MORTGAGES Loans go bad as British housing bubble pops

"I don't even know who owns it now," Hale, 72, said wistfully in an interview in the tiny public-housing apartment she lives in now. "It's empty still. . . . The garden shed has been stolen, all my built-in kitchen has been smashed to pieces, the wallpaper's been ripped off. . . . They could have let me stay."

Hale signed over her house for $50,000 less than what it was worth. In return, she says, she was told she could live in it as long as she wanted if she paid the company $600 a month. Six months later, Hale learned her home had been sold and the mortgage transferred to one of Britain's major sub-prime lenders. Hale had 28 days to get out.

After selling the family home in 2002, she bought a house in the suburbs of this old industrial city in northern England and took out a mortgage to fix it up. By last year, though, Hale had fallen behind on the payments on her "gorgeous little place" and was looking at foreclosure -- until a sales agent for a mortgage "rescue" company stopped in.

MANCHESTER, ENGLAND — When Shirley Hale's husband dumped her for a younger woman and moved to the Czech Republic, Hale didn't get mad. She got a new house.

The American sub-prime mortgage crisis has received attention worldwide, and European officials have been quick to blame lax U.S. oversight of lenders for the international credit crunch that has crippled banks and sent shock waves through the financial markets.

But Europe has its own burgeoning mortgage meltdown -- in Britain.

After years of watching house prices soar even faster than those in America -- modest three-bedroom tract houses in the London suburbs were going for $2.2 million at one point -- Britons are now weathering a sharp rise in mortgage defaults.

Moreover, many debt-laden homeowners have no means to salvage their properties because favorable loans are suddenly harder to get. Desperate consumers are increasingly turning to costly and confusing financial rescue plans that often end, later if not sooner, in the loss of their homes.

The Financial Services Authority, which regulates banking in Britain, warned last month that 1.4 million mortgage holders will face interest-rate resets on their loans this year, with payment hikes of up to $420 a month.

Repossessions -- the British term for foreclosures -- jumped 21% last year, with filings against more than 27,000 homes, according to the Council of Mortgage Lenders.

"There is potentially a huge number of people who may be in difficulties," said Adam Sampson, director of Shelter, a nonprofit group that counsels homeowners seeking to avoid losing their houses to debt. "So many of the people we see are husbands and wives who have borrowed against both their incomes. . . . A substantial number have never had to verify their income to their lender."

Because many borrowers have stretched themselves to the limit, Sampson added, seemingly minor economic changes such as less overtime or smaller bonuses might wreak havoc. "All of those things are able to tip them over," he said.

And while few borrowers here are "underwater" on their loans -- meaning they owe more than their home is worth -- the trend in housing prices isn't helpful. Forecasters expect a largely flat market this year, with some naysayers predicting a drop of up to 5%.

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British sub-prime

The Bank of England's decision this month to drop its key interest rate a quarter-point to 5.25%, following a similar reduction in December, was hailed as a boon to homeowners facing rate resets. But many mortgage lenders, operating on thin margins in a competitive market and having trouble accessing cash in the tight credit market, have elected not to pass on the rate reduction.

As in the U.S., buyers with bad credit or low incomes are often steered into the sub-prime market, where the prevailing interest rate is around 9.5%.