In light of rising interest rates and tightening affordability, the release of the Council of Mortgage Lenders’ (CML) figures revealing a 30 per cent increase in repossession rates on last year is bad news, but hardly surprising. For some time now, industry commentators have forecast the inevitable rise in people falling into arrears and ultimately having their homes repossessed.
Yet, the picture has become even clearer following the CML’s admission that its prior sample of lenders, covering 92 per cent of the market, had not been as fully representative as previously thought and that the inherent risks in the non-conforming market had been underestimated.
Striving for accuracy
The CML has ‘substantially revised’ its previous figures back to the beginning of 2003 and the sample now features 68 CML members, which account for 94 per cent of members’ mortgage business.
Michael Coogan, director-general of the CML, says: “Interest rates are clearly higher than many were expecting and are set to remain so. The greater risks inherent in non-conforming lending are resulting in significantly higher levels of repossession in that part of the market compared to mainstream experience. This impact has been underestimated in our past market data, which we have now revised. While the revisions are naturally unwelcome, more accurate market information is important.”
The data showed that arrears of three months or more at the end of June rose to an estimated 125,100 – 4 per cent up on the end of December, but 3 per cent lower than at the end of June 2006. Of these, the majority were in arrears of three to six months, while around 1 per cent of all mortgages were in arrears. This proportion has been stable for several years.
Of course, the headline figure being trumpeted across the board is that repossessions have risen nearly 30 per cent compared to the first half of 2006, with 14,000 repossessions in the first half of 2007, up 18 per cent on the previous half-year.
However, Alex Hammond, PR manager at Kensington Mortgages, does not believe lenders have been stretching affordability too far. He explains: “Lenders have a duty to be responsible in their lending policy as part of ‘Treating Customers Fairly’ (TCF). Lenders can be flexible, but they also have to be sensible about it.
“In the last 12 months, we have seen a number of rate rises and people on particularly good two or three-year deals have been coming off those and receiving a payment shock of more than 1 per cent on what they were on before.”
Historically low
Yet, it must be remembered that the repossession rates are still at extremely low levels historically, equating to one in 840 mortgages ending in possession. Nevertheless, possessions have risen more sharply than arrears for the past two years.
Rod Murdison, proprietor at Murdison & Browning, states that so many rates rises have affected more than just mortgages, with credit cards and the like also increasing. He says: “The error people make is just to see a lot of equity in their property, but if you don’t have an income, then you’ve had it. I can see a lot of frantic remortgaging coming, as unsecured debt causes people to do so and that will cause question marks over peoples’ ability to pay. It’s a side people haven’t paid much attention to.”
Murdison adds that ultimately, lenders’ decisions are predicated by the idea of repossession, as they would be more willing to lend on a property under 75 per cent loan-to-value, as there will be spare equity in the property to pay it off should it be repossessed.
A question of processing?
However, Julie Gaskin, corporate relations manager for GMAC-RFC, is adamant that the non-conforming market should not be pigeon-holed as being the worst offender in arrears and repossession figures. She says: “Our repossession figures have remained lower than the CML statistics, and there is a real mixture of lenders in there. The non-conforming market tends to be the innovators of online technology and that’s helping to adequately profile clients by looking into their credit history and how they fit into responsible lending. But other lenders don’t have that technology and it makes you wonder how the figures break down for individual lenders, especially those with manual processing.”
Hammond adds that people need to look beyond the negative headlines and consider the positive impact the non-conforming market has had. “It is important for lenders to remain sensible with their criteria, but the adverse market is incredibly competitive and that competition is of benefit to the borrower. It has helped millions of people become home owners who couldn’t before because they were excluded by the criteria of the mainstream lenders.
Often people end up with adverse credit because of things that tend to be one-off events such as redundancy, divorce, or accident and illness – things that you can’t predict. Even with sensible lending, circumstances change.”
At the end of the day, repossession figures may rise, but lenders and brokers must do their best to mitigate the circumstances and help clients that fall into difficulties. Communication and quick action are vital to prevent a bad situation getting worse, and lenders must have processes in place to catch the client early and help.
