UK Sub-prime Mortgages 2008

At the end of 2006, the future of the UK sub-prime mortgage market looked bright. Once a small niche with somewhat of a tainted reputation, this sector had expanded significantly over the last decade. However, things have changed dramatically since the advent of the credit crunch, with sub-prime mortgage lending shrinking dramatically and lenders shying away from the market.

Report Highlights
Extraordinary market conditions have meant that robust demand-led factors such as an increase in the sub-prime population were unable to exert a positive pressure on sub-prime mortgage lending in 2007, as the downfall of the sector is primarily due to supply-led factors.

In the last couple of years, an increasing number of specialist lenders were staying clear of the heavy end of sub-prime lending due to the increased riskiness of this sector in the rising consumer debt environment. The liquidity squeeze has accentuated this trend, with lenders also leaving the medium adverse sector.

From being a maturing sector with fewer opportunities, the sub-prime mortgage market has reverted to being a small niche segment with attractive prospects.
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Overview 1
Catalyst 1
Summary 1
TABLE OF CONTENTS 2
Table of figures 3
Table of tables 4
ANALYSIS 5
The once-booming UK sub-prime mortgage market has shrunk significantly due to the credit crunch 5
New mortgage lending in the UK sub-prime mortgage sector contracted by an estimated 18% in 2007 5
Sub-prime mortgage lending will amount to just 30.7% of its 2007 lending levels in 2008 6
Supply-led rather than demand-led factors are responsible for the downfall of sub-prime mortgage lending 7
Supply-driven issues are holding back the UK sub-prime mortgage market 8
A sustained increase in the sub-prime mortgage population in 2007 had little impact on the sector's performance 8
There are a number of drivers that affect the size of the sub-prime mortgage population 9
The UK sub-prime mortgage population has been on the upward trend since 2005 9
The majority of the drivers of the sub-prime population rose in 2007 10
The sub-prime mortgage population is expected to continue to expand in the near future 13
The competitive landscape of the UK sub-prime mortgage sector has changed beyond recognition 14
The number of lenders engaged in sub-prime lending has plummeted in 2008 14
There are currently fewer than 10 lenders operating in the UK sub-prime mortgage lending 16
Consequently, the number of sub-prime mortgage products has shrunk significantly 19
The medium and heavy adverse sub-prime sectors have almost disappeared 20
Margins in the sub-prime mortgage sector have become competitive again 21
A gloomy future awaits the UK sub-prime mortgage market 21
The UK sub-prime mortgage market will return in stages 21
Light adverse lending will remain the focus in 2009 22
Under the Datamonitor View scenario, sub-prime mortgage lending in the UK will contract by a further 10% in 2009 22
Given the unpredictability of the UK sub-prime mortgage market, Datamonitor has analyzed two additional alternative scenarios 24
APPENDIX 28
Supplementary data 28
Definitions 30
AAGR 30
Balances outstanding 30
Bank of England base rate 30
CAGR 31
CCJs 31
Gross advances 31
LIBOR 31
Loan-to-value (LTV) 31
Non-standard 31
Sub-prime 31
Methodology 31
Sizing methodology for the UK non-standard population 32
Reasons for credit rejection 32
Elimination of double counting 32
Datamonitor uses seven steps to size the UK non-standard population 32
Bankruptcies are excluded because of double counting 35
Sizing methodology for the sub-prime mortgage population 35
Elimination of double counting 35
Five steps are used to size the UK sub-prime mortgage population 36
Bankrupts are excluded because of double counting 37
Further reading 38
Ask the analyst 38
Datamonitor consulting 38
Disclaimer 38
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Table 1: List of sub-prime mortgage lenders, May 2007 15
Table 2: Forecasted UK sub-prime mortgage gross lending under Datamonitor View scenario, 2006-12f 23
Table 3: Forecasted UK sub-prime mortgage gross lending under the optimistic scenario, 2006-12f 25
Table 4: Forecasted UK sub-prime mortgage gross lending under the pessimistic scenario, 2006-12f 27
Table 5: Gross advances for the total UK mortgage market and the UK sub-prime mortgage market, 2003-07 28
Table 6: UK non-standard population and UK sub-prime mortgage population, 2003-07 28
Table 7: Number of CCJs on record and registered in England and Wales, 1998-07 28
Table 8: Property repossession and mortgage arrears data, 2003-07 29
Table 9: Individual insolvencies in England and Wales, 1998-07 29
Table 10: Number of credit-impaired mortgage products in the UK, February 2007-November 2008 30
Figure 1: Gross lending for sub-prime mortgages dipped by 18% in 2007 6
Figure 2: Gross lending in the UK sub-prime mortgage market is expected to amount to only £6.2 billion in 2008 7
Figure 3: The UK sub-prime mortgage population rose slightly in 2007 10
Figure 4: The number of CCJs on record rose further in 2007, although the number of CCJs registered fell slightly 11
Figure 5: After dropping in 2006, the number of mortgages which are more than three months in arrears rose in 2007 12
Figure 6: Bankruptcy orders increased by 2.4% to reach 64,480 in 2007 13
Figure 7: Only a few lenders are left standing in the UK sub-prime mortgage market, November 2008 17
Figure 8: The number of sub-prime mortgage products in the UK shrunk from a peak of 9,531 in July 2007 to 614 in November 2008 20
Figure 9: Gross lending in the UK sub-prime mortgage market will fall by 69% in 2008 and by a further 10% in 2009 23
Figure 10: Under the optimistic scenario, gross lending in the UK sub-prime mortgage market will amount to £7.8 billion in 2008 25
Figure 11: Under the pessimistic scenario, gross lending in the UK sub-prime mortgage market in 2008 will shrink to a quarter of its 2007 levels 26
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