The Council of Mortgage Lenders’ (CML) latest repossessions figures perhaps hide as much as they show. While repossessions have risen to 18,000 – a mere 25 per cent of their 1991 peak – the CML is anticipating 130,000 mortgages to be in three months or more of arrears by the end of 2007. This is supported by a recent survey of lenders by lawyers Moore & Blatch, which highlighted that 75 per cent of lenders expected possessions to increase by at least 5 per cent in the short term.
It is tempting to compare possessions data for 2007 with the figures of the early 1990s, but the world, both social and that of mortgages, has significantly changed and this presents both opportunities and problems for all parties active in the mortgage market.
A different world
Firstly, the nature of lenders has changed significantly. In the 1990s, before consolidation, the market was fragmented among the many building societies. Today there is a plethora of new entrants that has resulted in innovative product development and a wider access to mortgages, through non-conforming and interest only devices, such as those funded by the investment market’s hunger for asset-backed securities.
Securitisation has created the opportunity, but investors in securitised portfolios do not have the patience of the banks and building societies and are often looking for a consistent and constant return. Where building societies will persist to work with the borrower, to protect their regional reputations, centralised lenders with securitised portfolios are under enormous pressure to ensure the portfolio performs and will begin repossession proceedings much faster.
In our experience, collection rates over 95 per cent of the interest falling due in any period is achieved. For many lenders the demands of the investors will come as a shock. The rising market of the last 15 years means that there are few with hands-on repossessions experience, let alone dealing with the pressures of a securitised portfolio where the key to strong collection rates is the ability to act as soon as an issue arises, and this, in itself, requires strong systems and technology.
Nature and profile
A further pressure on lenders will be the nature of mortgages. The buy-to-let boom of the last few years has seen residential lenders enter a market that has many more similarities to the commercial market than the residential and, while the CML believes the market fundamentals remain positive, some landlords – particularly the more recent – will come under pressure from rising rates. It remains to be seen whether borrowers and lenders alike have appreciated just how different a buy-to-let portfolio is from an owner occupied and we believe a souring of the market could well cause some lenders to pull back from buy-to-let and many amateur landlords to be shocked at the commercial reality of their investments.
Finally, the profile of borrowers is changing. As well as ever higher loan-to-values, lenders are having to deal with the social factors that impact on the borrower’s ability to pay. The breakdown of relationships, unemployment, changing family circumstances and the ever higher levels of consumer indebtedness are all contributory factors in most repossessions. Indeed, in Moore & Blatch’s recent survey, 75 per cent of lenders believe excessive borrowing from other sources to be the principal cause of repossessions.
These factors combine to make it a very interesting time for the market. While rates rise and circumstances change, brokers will have business. That said, they may find their customers more pressured and the refinancing much more difficult than anticipated. Furthermore, some lenders, if their portfolios cease to perform as planned, will face unprecedented pressures. It remains to be seen if they are equipped with the expertise or systems to maximise collection and manage investor concerns.
