Market commentary

Mortgage arrears and possessions

Although the economic backdrop remains challenging, the vast majority of homeowners continue to meet their monthly payment obligations. The large cuts in interest rates have benefitted many, making it easier for households who suffer a loss of income to continue to pay their bills. Lower mortgage rates mean that struggling borrowers build up arrears more slowly, allowing greater scope for lenders to work with borrowers experiencing temporary falls in income. In addition, the range of government and industry initiatives including mortgage rescue, the homeowner mortgage support scheme and changes to income support for mortgage interest, mean that more people are making contact with their lender and in most cases get help.

Nevertheless, we expect that further job losses and disruption to incomes will cause the number falling behind with their mortgage payments to rise over the course of 2009 - but at a slower pace than we had previously anticipated.

We are now expecting around 360,000 mortgages to be in arrears of 2.5% or more of outstanding balance at the end of this year, up from 182,600 at the end of 2008. This is about 15% fewer than we had previously anticipated. This would equate to around 425,000 borrowers more than three months in arrears at the end of this year, lower than our previous forecast of 500,000. As we outlined in our first quarter data release, low interest rates have distorted the commonly quoted measure of number of months in arrears and we have stopped forecasting using this measure.

As arrears continue to climb, more borrowers are likely to face the risk of repossession. But, echoing our lower arrears forecast, we have cut our prediction for the number facing possession this year to 65,000, from our last estimate of 75,000.

Housing and mortgage markets

Despite some recent encouraging signs, we believe it is too early to be sure that the slightly more positive recent news from the housing market indicates the start of a robust recovery.

The raft of measures taken by the authorities over recent months has limited the decline in available funding. But the lending industry still faces considerable challenges in increasing the supply of mortgage credit. Commitments made by some of the large players are unlikely to fully off-set the loss of capacity elsewhere. Given also the weak economic backdrop, housing transactions are likely to remain subdued for some time.

The prospects for overall gross lending volumes are also heavily influenced by remortgaging activity. Tighter lending criteria and the impact of lower prices limit the ability of some to remortgage, while low reversion rates reduce the incentive for others to refinance. We expect interest rates to remain low for some time, and in the absence of a recovery in house prices there appears little rationale for lending criteria to be relaxed to any great degree in the short-term. This suggests that remortgaging activity will remain subdued. These are significant factors driving total lending volumes lower, but they have already been in play for some time. Our forecast for gross lending of £145 billion this year is in line with earlier expectations.

We now expect total mortgage balances to broadly stagnate this year. Our forecast is for net lending to fall by £5 billion, which represents a considerable improvement from the £25 billion contraction we had previously anticipated.

Overview

The raft of measures taken by the authorities has stabilised the economy and will sow the seeds for a recovery over time, including in the housing market. But the improvement is likely to be slow and drawn out, especially as the extensive fiscal, monetary and credit support measures are gradually unwound.

As with our December forecasts, the specific numbers we provide are simply indicative of the direction of travel for the market rather than precise projections.

Table 1: CML market forecasts, June 2009

Source: Bank of England, National Statistics, HM Revenue & Customs, HBOS, CML
Notes:
1. December 2009 forecasts in brackets where applicable.
2. The HMRC series relates to residential transactions over £40k.  It started in April 2005.
3. We have not previously forecast mortgage arrears by % of outstanding balance. By way of comparison, the estimate for number of mortgages more than three months in arrears at end 2009 has been reduced from 500,000 to 425,000.
4. Figures for arrears and possessions relate only to first charge mortgages held by lenders who are members of the CML.  They do not include arrears and possessions relating to other secured lending or to firms that are not CML members. 

CML Research

1. Name: Paul Samter
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2. Name: Bob Pannell
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