Industry stalwarts will vividly remember the UK financial crisis of 2007/8 and the subsequent market crash that all but ended the UK specialist or subprime mortgage lending market, which at the time had reportedly mushroomed to over 10% of the sector.

The crisis initially surfaced with the softening in the US property market of 2006/7 and with investors in mortgage backed securities becoming concerned with the quality and value of the products that they had purchased. Their concerns were warranted as it became evident that personal and institutional greed and occasional fraudulent processes, had made easy money available to clients who in many instances had no realistic or provable repayment method. Loans were often approved with minimal underwriting, credit checking and income checking and even without a correct property valuation being completed. Borrowers were targeted and often enticed with interest only loans where the monthly payments were low, but the loan balance never reduced. They were also offered no upfront costs and low introductory rate deals, but the rates soon quickly increased beyond reasonable affordability. Individual mortgages were then bundled together into multi-billion dollar bonds which were sold with a top level, triple A safety rating to institutional and private investors. These securities were not the safe bet that investors were led to believe and borrowers unable to pay soon started to default on their loans. Panic spread and banks which became worried by the possible status of their own investments along with those of their peers stopped lending to each other, increasing the difficulty in obtaining business funding. Even prime homeowners and purchasers were finding it much harder to invest in property and therefore the cash liquidity quickly dried up.

Ripples from the US escalated worldwide and grew into giant waves as they reached UK shores in 2007/8. It became apparent that our own specialist or sub-prime lending market had been handled in a similar fashion to that of the US. The subsequent fallout led to the first run on a UK bank in over 150 years, as depositors who were worried about the financial stability of one of the main UK mortgage lenders, began queuing outside branches to withdraw their savings. Northern Rock had grown quickly during the property boom and had lent much larger sums than it was able to obtain from its own savers. The shortfall was funded via borrowing from other banks, but once these banks stopped lending, it became impossible for Northern Rock to continue trading correctly. The knock-on effect of the crisis was that US investment bank Lehman Brothers, who had invested heavily in mortgage backed securities, collapsed and several UK & worldwide banks were forced to merge, were sold or were part or fully nationalised into government ownership. In addition, governments borrowed hundreds of billions of pounds/dollars to pump into the financial system to prop up ailing banks and economies.

10 years on ......

In the years since the crisis, the specialist or subprime lending sector has gradually returned to the UK, albeit in much smaller volumes. Clients who since 2007/8 were excluded from property finance borrowing due to having credit issues, complicated income streams, unusual property types or who generally did not fit the norm, are now quite rightly able to once again access a choice of funding options such as bridging loans. The difference now however, is that proper underwriting is always performed. Loan to value ratios i.e. the loan size compared to the value of the security, are lower than before the crash, credit issues are scrutinised, valuations are correctly completed, and income and affordability is carefully checked before any loan is agreed. Grouping and selling the loans into mortgage backed securities has also returned but this time investors are clear about what they are buying.

For those of us still in business from 2007/8, it is hoped that the much-needed specialist lending market remains and continues to grow but managed properly with the same prudent constraints that are currently in place today.   

For more information visit