Arrears and possessions both rose in the first quarter of the year, but remain lower than they were at their peak in the last recession in the early 1990s.
In first quarter of 2009, the number of loans with arrears of more than 2.5% of the mortgage balance rose to 205,300 from 182,600 in the preceding three months. The number of cases of arrears was 62% higher than a year earlier, when the total stood at 127,000.
There were also 12,800 cases of possession by first-charge lenders in the first three months of 2009, compared with 10,400 in the final quarter of 2008. Possessions in the first quarter of the year were 51% higher than the 8,500 cases recorded in the same period in 2008.
But the number of cases of voluntary possessions – where the owner opts to turn the property over to the lender – rose even more sharply. Voluntary possessions accounted for 27% of the total in the first three months of this year, compared to 14% a year before.
No lender will initiate possession action for at least three months after the borrower is in arrears. Indeed, some lenders have extended this period to six months. It is not in the commercial interests of lenders to seek possession. But the borrower needs to work with the lender to avoid this outcome.
Our forecasts
Although we are expecting arrears and possessions to continue to rise in the coming months, at this stage both remain considerably lower than the peak numbers seen in the last recession. In 1991, for example, when there were 9.8 million mortgages, the number of possessions totalled 75,000.
Our current forecast for this year is also for 75,000 cases of possession, although, given that there are now 11.1 million mortgages in the UK – 1.3 million more than in 1991 – a smaller proportion of borrowers would be affected. More significantly, however, we now believe that our forecast for this year looks pessimistic, and we therefore expect to revise the number for 2009 downwards. But it is still too soon to make even preliminary forecasts for 2010.
With the latest data showing that cases of arrears are rising faster than possessions, it is clear that lenders will offer greater forbearance to borrowers who fall behind with their mortgage payments in current market conditions, if customers are paying what they can afford. This also appears to be borne out by data on court actions for possession, published the Ministry of Justice (MoJ).
The MoJ figures showed that 17,054 orders against mortgage defaulters were issued by the courts in the first three months of this year, compared with 29,771 in the previous quarter. Over the same period, there was also a 13% drop in the number of claims issued, from 26,086 to 22,609.
Second charge lending
Some court actions for possessions will have been instigated by second charge lenders. Data from the Finance and Leasing Association (FLA) shows that its members originated around 4% of possession cases in the first quarter. But those numbers underestimate the impact of second charge lending on cases of possession overall.
FLA members account for "over 80%" of the second charge loan market, which means that problems associated with approaching 20% of second charges will not have been captured in its data.
But looking generally at what is happening to numbers of cases of arrears, court actions and possessions, why do lenders now appear to be able to offer greater forbearance to borrowers in difficulty? And what implications does this have for future levels of arrears, court actions and possession?
Low interest rates
One important factor is that interest rates now look as if they will be lower than expected for longer than expected. In March, the Bank of England’s monetary policy committee reduced the base rate to 0.5%, the lowest level ever seen in the UK. Perhaps even more significantly, however, the Bank’s latest Inflation Report, published earlier this month, provided a clear signal that the Bank rate is now likely to stay at this historically low level for longer than might have been anticipated.
The Report says that inflation is likely to “fall back sharply over the next few months,” after which the fall in the value of sterling will begin to militate against the downward pressure on prices. While the balance between these forces will be “highly uncertain,” inflation “is more likely to be below the target than above it.” The Report concludes: “The economy will eventually heal, but the process may be slow.”
Having interest rates at historically low levels for longer than anticipated increases the capacity of lenders to show forbearance to borrowers in difficulty. A borrower who loses his job and switches to an interest-only mortgage, for example – which may be appropriate, depending on individual circumstances – will have more capacity to maintain loan payments for longer on reduced income or a redundancy pay-off. Lower interest rates give more breathing space both to borrowers and lenders.
Falling house prices
In current market conditions, where there is low demand for housing and falling property prices, options are limited for borrowers to trade their way out of payment difficulty. Selling in such circumstances is more likely to leave the borrower with a shortfall, crystallising a situation in which the lender may have to try to recover an outstanding debt.
