CML news & views

For a country that does not have mortgage standardisation, and the reporting that goes with it, the UK nevertheless has a huge range of mortgage market statistics.

Last week, for example, saw the publication of two sets of data on mortgage arrears and possessions, one from our own long-running statistical series, the other the new quarterly report from the Financial Services Authority (FSA).

And it would have been a hat-trick of possessions data in the week, had the latest quarterly statistics on court activity for possession from the Ministry of Justice not been postponed due to a computer glitch – the court data is now due to appear on Friday.

Here, we outline and explain the latest findings from the different sources of data on mortgage arrears and possessions, and consider some of the implications.

The FSA’s new statistics

The FSA’s first publication of its quarterly mortgage lending and administration return (MLAR) data created a degree of confusion in timing terms, as it came just three days before our own arrears and possessions survey results.

And the confusion didn’t end there.

The FSA data is quarterly, and covered the period up to and including the first quarter of this year, ending in March (unlike our data, relating to the first half of the year, up to the end of June).

Second charge lending is also a source of some confusion as far as the FSA statistics are concerned. While our own data covers only first charge lending, the FSA includes second charge loans in its results. However, it provides a far from complete picture of the second charge market since it covers only those lenders that are authorised by the FSA – and many second charge lenders are not.

Our numbers include buy-to-let lending. But the FSA’s data exclude this (buy-to-let is not FSA-regulated) where it is undertaken by specialist lenders who do not require FSA permission to lend. (It does, however, include buy-to-let lending undertaken by lenders who also undertake regulated mortgage business).

The overall effect of the differences is that the FSA’s statistics on arrears and possessions are likely to exceed our own. And this appears to be borne out by a glance at the full-year figures for 2007, with the FSA reporting 27,900 possessions, compared with our total of 26,200 (revised from 27,100). In the first quarter of this year, the FSA reported 9,152 possession cases, up from 8,145 in the previous three months and 6,471 in the first quarter of 2007.

On arrears, the FSA reported that the share of loans more than 1.5% in arrears rose from 2.07% of the loan book in the first quarter of 2007 to 2.44% in the first quarter of this year. Securitised loans had a higher arrears rate, at 4.47%, than the unsecuritised book, at 1.66%. But this is not surprising for two reasons. First, securitised loans are likely to be newer ones (which have a higher probability of default than older mortgages). Second, a higher proportion of adverse credit loans are securitised than mainstream mortgages (again, adverse credit mortgages have a higher propensity to default).

Our arrears and possessions findings

In line with our usual methodology, we revised our previously published estimates at the same time as publishing our new findings on the number of arrears and possessions in the first half of 2008.

Overall, our findings remain in line with our forecasts for 45,000 possessions in total in 2008, and 170,000 mortgages in arrears of more than three months by the end of the year.

The chart below tracks both the number of arrears cases, and the overall arrears rate, for mortgages since the first half of 1994.

There were 155,000 mortgages in arrears of more than three months at the end of the first half of 2008, 1.33% of outstanding mortgages.  This is the highest rate of arrears since the first half of 2001, but far lower than the rates of over 4% in the mid-1990s.

The next chart shows the number of mortgage possessions, and the proportion of all mortgages subject to possession in each half-year, since 1989.

 An estimated 18,900 properties were taken into possession in the first half of 2008. That represented 0.16% of all mortgages – the highest rate since the first half of 1998, but nowhere near the 0.4% experienced in the second half of 1991, the peak period for possessions.

Sales and stocks of possessions

Our survey shows that lenders were holding a stock of 18,900 properties in possession at the end of June. That compares with a stock of 12,300 at the end of last year, and 9,900 at the end of the first half of last year.

Although lenders increased the number of sales of properties in possession to 11,700 in the first half of the year, up from 11,200 in the previous period, this was only equivalent to the number of sales in the first half of last year. So, the stock of possessions is rising, and sales are not managing to keep pace. This is perhaps not surprising in a housing market constrained by the credit crunch – but it is ironic that the dearth of mortgage finance is itself almost certainly a factor making it more difficult for lenders to dispose of properties taken into possession.

Recognising this problem is one thing, but finding a way to break the logjam is another. As we pointed out when we issued our latest data, lenders are working in myriad ways to minimise the number of possessions. For our part, we have been working extensively with the government, consumer groups, the FSA and the courts to ensure that as much as possible is done to help borrowers who may be facing financial problems, and to manage arrears effectively. Examples of this work include:

• Regular liaison with the Treasury to monitor trends and report initiatives, and liaison with the Department for Work and Pensions to seek reform to improve the overall safety net for borrowers facing difficulty.
• Helping lenders to embed the FSA's arrears management requirements into their systems, processes and staff training. One example of this is an e-learning training course, currently under development in partnership with Absolutely Training, which we are planning to launch this autumn.
• Regular dialogue with consumer groups and the advice sector to identify any emerging issues, and to facilitate good channels of communication between individual lenders and advice agencies acting for borrowers.
• Support for – and technical input to – the Civil Justice Council, to help deliver an acceptable and workable "pre-action protocol" for use when possession cases go to court. This will help to reinforce a consistency of approach by lenders and compliance with the FSA's mortgage rules, and minimise unnecessary legal costs for borrowers.

We have also published a leaflet for MPs designed to help them to advise any constituents who ask for help as a result of mortgage payment difficulties.

What next?

The Ministry of Justice data, due out on Friday, will reveal the number of cases that went to court, and the number of court orders for possession granted, in the second quarter of this year. But, because this data includes both first and second charge lending, and because there are many orders that are granted but not enforced, it adds to the mosaic of data about possessions rather than providing any more of a definitive picture than the other statistical sources.

At a policy level, we will be continuing to work with a range of bodies to explore alternatives to possession. One option currently being discussed with the housing association sector is a “mortgage rescue” scheme, allowing home-owners to become tenants in their existing property, subject to eligibility criteria. But this will not be a viable solution for all households facing problems.

Nevertheless, in an environment where selling properties in possession is becoming more difficult, and where the risk of losses to both lenders and former home-owners is increasing as a result of the housing market downturn, it makes sense to look as creatively as possible at whether there are alternatives that can reduce both financial loss and uncertainty, and the social consequences of possession.

In the meantime, it is important to keep the numbers themselves in perspective.  Most people are paying their mortgages in full and on time, and the vast majority will continue to do so. Communication and good advice can help most households who face payment difficulties to remain in their homes. And both lenders and advice agencies are working to help home-owners who come to them for assistance. We continue to urge the government to look at targeted reform to improve access to state help for those in greatest need, and we will begin publicly reporting our own arrears and possessions data on a quarterly basis from this autumn.