After several years of government pressure on banks to find ways to keep struggling borrowers in their homes, industry experts say problems are piling up.
Nick Hopkinson, director of PPR Estates, called forbearance for borrowers who would never realistically be able to repay their mortgage “a sick joke”.
He said: “The banks pretending that their struggling borrowers are likely to be able to pay up in future is becoming, unfortunately, a sick joke.
“In fact rolling up debts is only making the size of the eventual bankruptcy on both sides larger.
“It would be far better for the banks and individuals to face up to their losses before they grow any more out of control.
“It’s difficult to see how forbearance is really helping either individuals or the wider housing market and economy in this situation.”
Hopkinson claimed the banks are “still pretending” that large parts of their loan books may eventually come good.
“They are massively underestimating how bad many of their lending decisions were in the first five years of this century,” he added.
David Copland, managing director of Pink, agreed.
He said: “My only concern is that there are some borrowers struggling now and a hike in rates will push them over the cliff, so rather than have the constant worry of foreclosure over their heads they should unfortunately be biting the bullet.”
And David Hollingworth, director of communications at London & Country, said: “This is one of those questions where lenders are damned if they do and damned if they don’t.
“Pushing ahead to take possession is clearly of huge impact on the individual and I think the preference must be to avoid that at all costs with loss of the home a last resort.
“That said there is of course a good argument against a blanket approach being applied that may only be staving off the inevitable and ultimately not do anyone any favours.”
Financial Services Authority guidance on arrears and possessions forbearance states that firms must take “due care” there is “a beneficial impact both for the firm and the customer, in that it can reduce the number of repossessions and lower realised losses”.
The regulator’s latest figures on forbearance show that in Q1 of 2012 some 2.02% of outstanding mortgages were in arrears totalling 303,203 individual borrowers.
Of these 110,397 are in a formal arrangement to repay arrears over a fixed period, a temporary concession to pay a lower monthly payment for a fixed period or a “capitalisation of arrears” where the arrears are added to the outstanding principal loan.
This equates to more than one in three (36%) borrowers in arrears being offered measures to keep them in their home.
Despite this lenders defended their actions arguing that arrears and possessions are around half their peak in 1991’s recession when the average standard variable rate was 15.4%.
Tony Ward, chief executive of Home Funding, went a step further and said the real forbearance was the fact that Bank Base Rate remained at its lowest level since 1694.
He said: “At a macro economic level this is having far greater effect than any single forbearance strategy of individual lenders and we see little pressure to reverse this in the near term.”
David Finlay, director of intermediary channel at Barclays, said he did not believe there were problems being stored up for the future.
And he added: “I think any lender that can keep a borrower in their home and work with them on an individual basis through difficult times demonstrates social responsibility.
“Equally there will be occasions when the lender has no choice but to take possession of their security and this is never a pleasant experience for anyone involved.”
And a spokeswoman for Nationwide said: “Nationwide is well known as a responsible lender – clearly it is not in anyone’s interest to lend money that cannot or will not be repaid.
“Lending criteria are based on affordability and a personalised approach compares income and outgoings to ensure that after mortgage payments the borrower will have sufficient income left for household, social and other expenses.”
She pointed to the proportion of Nationwide originated residential mortgage accounts more than three months in arrears being just 0.54%.
This is less than a third of the industry average measured by the Council of Mortgage Lenders of 1.96% in Q1 2012.
House price impact
Industry pundits also voiced concerns that high levels of forbearance were artificially supporting house prices.
Hopkinson said: “The UK housing market is completely distorted and has become non-functioning as a result of falsely high prices being supported by large debts that are in forbearance.
“Potential sellers cannot afford to sell at the ‘real market value’ prices that are being offered even if they want to.
“Potential buyers cannot get a fair gauge on the ‘market’ value of a property because so few transactions are taking place and are therefore scared off or waiting for prices to fall to realistic levels.”
Hopkinson said this “cannot continue indefinitely”.
And he added: “The lack of mobility that the currently frozen market is causing is very bad for the wider economy. Everyone knows the house price bubble has burst but is being artificially maintained by lender forbearance.
“A collective ‘bullet biting’ needs to occur between lenders who made reckless valuation and lending decisions, and buyers who took on debts they cannot afford. This is the only way the market confidence will recover and everyone can move on.”
And Copland said: “There is an argument that says we should let the market do what it does naturally and therefore in both instances without either product innovation or more recently the Bank’s intervention there would have been a higher number of repossessions. This would have had an adverse effect on house prices.”
