The financial crisis of 2007-2008 brought much of the financial services industry into disrepute.
But perhaps none more so than the subprime mortgage market and, more specifically, the US part of the market.
Ask people how and why the financial crash happened 10 years ago and most will answer that it was largely because some of the biggest lenders, both in the UK and US, offered mortgages to those who could not afford to keep up repayments.
It is a rather simplistic version of events but it does go some way to explaining why subprime is something of a ‘dirty word’ in financial services, especially as many bad mortgage debts were being wrapped up into collateralised debt obligations (CDOs) and pumped into the fixed income market, which precipitated the credit crisis.
Many of those investment banks involved in this securitisation, such as Bear Stearns and Lehman Brothers, nor longer exist. And lenders with large subprime loan books, such as Northern Rock, are no longer a feature on our high street.
The term 'subprime' therefore comes with a certain amount of history, but the concept behind subprime still prevails.
Definition
What exactly does subprime mean in the context of the mortgage market?
The term largely refers to those who perhaps have a poor credit history and who may have struggled with repayments in the past but who want to be able to take out a mortgage in order to purchase property.
Charlotte Nelson, press officer at Moneyfacts, confirms that credit impaired mortgages or subprime mortgages, as they were once known, are useful to help borrowers with poor credit ratings to get onto the property ladder.
Ray Boulger, senior mortgage technical manager at John Charcol, explains: “The definition of subprime varies depending on the lender, but in any case UK lenders now prefer to use euphemisms such as credit repair and adverse credit.”
Some lenders have rebranded subprime mortgage products as credit repair, credit adverse or more generally, see it as falling into the specialist lending category.
Mr Boulger reminds advisers of the scale of the problem leading up to the crash of 2007, suggesting “mortgages were available to people with very heavy adverse credit, providing they had sufficient deposit/equity. It was even possible to apply for a mortgage the day after coming out of bankruptcy”.
It is no wonder the market is trying to move on from 2007.
Jeremy Duncombe, currently director at Legal & General Mortgage Club, says: “The connotations associated with ‘sub-prime’ are based on a very different market compared to what we have now.
“As a result, it’s unhelpful and inaccurate to use 'subprime' as a term to describe the current specialist lending market.”
