Credit conditions could ‘worsen’ in 2008

(05-12-07) - Mortgage lenders have been warned to prepare themselves for the “very real prospect” that the global credit crunch that has plagued financial markets this year, could get much worse in 2008.

The Financial Services Authority (FSA) warned lenders that access to cash could become problematic as well as expensive - a problem that sparked the bank run on Northern Rock, which had to be bailed out with emergency loans from the Bank of England.

Speaking at the Council of Mortgage Lenders’ annual conference, Clive Briault, the FSA’s retail managing director, said: “There is a very real prospect that conditions will worsen further into next year, in terms of both liquidity and credit risks,” and advised that firms should be “reviewing and assessing their medium and longer term strategies and the options open to them; and considering contingency plans against the worst outcomes”.

More than 1.4 million homeowners are due to come off their low, fixed-rate deals next year according to the FSA, which Chris Eagle, CreditChoices.co.uk commercial manager, warned would instantly push up monthly repayments unless borrowers could find new deals in time.

“Many people will be jumping from a fixed-rate of around four per cent to as much as 7.9 per cent on some standard variable rates,” he said. “This will put a huge strain on finances, and with the very tight lending criteria, high interest rates and ongoing credit crunch, many people could find themselves being turned down when applying for more favourable deals - which in a worst case situation could lead to arrears and even repossession,” he warned.

Mr Briault said: “A fairly consistent picture is emerging of some lenders across the market appearing to be unwilling to consider cases on an individual basis, unwilling to agree a solution tailored to the borrower’s individual circumstances and apparently adopting a one-size fits all approach to arrears recovery.”

Adding that “arrears and repossessions have increased significantly, albeit from a very low base and concentrated in specific sectors of the market,” Mr Briault said that the FSA would be taking an urgent look into whether lenders are complying with FSA rules and treating customers fairly in their practices for the handling of mortgage arrears and possessions.

“Clearly, this needs to be done as a matter of some urgency, before any further increase in arrears rates, and we expect the initial phase to be completed by the end of March next year,” he concluded.

Related article - For advice on surviving the credit crunch.

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