For the vast majority of clients, dealing with their mortgage intermediary will be a satisfying experience. After all, the client is looking for a positive outcome, for example, the advice and subsequent mortgage allows them to move into their dream home or they remortgage and potentially save some money. Intermediaries are there to help and provide a service. Plus, I would wager that no client walks into their intermediary’s office anticipating a negative outcome when they do secure their mortgage. Who, after all, expects to default on their mortgage payments or, even worse, be repossessed?
Unfortunately, this does happen. Risk warnings such as, ‘your home may be repossessed if you do not keep up repayments on your mortgage’ exist for a reason and sometimes a repossession will be the unfortunate end to a client’s continued inability to pay their mortgage.
As a mortgage intermediary, this is a position in which you would never wish to see your clients. Clearly, you outline the potential risks involved in arranging the mortgage contract and make sure the product is affordable for the client. Yet, repossessions will still take place. The intermediary does not have the power to force the client to keep paying his or her mortgage. With every mortgage contract, the client still has the ‘option to fail’ and payments can be missed for any number of reasons that were unforeseeable at the time the mortgage was first arranged.
Intermediaries are, however, in a pivotal position to help clients who may be experiencing difficulty paying their mortgage. Given the current changing economic position – rising interest rates, increasing unemployment – it may well be that a larger number of borrowers in the short-term, firstly fall into arrears and have to endure the repossession of their property.
On the rise
The latest figures from the Council of Mortgage Lenders (CML) certainly show that repossessions are on the rise, albeit from a particularly low base. Figures for 2006 reveal that 8,860 repossessions took place in the second half of the year, compared with 8,140 in the first half. This total of 17,000 for the year was 65 per cent higher than 2005 where the total was 10,310, and almost three times more than the 6,030 repossessions undertaken in 2004.
The CML had previously forecast that repossessions would hit 18,000 in 2006 so there had been a slowdown towards the end of last year. Yet, it had also forecast the same number again in 2007 and 2008 but has now revised this to 19,000 in 2007 and 20,000 for 2008. It puts this revision down to the higher than anticipated rise in interest rates we have experienced in the last six months and stresses in its ‘Repossession Risk Review’ that further rate rises will mean further changes to its outlook.
It is important to stress that, in historical terms, these forecasted numbers are still low. For example, in
1991, repossessions totalled 75,540 and generally fell every year until 2004. That said, the recent increase in the number of repossessions is a cause for concern and has been highlighted as such by the Financial Services Authority (FSA) itself. The FSA recently published its ‘Financial Risk Outlook’ (FRO). The FRO makes specific mention of the rising levels of repossessions. The FSA is concerned that a weaker economic environment will have a considerable effect on consumers, given the fact that many of them have increased their levels of borrowing in recent times.
A crucial point
This is a crucial point. Very recent history shows that borrowers have anticipated house prices to rise continually and interest rates to always stay at the same relatively low levels we have experienced over the last few years. Homeowners have decided to borrow more on this belief. Of course, for this situation to take a turn for the worse doesn’t require house prices to fall, it merely needs house prices to plateau and interest rates to keep rising. With some homeowners having potentially borrowed beyond their means on the anticipation that today’s circumstances will never change, trouble could be brewing in their ability to pay off their loans. Clearly, the higher interest rates rise, the more borrowers could potentially be pulled into this difficulty.
Like the CML, the FRO also suggests that the number of properties repossessed will rise in the coming months, especially given the increase in interest rates we have recently seen. It has warned lenders to improve applicant vetting procedures and suggests that some are not as aware of the quality of their mortgage book as they should be – the accusation seems to be that they could be storing up problems if their stress testing is not robust enough.
Interestingly, the FSA created and analysed a sample of repossessed properties using data from auctions, the Land Registry, the 2001 population and housing census, geodemographic profiling and its own product sales data. This analysis seems to suggest that the majority of repossessions are for buy-to-let properties. The FSA says this ‘reflects the negative net rental returns and the low rates of capital appreciation on newly-built properties in the last couple of years’. It is also suspicious of properties which seem to have been bought for the purposes of buy-to-let but with a standard mortgage – it has warned lenders to be extra vigilant of this type of potential mortgage fraud.
Making clients aware
For brokers, the key point is to make your clients aware of the potential impact a change in, either their personal circumstances, such as unemployment, and the wider economic environment, for example, further rises in interest rates, could have on their ability to repay their mortgage. This can clearly be done in the initial advising and arranging interviews, but it is also important to continue this level of support and advice on an ongoing basis. Ask the question the FRO asks of the UK’s borrowers – how will you cope with a weaker economic environment given the increased levels of borrowing in recent times? How would you cope if the current situation was disturbed?
The changing economics and the rise in repossession figures certainly suggest that now is the time to revisit your client database. Could you have clients who have slipped onto a lender’s standard variable rate and, as a result, are feeling the pinch? Have you made those clients who are coming to the end of their special mortgage deals aware of the potential ‘payment shock’ should they chose to do nothing? Given the regulator’s results on buy-to-let repossessions, shouldn’t you be reviewing your buy-to-let clients to ensure their properties are providing the return they anticipated?
Now should be the time to make use of your client management systems to reveal any potentially vulnerable clients – the very least you should do is write to them and suggest a review of their mortgage arrangements. They will certainly appreciate the contact, especially if it staves off future difficulty.
A wider issue
The increasing number of repossessions does bring into sharp focus a wider issue involving the relationship between the intermediary and the lender – specifically, the level of information sharing between the two. The regulator has been keen to promote a greater degree of information sharing between the two, indeed it says as much in it’s ‘Provider/Distributor responsibilities’ discussion paper.
For intermediaries to carry out a full service, information on whether their client has fallen into arrears will of course be particularly useful. It is likely that the intermediary will have a much closer relationship with the client than the lender and therefore be in a position to offer advice on how to manage finances and ensure the situation is resolved.
Unfortunately, few lenders have recognised the benefits to the client and themselves in providing this information. Recently, Accord Mortgages announced that it was looking at ways it could provide intermediaries with information on when their clients are threatened with repossession. It will firstly ask the client if they would want this information passed to their intermediary and is currently working on when in the arrears cycle it will inform the broker. This is certainly a positive move. Intermediaries have continually requested to be ‘in the loop’ in terms of information provision and it is to be hoped that Accord’s intention bears fruit and more lenders follow suit.
The positive news in these forecasts is that, as the CML states, ‘the vast majority of possession actions entered do not result in actual possession’. It points out that it’s actually not in a lender’s best interest to repossess a property anyway, and court action is generally used to get a borrower’s payments back on track when they have moved into arrears.
If this truly is the case of course, lenders may wish to revisit their broker relationships, involving the adviser by updating them of their client’s situation should they fall into arrears. A broker is surely best placed to help a client experiencing mortgage payment difficulty and the sooner a problem is identified, the sooner help and advice can be given. Now all they await is the information to take action.