Lenders are anxious to avoid this, partly because recovering a shortfall debt can be expensive, uncertain and time-consuming. Where they are able therefore to continue to work with the borrower on a solution to the arrears problem – and where there are realistic prospects of an improvement in the borrower’s position – the lender is likely to have a much stronger preference for this option.
Falling house prices can therefore provide an even greater incentive for the borrower and lender to work together on a solution to the arrears problem to avoid crystallising a debt through possession, particularly when other factors – like lower interest rates and improved government support – present a more favourable backdrop for coping with payment difficulty.
Court measures
Last November, the Civil Justice Council (CJC) introduced a 'pre-action protocol' for cases of possession coming before the courts. The protocol is intended to embed in the legal process a requirement for all alternatives to possession to be thoroughly explored before deciding that a case should go to court.
While it is still too early at this stage to be clear about the impact of the protocol, some lenders and advisers are reporting that it has had a positive impact.
Having originally – and unexpectedly – rejected the idea of a standardised checklist to be applied to cases that may come to court, the CJC has now changed its mind and is keen to develop the idea. It now believes that a standard checklist would augment the process, so we are working with the CJC to finalise this as soon as possible. We would like to see it based on the processes already being applied by lenders so that it causes minimal inconvenience to firms.
Government help
The government has improved the benefit system and implemented other initiatives intended to help borrowers manage their way through a period of payment difficulty. The main benefit measure is that the cap on the size of a mortgage covered by income support for mortgage interest (ISMI) has been raised, while the waiting period to qualify for help has been shortened. The reality is, however, that the eligibility criteria for ISMI remain too narrow for the scale of the problem we face – if the policy objective is to minimise arrears and possessions.
The government has also introduced two other measures. The home-owner mortgage support scheme offers a state guarantee to participating lenders for part of any eventual shortfall debt that a borrower may be left with if he is unable to recover from a period of arrears. Second, a mortgage rescue scheme has been introduced to help ensure that those borrowers for whom home-ownership is no longer sustainable can remain in their home as tenants.
Having been introduced only very recently, neither scheme will have had any significant impact on court actions for possession so far. In future, both will help some borrowers in some circumstances but will not be appropriate for everyone. Both, however, encourage borrowers to discuss their options with lenders and money advisers at an early stage which will be helpful in exploring the options available to help customers in difficulty before they reach a crisis point.
Debt advice
In recent years, the government has put more resources into providing debt advice. This has helped widen the availability – and improve the quality – of professional debt advice, tailored to individual needs. It also helps borrowers to manage and prioritise debts from a variety of sources.
Against a backdrop of rising arrears and possessions, the lending industry has been reinforcing its message about the need for borrowers anticipating payment problems to talk to their lender at the earliest opportunity. As the economy worsens and the threat of payment problems looms larger, consumers are, perhaps, more likely to heed the message.
Better provision of debt advice – and better engagement with it by consumers – will encourage borrowers take a responsible attitude to payment problems, which, in turn, helps lenders show forbearance.
Conclusion
Recent data showing a rise in mortgage arrears and possessions was expected in a recession, with rising unemployment. But any increase is, of course, a cause of concern. Lenders are acutely aware that behind the statistics are real people, many of whom are affected by the wider economic downturn and its effect on employment, as well as changes in their circumstances or an inability to re-finance.
Against this backdrop of rising arrears and possessions, there are, however, a couple of trends that are a little more encouraging, specifically that:
mortgage possessions are not rising as sharply as arrears, suggesting that, for a variety of reasons, lenders are more able, in current circumstances, to extend forbearance; and
we now believe that our current forecast of 75,000 possessions this year is pessimistic. We are therefore re-appraising our forecasts and are likely to revise downwards our expectations for possession in 2009 in the coming weeks.
We must not forget, however, that, in a recession, mortgage possessions are a lagging indicator. And, while we will continue to encourage lenders to show forbearance, where possible, there may be a deterioration in some of the background factors affecting the capacity of borrowers to cope with mortgage arrears in the future – for example, if interest rates go up while unemployment is still rising.
The key message for borrowers cannot be repeated too often: talk to your lender as soon as you are aware of any emerging payment difficulties, and take advice if you have other debt issues as well as your mortgage. Lenders do not want to take possession of a property if a realistic alternative can be found.
