosures, which are the equivalent of repossession hearings.
Years of reckless lending caused the financial markets to lose trust in sub-prime loans. This triggered the credit squeeze that resulted in a run on Britain's Northern Rock bank.
The investigation into Britain's sub-prime market found cases of council tenants on benefits being encouraged to significantly exaggerate their incomes in order to buy their houses under the right-to-buy scheme - some of whom now face having their homes repossessed.
In other cases families were given mortgages which became unaffordable within months.
On benefits, with mortgage
The Bradburys are on benefits - but were given a mortgage
Despite being in their late 50s, on benefits and in poor health, David and Maureen Bradbury were given a 25-year mortgage worth £55,000 by London and Scottish Bank.
With their interest rate currently more than 11%, the couple have struggled to make repayments. In June they faced a repossession hearing.
The couple say they bought their council house under the right-to-buy scheme so they could pass it on to their children.
"I'm at the mercy of the interest rate," said David Bradbury. "If it goes up again, I'll struggle, I'll try and meet it. But after that if it goes up again I can't. We'll just lose the house."
In a statement, London and Scottish said the mortgage was arranged through an intermediary company.
The bank says it follows industry rules regarding responsible lending and took into account the income of the daughter of the Bradburys when granting the mortgage - although she too is on benefits.
Many banks and building societies involved in sub-prime lending in the UK bundle up hundreds of mortgages like that of the Bradbury's and sell them on to investors for cash up front.
This trade in debt has become a multi-billion pound industry in the City of London and many investors - including pension funds - have eagerly bought a piece of this market.
The risk comes when increasing numbers of these mortgages have been mis-sold to people who could never repay them.
Whoever is left holding the debt in this game of pass-the-parcel could suddenly find it to be worthless.
Nearly a year ago Southern Pacific Mortgages, which is owned by US investment bank Lehman Brothers, was forced to buy back £13m of mortgages it had sold on after discovering they had all been sold fraudulently.
The UK's City watchdog, the Financial Services Authority (FSA), is also under fire. Critics say its "light touch" regulation of companies selling mortgages has lead to more fraud.
The FSA points out that in July it "reported the results of a review of mortgage lenders and brokers operating in the sub-prime market, which found weaknesses in responsible lending practices and in firms' assessments of a consumer's ability to afford a mortgage" and insists it is "paying particular attention to self-certification busines".
"We will take action against firms that do not adhere to our rules or treat their customers fairly," the watchdog says. "We are also determined to cut down on mortgage fraud."
The Council for Mortgage Lenders has welcomed the BBC's research, saying that little was currently known about the extent of repossessions among sub-prime borrowers.
"I think the research you're doing is very valuable because it highlights who is actually starting to take action," said Michael Coogan.
He admitted there was a "worsening picture" in the sub-prime sector but said lenders had to check whether their customers could repay their mortgages.
"Every lender is under a responsibility to check ability to pay and to make sure that the advisers that they're using are reputable ones," said Mr Coogan.
5live Report: Mortgage Mayhem: 1100 UK time, Sunday 7 October or via the Five Live podcast (see links on right hand side)
Panorama: Sub Prime Suspect: BBC 1, 2030 UK time, Monday 8 October
The BBC survey was done by obtaining the court lists of repossessions hearings at 28 county courts across England, Wales and Northern Ireland during the months of July, August and September. A repossession hearing does not necessarily mean that a house will be repossessed as both parties, the lender and the borrower, could reach a settlement. The survey included both lenders who specialise in sub-prime debt and lenders with both sub-prime and so called prime borrowers.