Paragon , Britian's third largest buy to let mortgage financing company crashed 40% yesterday and appears to be following a similar path to Northern Rock Bank. Both financial institutions relied heavily on the credit markets to finance loans to mortgage borrowers and both have been hit by the credit crunch. However not being a bank with no customer base, Paragon appears did not go the whole hock down the short-term funding route as Northern Rock and hence has managed to stumble along until yesterday.

Still not being a bank, Paragon was faced with even higher interest rates than the interbank market rate, which forced Paragon to make yesterdays announcement, even before the UK housing slump kicks into gear. Paragon is being forced to go to shareholders for £280 millions to save the company from going bust. However once the avalanche of buy to let selling begins the number of mortgage defaults is expected to explode and the rights issue may just be a stop gap to much greater difficulties for the company during 2008.

Paragon chief executive Nigel Terrington is still banking on a strong Buy to Let market during 2008 and unfreezing of the credit markets to enable the company to resume normal lending business.

However the risks are that if the freeze continues at anywhere near current levels than it is only a matter of months before Paragon is forced to liquidate itself.

Other banks at potential risk due to the credit crunch are Alliance and Leicester and Bradford and Bingley, and undoubtedly expected to hit the whole financial sector for some time.

UK Housing Market Forecast for 2008-09 - As of 22nd August 2007

UK House Prices to fall by 15% over two years, falling prices to be accompanied by cuts in UK interest rates. (22nd Aug 07),

1st May 07 - UK Housing Market Heading for a Property Crash

25th Sep 07 - UK Housing Market on Brink of Price Crash - Media Lessons from 1989!

28th Oct 07 - UK House Prices - Primary Reasons For a Sharp Fall

10th Nov 07 - Crash in UK House Prices Forecast for April 2008 As Buy to Let Investors Sell on Capital Gains Tax Change

By Nadeem Walayat
Copyright (c) 2005-07 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 20 years experience of analysing and trading the financial markets and is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 100 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

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