Mis-selling in UK subprime loans exposed

Published on Wednesday 26 September 2007 00:07

THE beleaguered subprime mortgage market in the UK has been dealt another blow, by an investigation claiming to have uncovered evidence of serious mis-selling.

Borrowers have been told to stretch their incomes to take out loans much bigger than they can realistically afford, according to a BBC File on 4 radio programme broadcast last night.

Half of all subprime mortgages in the UK are estimated to be self-certification loans - where borrowers state their incomes, which the lenders will not always check. This is intended to help such groups as the self-employed and those who derive some income from state benefits.

A former mortgage broker told the BBC that inflating the client's income is seen as an easy way for some advisers to get a deal approved. And one borrower whose real income was 25,000 said he was advised to double that on his mortgage application to obtain a loan of more than eight times his salary.

A spokesman for the Financial Services Authority said: "We are determined to cut down on mortgage fraud. Based on our investigations and on information received from lenders and whistleblowers we have banned a number of brokers who have been involved in knowingly overstating the income of mortgage applicants and we will continue to crack down on this abuse."

Industry experts in Scotland say that while there may be the occasional case of this type of mis-selling it is unlikely to be widespread.

John Postlethwaite, consultant at Punter Southall Financial Management in Edinburgh, told The Scotsman: "I would be surprised if this isn't happening but I've not come across any clients who have wanted to lie about their income. Lenders should have systems in place to pick this up. They should spot if a postman is claiming to earn 100,000."

Postlethwaite added that the problem was likely to be less pronounced in Scotland because house price inflation had not stretched affordability to the same extent as in some areas in England, especially the south-east.

David Watson, consultant at Savills Private Finance in Edinburgh, said: "I'd be very surprised if it's happening on a big scale. As with any industry there is probably the odd 'bad apple' and it looks like some brokers have been encouraging borrowers to lie.

"Most of the big lenders in these fields say that arrears for their subprime mortgages are not that much greater than for their mainstream business so this would back up the fact that, in the main, people are borrowing within their means."

But the investigation will put further pressure on subprime lenders and borrowers. This month Victoria Mortgages became the first UK subprime lender to go into administration.