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The US subprime nerves affecting the UK stock market

Subprime mortgage lenders in the US are struggling to survive and their demise is significantly affecting the world’s financial markets. In London, the FTSE has seen a series of major declines, suffering the biggest drop in seven years in a single day on Friday, August 10, sweeping away most of this year’s gains. As a result, there is now a real fear that the US housing market crash will repeat itself here in the UK.

Panic selling and a lack of confidence in the equity markets can be traced back to the collapse of the subprime market in the US The rise in delinquencies and defaults among subprime borrowers in the US. It has led to a reassessment of the value of such holdings by investment bankers who bought a lot of securities for risk. They are seeing the potential paper value of their investments practically disappear overnight as US home prices collapse, sparking panic and attempts at consolidation in about equal measures.

Subprime mortgages are usually given to those who cannot prove their income or have bad credit, or perhaps even both. In exchange for receiving higher interest rates from borrowers, lenders are willing to take the risk of these types of bad credit loans. When home prices rise, the risk is minimal because if the borrower defaults, the lender takes a charge on the property and can therefore force the property to sell by recovering the initial investment, interest owed, and fees. recovery.

However, in a market where house prices are falling, as is the case in the US, the property’s value can become less than the outstanding liability, leaving the lender with a significant loss. Because US subprime lenders have the least ability to absorb defaults, as most of their borrowers get 100% mortgages, they are more likely to collapse if all goes wrong.

America’s largest subprime lender, New Century, issued subprime loans worth $ 33.9 billion last year alone. It is now being investigated by federal investigators to establish whether the misconduct figured in their business practices. It is bad debts recorded by lenders like New Century that are causing extreme nervousness in financial markets around the world, leaving analysts wondering if the situation will repeat itself in the UK. That has led many UK lenders to assess their riskier loans to determine their exposure and ensure they have an adequate amount of principal to cover potential losses. Fortunately, the UK market is believed to be less exposed to subprime loans than the US market. Also, as long as UK house prices continue to rise or remain stable, then the lenders who have issued these bad credit loans [http://www.blackandwhite.co.uk] homeowners will not be affected. Any threats will materialize if UK home values ​​fall, as the amount of equity in properties will also drop, and that could lead to the kind of financial chaos seen in the US.

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