The financial regulator will this week raise concerns about the subprime mortgage market which provides home loans to consumers with patchy credit records.
The Financial Services Authority is poised to raise some criticisms of both lenders and mortgage brokers as it publishes the results of its investigation as to whether loans are being correctly sold to consumers by mortgage brokers and banks.
The FSA is thought to have found poor record keeping at some mortgage brokers that meant they were unable to demonstrate mortgages sold to customers were suitable for them.
The FSA?s concern comes as arrears among subprime mortgage customers are currently running at 20 times those of mainstream mortgage borrowers.
Since 2005, the FSA has identified subprime mortgage lending as a ?priority area of supervision?.
In recent months it has intensified its warning to banks that they may be ?taking on substantial risks? by ramping up subprime mortgage lending to customers with patchy credit histories.
The FSA?s concerns come as the US subprime mortgage market experiences its most severe crisis in modern times, triggered by rising defaults and repossession.
Although the UK market differs in important respects from that of the US, Clive Briault, managing director of retail markets at the FSA, said of the US in a recent speech: ?We cannot completely ignore the parallels with our own market.?
Citizens Advice, which is undertaking a nationwide study of the issue, said it was seeing increasing evidence subprime mortgage borrowers comprised a large proportion of the possession proceedings going through the courts.
A study of one county court in Kingston-upon-Thames found that in 2006 one third of the 751 possession hearings related to subprime lenders.
In 2005, 204 of the 612 possession proceedings in the borough?s county court were brought by such lenders, according to a study by the local Citizens? Advice bureau.
Data about subprime mortgages are scarce; the Council of Mortgage Lenders does not even collect information about the level of arrears among subprime mortgage borrowers.
But a recent report by Standard & Poor?s, the rating agency, showed overall arrears and repossession rates in the UK subprime sector were increasing.
The agency?s UK non-conforming mortgage index shows average total arrears increasing to nearly 23 per cent by the end of 2006, from 17 per cent at the end of 2004.
Rating agencies also noted relaxation of underwriting standards in the past five years had meant the sort of borrowers who might not have secured a loan in the past at competitive rates were being accepted. The FSA is concerned rising house prices may encourage some over-indebted subprime borrowers to increase their levels of personal debt by borrowing against their property, in effect placing a one-way bet upon rising house prices.
It reckons even a slowdown in house price rises could ?expose a number of seriously over-indebted borrowers? to problems.
In a recent report, Andrew South, analyst at S&P, flagged concerns about what might happen when subprime borrowers come off two-year fixed-rate mortgages taken out when interest rates were much lower.
These homeowners face the prospect of moving on to mortgages that are at much higher rates.
The Council of Mortgage Lenders points out subprime mortgage lending by its very nature is riskier than conventional mortgage lending.
Customers who take out subprime mortgages often have bad credit records or arrears that may increase the possibility they will default again.
It also points out there are fundamental differences between the subprime market of the US and that of the UK, where lenders have not relaxed their lending criteria so aggressively as in the US.
US, loan-to-value ratios ? which show the loan as a proportion of the value of the property ? have been as high as 100 per cent. In the UK, only 15 per cent of lending is at 90 per cent or more.
Products are also very different and less risky in the UK.