Last week in the U.S., the subprime debacle kept grabbing headlines that rattled wider markets. Meanwhile, across the Atlantic, spreads stood fairly firm. Why the disconnect? Well, for starters, Europe has a relatively non-existent subprime mortgage market. Furthermore, when we talk about subprime across the Atlantic, we mean the U.K.
Things just aren't done in the same way in the U.K. as they're done in the U.S. Call U.K. lenders conservative, but it's their very lack of bravado in the past that is shielding spreads today. Even with the ballsier mortgage lending techniques employed by U.K. lenders over the past two years, subprime lending in this country looks rather tame when compared to U.S. lending techniques. If lenders even considered taking a page out of the U.S. style guidebook, these past few weeks may prove to have been the wake-up call that was needed. The U.S. experience shows that riskier borrowers should be treated with more caution because in the event of a dramatic shift in economics, these borrowers will be the most likely to default.