Britain's financial watchdog has issued one of its starkest warnings on the state of the mortgage market and credit conditions, telling lenders to prepare for bleak times and secure adequate liquidity, even at high prices.
Clive Briault, head of retail markets for the Financial Services Authority, told Britain's largest lenders that UK borrowers are likely to come under strain in 2008, with many unlikely to be able to refinance their home loans at attractive terms - and some unable to do so at all.
According to the FSA, at least 1.4 million short-term fixed- rate mortgages will end in 2008.
"Many of these borrowers are on relatively high loan-to-value ratios or income multiples and will find it difficult if not impossible to refinance their mortgage on favourable terms, which will leave them facing a significantly higher interest rate on their borrowings, which may prove too much for many of them to afford," Briault said.
He said subprime borrowers "may not have access to the market at any price", until normal market conditions return. In the speech at the Council of Mortgage Lenders' annual conference, Briault told lenders to protect themselves for tough market conditions by ensuring they have adequate levels of liquidity - and liquidity of adequate quality.
"It would be prudent to pay a correspondingly high price - and to forego some profits - to secure this protection, or otherwise to scale back balance sheet growth," he said.
Touching on one of the key lessons learnt from the near-collapse of Britain's fifth-largest mortgage lender, Northern Rock in September, Briault said firms should also do more to revise tests to ensure they can withstand more turmoil, particularly covering liquidity and credit risks.
"You should consider what liquidity and credit stresses would take you to the point of destruction, so that you can decide whether you are comfortable with what that implies about how you are currently positioning your business," he said.