An increase in the number of property repossessions and the publication of a report raising concerns over the ability of many borrowers to meet their mortgage repayments has triggered a flurry of tabloid newspaper headlines speculating on an imminent crisis for home owners.
According to figures released by the Council of Mortgage Lenders (CML) in August, repossessions in the first half of 2006 rose to 8,140 – an increase of more than 3,500 on the same period in 2005 and almost 2,500 up on the second half of last year. In fact the CML says repossessions are now at their highest level since 2001.
The increase has been blamed on interest rate rises and higher unemployment, adding to the already huge personal debt burden that many British consumers are struggling with. But some commentators have blamed lenders for stoking the problem by relaxing their lending criteria and offering mortgages in excess of 100 per cent loan-to-value (LTV) or higher than the traditional three times income multiples.
Research undertaken by the Citizens Advice Bureau (CAB) found that 770,000 borrowers in the UK have missed at least one mortgage payment, as well as revealing a staggering lack of awareness among consumers with regards to their repayment obligations and the ramifications of being in arrears.
Announcing the findings, David Barker, chief executive of the CAB, called for more education for consumers, saying: “These figures do not surprise us. Local CAB helped people to deal with 1.25 million debt problems last year and see many people with mortgage and rent arrears.
“Missing payments on mortgages or secured loans could lead to arrears and possibly repossession. There is a clear need for more information and advice about the consequences of taking on financial commitments, particularly for younger adults.”
Painting a different picture
CML figures also reveal a slight upward trend in the amount of arrears: 6-12 months in arrears were at 35,320 in the first half of 2006, up from 34,630 at the same point in 2005; arrears in excess of 12 months rose to 15,070 in the first six months of 2006, up from 12,580 during the same period in 2005; and there were 61,470 people who were 3-6 months in arrears in the first half of 2006, up from 58,130 at the same time in 2005, although showing a slight drop compared with the second six months in 2005.
However closer inspection of the repossession figures reveals a somewhat different picture. According to the Royal Institution of Chartered Surveyors (RICS), even at its current level, repossessions only account for 0.1 per cent of outstanding mortgages.
The CML has estimated that the total number of repossessions this year will hit 12,000, but this is still lower than the figure of 18,280 in 2001 and way below the 43,890 repossessions recorded by the organisation in 1990. Currently repossession figures are not broken down by type of loan or lender, for example, mainstream mortgages as opposed to specialist loans, but this is something the trade body is working on.
In announcing the repossession figures, the CML partly blamed interest rate rises from 2003 and 2004, saying that the impact of those increases had now ‘largely worked through’. The organisation admitted that the rise this August could put a further squeeze on borrowers at the margins, but suggested that many people had shielded themselves from the impact of rises by taking out fixed rate deals.
The CML predicted repossession numbers to level out at 15,000 per year between 2006 and 2008, citing a calmer economy, an increased uptake of fixed rate mortgages, fairly stable interest rates lessening the instances of payment shock for borrowers coming off a fixed rate to a higher standard variable rate (SVR), and a slowing down in the growth of unsecured lending that it believes has added to the general over-indebtedness of the UK.
According to the CML the recent rise in repossessions is no cause for concern and is not the result of lenders encouraging borrowers to over-extend themselves. Communications manager, Bernard Clarke explains: “If you look at where possessions are in the historic context and the number of mortgage accounts, it shows that lenders are getting the balance right.
“Lenders are using more flexible measures so more people are getting access to mortgages, but there is not a huge increase in repossessions. Lenders are being cautious with customers that have a potential affordability problem, such as first-time buyers.”
Clarke says that repossession is the last course of action for lenders, as they prefer to reach a solution with the borrower rather than taking away their property. In fact, although government figures also show a marked increase in the number of borrowers taken to court – more than 115,000 court actions were entered and almost 71,000 repossession orders were made last year – the majority of these orders were suspended, so they did not actually result in people losing their homes.
All too often, however, borrowers fail to inform their lenders about changes in their circumstances or problems they are facing that could cause repayment problems. They ignore letters and calls from their lender and the situation escalates to such a degree that the only option is for the mortgage provider to apply for a repossession order, which acts as a wake up call for the borrower.
Consumer education and responsibility
The CML agrees better consumer education is required to make borrowers more aware of their responsibilities and also their options if they get into problems. Clarke says the CML and lenders are supporting the Financial Services Authority’s (FSA) financial capability initiative and its own Sustainable Home Ownership Initiative to help provide such education.
Clarke continues: “If borrowers do find themselves with problems with their mortgage they should talk to their borrower. The earlier they talk to them, the earlier the lender can work out a solution.”
David Hollingworth, head of communications at brokers London & Country, also believes borrowers must take more responsibility for the current rise in repossessions. He feels that mortgage lenders are not to blame for the situation and in fact it is unsecured borrowing outside of their home loans that is leading to problems for customers.
