CML news & views

On the day the chancellor delivered his recent emergency Budget, the Financial Services Authority (FSA) published some important statistics on mortgage lending. The FSA’s data showed that a downward trend in mortgage arrears – beginning last year – continued in the first quarter of 2010. In the first three months of the year, there were 40,500 new cases of arrears, 2% fewer than in the preceding quarter.

The FSA data also showed a fall in the overall number of accounts remaining in arrears, at 361,800. That was a decrease of more than 4% over the preceding quarter and more than 9% lower than the first three months of 2009. The regulator said the performance of loans in arrears had now improved for five quarters in a row, with payments made as proportion of payments due steadily increasing.

Finally, there was encouraging news from the regulator on mortgage possessions. The FSA said that in the first quarter of this year, there were 10,452 cases of possession, nearly 11% fewer than in the preceding three months – and the lowest total for two years.

Cutting state support for borrowers in difficulty

It is therefore against a backdrop of steady improvement in mortgage payment problems – as well as one in which the government is required to look for savings wherever possible to reduce the fiscal deficit – that we must view the chancellor’s announcement in his emergency Budget of his decision to cut support for borrowers in difficulty. 

The chancellor said that from this autumn income support for mortgage interest (ISMI) would be paid at the level of the Bank of England’s average mortgage rate. Currently 3.67%, this is significantly lower than the existing ISMI rate of 6.08%, a level that has been maintained since December 2008 as a means of providing additional support for borrowers in most difficulty.

The change is likely to come into effect in October after the Department for Work and Pensions (DWP) has agreed changes with the social security committee and new regulations have been drawn up. The DWP also needs to agree a process for how ISMI tracks the Bank of England mortgage rate, and a mechanism for triggering changes in payments. It is possible, for example, that the rate at which ISMI is paid may only change when the average mortgage rate rises or falls by 0.5%, thus avoiding the administrative problems associated with changing the rate too frequently.

The CML’s reaction

Although the decision to reduce the ISMI rate is not welcome, we understand that the government had tough choices to make. An uncompromising Budget was widely anticipated, and it was not surprising that support for home-owners should come under pressure – just as the housing benefit bill has been targeted.

Last year, the DWP reported that 204,000 households were getting mortgage loan payments through income support, jobseeker’s allowance or pension credit. We estimate that more than three-quarters of borrowers receiving ISMI payments at the existing rate currently have no arrears on their mortgage – a clear indication that it is currently delivering the support intended for borrowers.

Clearly, however, paying ISMI at a significantly lower rate, as the government now proposes, will put the finances of these households under considerably more pressure. There is therefore a greater risk that arrears will rise again after October, and the performance of loans where the borrower is behind with payments may begin to deteriorate again. 

This could be accentuated over time by base rate increases and a rise in unemployment as a consequence of addressing the fiscal deficit. But we can still avoid a rise in mortgage possessions if borrowers continue to take a responsible approach to payment problems, seek advice on their options at an early stage and communicate with their creditors (often involving several secured and unsecured debts outstanding).

Trends in arrears and possessions

Our data shows not only that mortgage arrears have been falling since the second quarter of last year, but also that the number of properties taken into possession has decreased over the last six months. However, even when both of these measures were rising earlier in the downturn, a combination of low interest rates, forbearance by lenders and government support helped to keep payment problems in check to a greater extent than we had originally expected. That meant that we have been able to revise downwards significantly our forecasts for mortgage arrears and possessions over time.

In December 2008, with the number of mortgages falling into arrears still rising, we forecast that 75,000 properties would be taken into possession in 2009 – a number similar to the worst year in the 1990s when there were, however, one million fewer borrowers. But as 2009 progressed, we were able to cut this prediction as support measures proved to be increasingly effective. At the end of the year, we reported that there were 47,000 cases of possession. 

For this year, we have forecast that the number would nudge upwards to 53,000, and that there would also be an increase in the number of mortgages in arrears of at least 2.5% of the balance, from 195,000 to 205,000. But, as ever, we are keeping our forecasts under review, and we have already indicated that we may be able to revise downwards our prediction for arrears and possessions this year. Later this summer, we will publish our updated forecasts. For this year, the change to ISMI will not affect the number of possessions.

