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The problems in the United States sub-prime market are far from over. In fact, they may have only just begun, experts say. This is because a number of temporary teaser rates come to an end this year and next, increasing the chances of a huge rise in the number of risky home loan defaults.

Fidac is a US-based mortgage-backed securities investment company, and their chairman Michael Farrell said that home loans to the value of $1,000 bn may have to switch to higher floating rates over the next two years. The situation is not dissimilar to that which exists in the UK, with over 2 million borrowers on cheap fixed rates that are due to expire in the next twelve months or so.

In the States over half the loans might be loans to risky, sub-prime borrowers (not the case in the UK), and many of these will default soon after higher mortgage start to become due in the next twenty-four months. Mr Farrell pointed to the abnormality of the situation, saying that such numbers delinquencies (as they are called in the US) as are expected usually happen in a recession, but currently the US is in the midst of good job growth.

Aberdeen Asset Management fixed-income manager Daniel Taylor said that the road ahead would not be pretty as sub-prime borrowers do not have the back up resources to be able to handle monthly payment increases of $500, $600 or even $800. Around 60% of outstanding sub-prime mortgages are expected to be reset to highest interest rates by the end of next year. Taylor believed that the very real danger of a collapse in the US sub-prime market could lead to a wider financial maelstrom. He says that some of the risks taken should never have been taken and problems could spread further. He was particularly scathing about ratings agencies and said that some of the ratings assigned to complex derivatives based on many sub-prime home loans were “mind-boggling”. Taylor suggested that a lot of people had made a lot of money in the sub-prime market, including borrowers hoping to make a fortune, lenders who handed over the money, banks and ratings agencies. Aberdeen also say that some riskier portions of debt at the lower end of the collateralised debt obligations (CDOs) holding sub-prime mortgages were owned, not by real investors, but by other CDOs.

Neither Fidac nor Aberdeen are involved in the sub-prime market.

Meanwhile Bear Stearns, the Wall Street banking giant, has shocked investors by acknowledging that the US sub prime mortgage meltdown has left two of its main hedge funds high and dry. They are almost worthless and have lost billions of dollars. On of the funds was said to have “effectively no value left” and the other had “very little value left”. At their peak the two funds had a combined value of $20bn (nearly £10bn). Bear Stearns gambled on the American mortgage market – and lost, as high-risk borrowers with poor credit histories began to default, and left both funds devastated by the effects.

Analyst Sean Egan of Egan-Jones Ratings declared this to be a watershed moment, as such a leading player with a fine reputation as a wise investor in mortgage securities, has come a cropper. He wondered how many other players in the market might follow the same problematical path.

Bear Stearns sent a letter to investors, which said: 'We will seek an orderly wind-down of the funds over time. This is a difficult development for investors in these funds, and it's certainly uncharacteristic of Bear Stearns Asset Management's overall strong record of performance.'

In June Bear Stearns announced that it was going to use $1.6bn of its reserve funds to rescue the High-Grade Structured Credit fund. That left $1.4bn still outstanding which it was seeking to recover. Now, however, the High-Grade Structured Credit Enhanced Leveraged fund is worth nothing as the assets were mostly securities backed by sub-prime mortgages which lost value when delinquencies grew during the slump in the US housing market.

The warnings from the US are that in the current and foreseeable economic climate lenders should ensure that customers do not borrow more than the can afford. The subprime industry in the UK may be looking at problems as it may be subject to legal claims of billions of pounds after the FSA found inadequate lending checks for loans to vulnerable borrowers.

The sub-prime market caters for people with bad credit ratings. Arrears in the sector are many times higher than those for conventional home secured loans. With the financial situation getting tighter for people already in difficulty, there seems little likelihood that situation will improve. In the UK experts are now expecting interest rates to reach 6% before year-end and some gloom merchants say it may not end there, with 6.25% a possibility in early 2008.

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The burden of debt is reaching record levels as the four interest rate rises in a year begin to take their toll. UK household’s are using around 19% of their income to repay borrowed money and the interest on it.

The previous highest level was in late 1990 at 18% according to figures from accountants Pricewaterhouse Coopers (PwC). In quarter three 1997 only 12% of average income was used to repay debt, but the figure has been on a steady rise ever since.

Interest rates are almost certain to rise again in early July, making the situation even worse for many households.

In recent months rising utility bills, fuel prices and increasing interest rates have not been matched by earnings increases, leaving many households worse off. This means that the amount of spending power for goods and services will be reduced. This will inevitably lead to lower consumer spending in the next two or three years. This is, of course, what interest rate rises are designed to do to cool an overheated economy. The danger is that interest rates will be pushed up too far, cutting spending by so much that spending stops enough to result in companies struggling against falling orders.

PwC reports that after debts and bills have been paid, the level of income rose by 3.1% per annum from 2004 to 2006. It was 3.9% per year over the longer period of 1997 to 2006. Since 1995 household spending has been going up by 5.5%, whereas as disposable income has gone up by only 4.9%. The result has been an increase in borrowing to match the shortfall. The increase in borrowing means higher mortgages and more credit being taken on by more people

PwC forecast GDP growth to fall to 2.75% for the rest of 2007, from 3% in the first quarter, and then to 2.5% in 2008. Consumer inflation is expected to go down towards the target of 2% in early 2008.

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Adverse credit homeowner loans might seem tricky to secure, but actually this is not the case. People are securing the adverse credit loan that they need each day, and so could you. You just need to know where to look and be open to various funding options. The information in this article will tell you more about how to find and secure an adverse credit homeowner loan. Whether you need to renovate your property or simply go on a dream holiday, adverse credit homeowner loans can be easy to find if you know where to look.

About collateral

An adverse credit homeowner loan is exactly what it appears to be, and allows homeowners who have adverse credit to get hold of a loan. The collateral for the loan is either the house itself or the equity of the property that you have built up over the years, although this does depend on the loan amount. You need to know the exact amount that lenders need for collateral before applying for a loan, as this will help you to secure the right loan with better interest rates and loan terms.

Looking for a loan

Finding an adverse credit homeowner loan is about keeping your options open. As well as looking at your standard banks and lenders, you should consult remortgage companies, online lenders and finance offices. All of the lenders have loans that they might be able to offer you, and it will give you a larger range of interest rates and loan terms to compare. This will help you to find the best adverse credit homeowner loan deal. The better and more thorough your lender search is, then the better the loan that you secure will be.

Shopping around

Once you have a shortlist of lenders for your adverse credit homeowner loan, you need to look around for the best deal. Get loan quotes from the various lenders and what loans are available. This will aid you in choosing the right loan for you, as well as work out which loans are the best value. Online lenders often offer the best rates because they have lower operating costs, and so can offer lower rates even if you have a poor credit history.

Picking the ideal loan

Picking the ideal adverse credit homeowner loan can be hard; as it is likely that one single loan will not have all the things you need. This is when you have to find the right balance of features to suit your needs. As well as considering the interest rates you should consider the length of the loan term as well as the penalties for missed payments as well as the price of payment protection. Think about what you can afford to repay, and then you will find the best adverse credit homeowner loan for your requirements.

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