Yorkshire Post - September 2007
Contributor : Jonathan Fry

This week we remembered the sixth anniversary of 9/11, September 11, 2001, when the world's most horrific acts of terrorism resulted in the destruction of New York's World Trade Centre and the deaths of more than 3,000 people.

In targeting the Twin Towers, Al Qaeda chose not only to strike at the most iconic symbol of American confidence, but also at the heart of its economic prosperity. The Towers housed many of the global giants of the financial world and the attacks shook financial markets in the four corners of the world for many months afterwards.

Thankfully, no such carnage marked the sixth anniversary on Tuesday nor, let us hope, shall it ever again. Nevertheless, the anniversary was marked, not only by services of remembrance across the United States, but also by the biggest financial crisis to hit the US since 9/11, 2001.

Who could have imagined that the flawed practice of issuing loans for homes at levels and at a cost that borrowers clearly were going to struggle to afford would have brought such a dramatic downturn in financial market values as we have witnessed in recent months?

Labelled the "sub-prime crisis", it has seen more than 20 US lenders file for bankruptcy and has wiped billions of dollars and pounds off the stock exchanges in New York, London and elsewhere. It has also generated the near collapse of the American housing market.

As home owners and borrowers in the UK, we have to be concerned that the sub-prime crisis across the water will leave in its wake a downturn in our own housing and financial markets so yes, our concern is well-founded.

The sub-prime market comprises vast sums of money that are loaned to people who have poor credit records at higher-than-average interest rates. It seems barmy, I know, but investors in the debt markets, including hedge funds, have in the past been able to profit from securities derived from the initial sub-prime loans.

The meltdown in the United States was caused by a huge increase in the number of houses that were repossessed from sub-prime borrowers who defaulted on their mortgage repayments because of higher interest rates. That in turn led to a glut of houses being put up for sale as hard-pressed mortgagees tried to cash in their homes before falling values plunged them into a negative equity trap, whereby their house was worth less than they owed on it.

With no chance of recovering the money they had loaned, sub-prime lenders collapsed and the ripples extended across the debt and global equity markets.

The seeds of recession were firmly planted.

Unlike the US experience, keen competition among sub-prime providers in the UK has benefited astute borrowers who have been able to strike favourable deals. The shortage of available housing is also helping to maintain property values, so shielding the UK from the worst ravages of a housing slump.

The lesson for borrowers and lenders is to be realistic about the prospects of loans being repaid and certainly not to enter into arrangements that could trigger a personal, institutional or even national financial disaster.