The reality is, however, that – even if we do revise downwards the forecast for 2010 – it will take a number of years before possessions subside to former levels. Table One shows the pattern of mortgage possessions over successive years during the last economic downturn and the current one. A key feature of the last recession was that, after peaking at 75,500 in 1991, the number of annual possessions subsided only slowly. With uncertainty about the economy, we may not have passed the peak of possessions in the current cycle. But, in any event, we would expect a similar pattern in this downturn, with annual possessions remaining a feature of the market for several years if borrowers are unable to sell voluntarily or get back on their feet by finding a new job.

Table One: Mortgage possessions in the current downturn and the last one

Source: CML

Planning for the future

Keeping mortgage possessions in check in the coming years can only be achieved if there is a continuing commitment by borrowers, lenders and the government. There is no room for complacency, and a close dialogue continues between the industry, debt advisers, regulators and the government to ensure that the outcome for consumers is fair for all concerned.

Borrowers who fall into arrears will need to continue to show determination – and the capacity – to address their problems over time. It remains crucial for them to maintain a dialogue with their lender, preferably as soon as any problems are anticipated and before the first mortgage payment is missed. Borrowers need to be able to show they are capable of getting back on own their feet over time and to pay as much as they can in the meantime.

Lenders will continue to show forbearance to borrowers who have a realistic chance of restoring their finances. But, as with state support, there is a limit to what lenders are able to do if the borrower cannot get back on a stable financial footing.

Although the government – under pressure to repair the public finances – is proposing to cut the rate of ISMI, there are a number of other ways in which it can continue to help borrowers in difficulty:

• Even at a lower rate of ISMI, it should seek to maintain access to the benefit at current levels. In 2008, the government cut the qualifying time for ISMI from 39 to 13 weeks and raised the capital limit to £200,000. At the end of this year, however, these measures – intended to provide short-term support – are due to run out. But any further reduction in access to ISMI will inevitably ensure that arrears build up more rapidly, and lead to an increase in the number of possessions.
• Mortgage rescue (where the borrower becomes a tenant but continues to occupy the same property) and the home-owner mortgage support scheme have helped some borrowers either to get financial advice to manage their way through a period of payment difficulty, or avoid possession as they move out of home-ownership because the tenure is no longer sustainable for them. We need early decisions on the future of mortgage rescue schemes, both centrally and across devolved countries. We think they are valuable and should be retained.
• Mortgage rescue has successfully helped a number of borrowers for whom home-ownership is no longer sustainable to avoid homelessness as they switch tenure. It would be helpful, however, to look at other ways in which we can achieve this. An example would be to review the homelessness rules for re-housing former home-owners to ensure they are working as intended. Voluntary sales should not be viewed as borrowers intentionally making themselves homeless.
• Free advice has also helped a number of borrowers in difficulty avoid possession. It is estimated, for example, that free legal advice and representations through the court duty desk scheme has helped 85% of those attending court to avoid immediate possession. However, the funding of advice from a variety of government agencies remains uncertain.
• Low interest rates have been a key factor in keeping arrears in check and enabling borrowers to recover their finances. This, in turn, enables lenders to show forbearance. Interest rate movements will be crucial in determining what happens to levels of arrears and possessions in the coming years.
• Unemployment has not yet affected mortgage arrears and possessions to the extent originally feared. But the outlook remains uncertain, and new job losses in the public sector will put added pressure on the sustainability of home-ownership for some households.

Conclusion

Low interest rates, lender forbearance and government support have helped us through a difficult period with a lower level of possessions than we originally expected. But given the budget restrictions now facing the government, now is the time for some long-term decisions on the government’s role to promote sustainable home-ownership and help provide a safety net for borrowers in difficulty. 

An early commitment to maintaining government support for ISMI and mortgage rescue would re-assure current – and future – home-owners and lenders alike.