He says: “The very high levels of consumer debts are not helping borrowers. I would say that lenders are not being irresponsible. The affordability models lenders have are right for some people and the demand is there from borrowers.
“The issue lies with unsecured debt, particularly where people have consolidated their unsecured debt into their mortgage. The worry is that having done that, they then go out spending again on their credit cards, which makes the debt issue worse and they start getting into a downward spiral.”
Despite the controversy surrounding mortgage payment protection insurance (MPPI), particularly single premium products, Hollingworth says that more borrowers should consider taking out such cover so that if they are hit by an unexpected change in circumstances, such as losing their job for example, they have something in place to ease the blow.
He says that explaining the advantages of payment protection is a vital piece of advice that intermediaries can offer to their clients. Moreover Hollingworth believes that brokers and mortgage advisers have an important role to play, not only in explaining to borrowers their responsibilities when taking out a mortgage, but also offering help if their client does get into payment difficulties.
Hollingworth continues: “Part of this situation falls on the borrower – if they don’t make the first move to say ‘I’ve got a problem, what can we do to remedy it?’, there is very little the lender can do.
“Key Facts Illustrations (KFIs) show consumers what their repayments would be if interest rates were to rise by 1 per cent, so everything is now being geared towards showing borrowers what can happen. From the intermediary’s point of view it is vital to explain to the borrower the implications of not keeping up with their repayments.”
Hollingworth does question whether some of the newer players in the specialist mortgage lending sector will take a different view of defaulters, particularly those working in the traditional non-conforming area. He says: “It will be interesting to see whether the new entrants will be keener to get on the repossession trail. For high-street lenders it is an action of last resort. But for specialist in that area they are more open to arrears and therefore maybe more likely to take action.”
Addressing the problem
Ray Boulger, senior technical manager at John Charcol, believes that blame for rising repossession rates cannot be laid at the door of providers. He says: “Most lenders will do everything in their power to prevent a repossession. Anecdotally, it seems the increase is due to second charge loans, which have pushed borrowers into problems.”
Boulger says that many short-term repayment problems can be addressed by switching mortgages to an interest only option or taking a payment holiday, facilities that he says many more lenders offer these days. However he admits that too many people are unaware of these options, so they do not realise there could be a solution to some of their woes.
He also believes that the relationship between broker and client can be crucial in these circumstances. Boulger explains: “If a client is getting into difficulties with mortgage repayments they should talk to their broker as soon as possible because they can look at all the possibilities to help the borrower. The longer the customer waits then their options are much more limited.
“But this can only happen if the broker has a good relationship with their client and has kept in contact with them, so the client feels they can turn to them for help. If the relationship isn’t there then they won’t turn to the intermediary for help.”
Halifax says it is keen to prevent repossessions. Senior media relations officer, Paul Fincham explains: “We always work with customers to try and ensure they remain in their own homes. The best advice is for borrowers to speak to their lender quickly to install some kind of payment arrangement. So long as they acknowledge there is a problem we can try and work to help them.”
Halifax’s chief economist, Martin Ellis, says the mortgage lender predicts a continued small rise in repossessions as a result of higher unemployment and interest rate rises, but believes these will remain modest in light of a more stable economic position.
Halifax uses this information to help reduce the potential for customers getting into problems with repayments. Ellis says: “We have been more cautious in growing our market share and not letting people borrow more than they can afford because this is just storing up problems for the future. We use these economic factors to help decide what our lending policy should be.”
Looking in context
The increase in repossession should also be seen in context of a soaring number of bankruptcies and Individual Voluntary Arrangements (IVAs) in the UK, many of which relate to individuals with personal debts. According to the Insolvency Service, there were 23,351 individual insolvencies in England and Wales in the first quarter of 2006, an increase of 73.4 per cent on the same period a year ago. For the first time insolvencies are expected to top 100,000 by the end of this year.
Although the instances of people getting into problems with debt are increasing, it also widely felt that more people are viewing bankruptcy as a way of getting out of their financial difficulties. Bankruptcy has less stigma attached to it these days, ironically partly because of the steps taken by specialist lenders to help borrowers get back on track and rehabilitate their credit histories. It is not a stretch, therefore, to surmise that more borrowers are willing to push their lenders until they get to the point of no return and are forced to hand over the keys to their home.
When compared to record amount of mortgage lending taking place currently, the small rise in repossessions does not seem like a major point of concern for mortgage providers, the regulator or borrowers. But as part of an underlying trend of growing personal debt and a continued lack of financial awareness among consumers, then it is a worry.
Mortgage lenders and intermediaries obviously feel they are playing their part with robust affordability criteria, appropriate and detailed advice and using repossessions sparingly, but until the financial services industry and the regulator are able to improve the level of understanding among the general public, we are likely to see more and more people losing their homes.
