Mortgage Implosion in UK

The term mortgage implosion refers to the dramatic decline in the number of mortgage approvals in the UK and other countries affected by the housing downturn.

Upto June 2007, the mortgage lending market was very competitive and lenders eager to attract customers through offering non traditional mortgages such as interest only, low deposit mortgages and mortgages with high loan to income ratios.

However, beginning in the US, there have been many problems in the mortgage industry worldwide.

The US mortgage industry made many inappropriate loans to people, especially in the subprime (bad credit sector). In 2003, US interest rates were very low, so these mortgages were temporarily affordable. However, as US interest rates increased to 4.5% many homeowners suddenly found themselves with unaffordable mortgage payments and so they failed to meet their mortgage payments. This led to a rise in foreclosures (mortgage defaults) and many mortgage companies lost their money.

Furthermore, these risky mortgages had been bundled up and sold onto other financial institutions (in the form of CDOs). The idea was to diversify the risk. However, as the mortgage companies lost money so did so many banks. This made banks very reluctant to lend money. This caused a rise in interbank lending rates and a shortgage of funds in the money markets.

Therefore, it has been very difficult for the top mortgage lenders to finance new mortgages. Therefore, they have been looking for less customers, and in particular customers with large deposits and good credit history.

This shortage of mortgages has led to lower demand for houses and therefore lower house prices. Falling house prices have made mortgage companies even less willing to lend and therefore, mortgages are even more difficult.