The subject of clients who apply for mortgages and loans with what is deemed ‘adverse credit’ has long been in the press for the problems it poses to brokers and lenders. The current non-conforming market trouble in the US has been particularly highlighted, with lenders granting mortgages to applicants who are not able to meet their repayments.
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In the UK, the same fate is being avoided not just by careful and stringent regulation, but also by correctly advising borrowers with large amounts of debt. One company offering an option for brokers is Debt Advice Portal, which offers an online system which provides debt solutions for brokers to use when advising clients with debt problems.
So, if a client can only see bankruptcy as a resolution to their problems, brokers can use the portal to get the best advice for the client – be it an Individual Voluntary Arrangement (IVA), a remortgage, or the option of taking out a secured loan.
As well as advising clients, the portal helps brokers learn more about how to deal with bad debt cases, and how to advise and work with bad debt options. Nick Du Boulay, director of the Debt Advice Portal, said: “The system enables the broker to provide a service fully in line with best advice, while earning a fee and maximising the opportunity for the client to return to the broker once their financial situation has improved. Brokers are in a great position to advise their clients to do the right thing.”
Horror stories
So how common is bad debt in the UK? We have been fed horror stories by the national press and have been hit around the head plenty of times with the ‘don’t take out too much debt’ baton by banks over the past couple of years. According to The Insolvency Service, in Q1 this year 30,075 insolvencies were recorded in England and Wales, of which 13,233 were IVAs. This is an increase of 4.7 per cent on the previous quarter and 47.6 per cent on the same period a year ago.
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Along with this, 300 people a day are declared insolvent or bankrupt and at the end of April 2007, the total personal debt mountain in the UK stood at £1,325 billion, with a growth to 10.4 per cent from the previous 12 months, which works out as an increase of £114 billion.
Perhaps the largest concern in terms of this industry is in regard to the total secured lending on homes, which at the end of April 2007 stood at £1,112 billion, and the Consumer Credit Counselling Service reported it received 33 per cent more calls in Q1 2007 than in the same period in 2006, with almost 87, 000 calls received.
Missing payments
Research from MoneyExpert.com showed that 460,000 monthly payments had been missed in the past six months, with around 77,000 payments missed every month – a figure that is feared to increase following the recent rise in interest rates.
Sean Gardner, chief executive of MoneyExpert.com, said: “Missing a mortgage payment is a real signal of distress and anyone in such dire straits needs to address the issue as soon as possible. We are a long way from the dark days of the late 1980s and early 1990s when more than a million people lost their homes but many are feeling the strain.
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“Anyone who has missed a mortgage payment should, for a start, be talking to their lender and letting them know what is going on. They should also look to cut spending and reduce debt across the board. That ought to mean sorting out their finances and getting all loans and credit cards under control. It can mean looking to consolidate loans and exploring secured loans against the value of their home. Many of us have considerable equity in our homes which can be used.”
Unhappy reading
So the statistics don’t make for happy reading, and it seems that scare stories featured in the national press have plenty of grounding in real life. But what bearing does this have on the mortgage industry? With the statistics featured, the problems abound are rather appropriate for lenders, as mortgage repayments seem to be one of the first areas to be missed.
So what does it mean for lenders? How can they guarantee that the mortgages they approve can be repaid by the borrowers? What is the future for the industry if borrowers are struggling to make repayments and have increasing personal debt?
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Virginia Darrow, chief executive officer at Rooftop Mortgages, explained that the lender employs a division called ‘Special Servicing’, whose job is to look over arrears incurred on its mortgages, and helping borrowers with payment plans to get them back on track. Darrow claimed that by offering the service angle and educating the borrower about ‘not hiding’ when they are unable to make a repayment instils a good feeling within the borrower, and adds value.
Lenders are well aware of the difficulties faced by adverse borrowers in getting on to the mortgage ladder, but how to deal with debt problems that arise after the home loan has been granted is a different matter that has to be planned for beforehand and dealt with immediately.
