RENEE MONTAGNE, host:
Europe has been hit by the fallout of the subprime crisis, as this week proved once again. European markets have been volatile all week and turned dramatic in London. Their traders floated rumors that a big mortgage lender was in trouble. And like the U.S., some homeowners in Britain who took out big mortgages are finding it harder to make their payments.
NPR's Rob Gifford begins his report at the home of one of them.
Ms. JESSICA SHEPHERD: This is my living room and we went for a '70s feel, as you might have noticed. It's bright orange, and we have got original '70s G Plan furniture, which we're very proud about but which we found really cheaply.
ROB GIFFORD: Twenty-nine-year-old Jessica Shepherd(ph) gives a guided tour of her small terraced house in the city of Leicester. She and her boyfriend bought the house two years ago on a 35-year mortgage, fixed rate for the first two years.
Their problem, and the problem of many first time buyers in Britain, was that they had no deposit. No problem, said Northern Rock, the bank that has since been taken over by the British government; we'll lend you the full 100 percent plus another 25 percent of its value so that you can decorate it and pay the legal fees.
Ms. SHEPHERD: It was always going to happen really, wasn't it? I mean banks have been lending people money, so much money, so much more than they can afford. It was probably cheaply(ph) because I wouldn't have given us a mortgage. One hundred and twenty-five percent, I wouldn't have done it. I wouldn't have given 125 percent mortgages out; where's the extra 25 percent come from? It doesn't come from anywhere, does it?
GIFFORD: Shepherd's case is multiplied thousands of times across Britain, but not always with the same philosophical effect on the borrower. Shepherd and her boyfriend simply can't find a mortgage company that will give them a low fixed rate, so they'll have to resort to the higher floating mortgage rate and scrimp and save to try to meet the payments. If not, they'll have to sell.
Mortgage lenders have been flooded with applications from people like Jessica Shepherd trying to renegotiate their mortgage rate, to the point that several, such as the Bath Building Society, have withdrawn almost their entire range of mortgage products. Dick Jenkins is its chief executive.
Mr. DICK JENKINS (Bath Building Society): We've been getting inquiries in recent weeks and days at several times our normal level. And there's only so far you can take that before service starts to - starts to be impacted. Now, we don't want to get to that level, so we've actually decided to withdraw our product range before we get to that point.
GIFFORD: It's a challenge not just in Britain but right across Europe, especially in countries like Spain and Ireland, where there's been a huge housing boom that's now turning to bust.
Mr. ALAN AHEARNE (National University of Ireland): I think it would be surprising if we didn't see some European banks get into fairly serious trouble.
GIFFORD: Alan Ahearne of the National University of Ireland was formerly a senior economist at the U.S. Federal Reserve. He says the housing problems across the continent have come at the same time as a number of other economic problems, such as the rise in value of the euro that has affected exports.
In some European countries such as France and Germany there have been plenty of problems. German banks have bought mortgage bank securities from U.S. lenders, for instance. But generally, Ahearne says, in these countries, where there hasn't been such a housing boom and where there's more regulation and less reckless lending, the fallout has been less severe.
Mr. AHEARN: There are certainly structural problems in the European economy. These are well known with the labor marketing flexibility and some other problems where product market deregulation is needed. But the fact that they hadn't gone through the property booms and bust I think does mean that they should be in a slightly stronger position.
GIFFORD: The sheer volatility of the situation in Britain was shown dramatically on Wednesday. Rumors began to fly on London trading floors that Britain's biggest mortgage lender, HBOS, was seeking billions of dollars of support from the Bank of England, just as the doomed Northern Rock bank did last year. Shares nosedived before HBOS and the Bank of England firmly denied the rumors. The government financial watchdog, the Financial Services Authority, is now investigating whether rouge traders falsely planted the rumors to take advantage of the jittery financial climate here in order to make money.
Rob Gifford, NPR News, London. Transcript provided by NPR, Copyright NPR.
