CML news & views

Beneath the headline numbers, there’s a lot of information that our quarterly arrears press release never has room to report. In this article, we delve a bit deeper into the survey results, put buy-to-let results into the context of the wider market, and take a look at some associated issues such as the falling number of mortgages and the position of tenants whose landlords default on their mortgages.

Arrears and how we measure them

Our preferred measure of arrears is to record the amount of arrears as a proportion of the mortgage balance. So, for example, £2,500 arrears on a £100,000 mortgage balance represents a 2.5% arrears balance.

The advantage of this measure is that it enables us to gain a clear comparison of absolute levels of arrears over different time periods, irrespective of prevailing interest rates. However, it is a less easily understood measure than the “number of months in arrears” measure which, for intelligibility purposes, does what it says on the tin.

The trouble with the “number of months” measure is that, when interest rates fluctuate, the same given sum of arrears represents a different number of months’ payments. £2,500 is two month of arrears when the monthly payment is £1,250, but four months of arrears when the monthly payment is £625.

However, given that rates have remained relatively stable for some considerable time, the number of months measure is less distorted at present than it was a couple of years ago. And so, for those who prefer this measure, here is the relevant chart for the last two and a half years, including the 18 months over which the base rate has been at 0.5%. It is worth noting that the average interest rate on all UK mortgages was 3.62% in March 2009, it was barely changed at 3.65% at the end of June 2010 and has barely moved over this period (source: Bank of England, series HSDE, Bankstats table G1.4).

The numbers in context

The underlying number of mortgages does not remain static. So, when comparing the number of arrears cases or repossessions now with earlier periods, it is important to remember that the total number of mortgages gives vital context. For example, the number of repossessions in the first half of 2010 totalled 19,200. Twenty years earlier (to pick a random historical comparison), in the first half of 1990 there were 16,600. But the total number of mortgages back in 1990 was only 9.3 million, compared with today’s 11.4 million, meaning that the repossession “rate” for that half year was higher  - at 0.18% of all mortgages - than it is now (0.17%).

As a by-product of this important contextual information, the publication of our quarterly arrears and possessions data also means that there is a regular quarterly update on the CML’s estimate of the total number of first-charge mortgages in the market. While on a rounded basis this is still 11.4 million, it is instructive to note that the number has fallen quarter-on-quarter ever since the third quarter of 2007. Great caution is needed when comparing numbers before 2009 with those of the last 18 months, because the CML made a significant adjustment to the data series from the first quarter of 2009. Even so, the direction of movement is clear.

And since the beginning of 2009 it is possible to compare the data on a consistent basis. In each quarter since then the number of mortgages has fallen. But when we look back at previous periods of far more elevated numbers of repossessions – 144,100 in the 1991-1992 period, for example – the overall number of mortgages nevertheless continued to rise (by 507,000, over that particular period).

So why is the number of mortgages falling?

Basically, there are simply fewer new mortgages being taken out now to replace the number which are maturing or otherwise being paid off. There’s no one single factor that explains this phenomenon. Clearly, reduced demand from consumers is likely to be a significant influence. And it’s entirely possible that, in such a mature market, the proportion of home-owners who are reaching the end of their mortgages and no longer need to borrow is increasing, compared with previous periods.

But other influences include the rationing effects on the supply of mortgages and the reduced number of active mortgage lenders which have come about as a result of post-crunch regulatory initiatives. The lending restraint imposed through the greater difficulty of sourcing funds is relevant too, as is the element of competing pressure as far as what type of lending should be done with a finite amount of funding.  And a huge influence is the regulation-driven requirement for lenders to hold more capital (and hence recycle fewer cash receipts into new lending).

Buy-to-let arrears and possessions

We are often asked to provide a comparison between the level of arrears and repossession in the buy-to-let market with those in the owner-occupied market. While possible, caution is needed as the interpretation of the numbers is more complicated than it may at first appear.

This is because, in the buy-to-let market, there is an additional arrears management route available in the form of the appointment of a “receiver of rent”. A “receiver of rent” effectively acts as the conduit for the rental income to be passed to the lender to pay the mortgage, and can also act to sell the property (and hence realise the lender’s security). However, there can be a certain amount of fluidity in how the appointment of a “receiver of rent” affects the original borrower. In some cases, it is akin to repossession and effectively signals the end of the lender’s relationship with the borrower, while in others the receiver of rent’s appointment may cease and the management of the mortgage account revert to the borrower if and when the arrears are brought up to date.

For these reasons, direct comparisons with the owner-occupied market are not straightforward. However, the chart below gives a comparison of the 3-months arrears rate across the owner-occupied market, compared against the buy-to-let market where the borrower remains in control of payments, and the composite rate in the buy-to-let market which includes those arrears cases where a receiver controls the account.  As this chart shows, while the arrears rate for BTL mortgages excluding receiver cases has fallen back below that for the owner-occupied market since early 2009, the composite rate (including those under receiver control) remains above that in the owner occupied market, although the gap is narrowing.

As far as the buy-to-let market is concerned, there has also been much attention focused on the position of tenants whose landlords default. It is worth restating that, on a legitimate buy-to-let mortgage with a recognised tenancy, lenders will respect all the usual rights of the tenant even where the borrower is in default.

Problems are more likely to arise where the mortgage is not a legitimate buy-to-let loan and the tenancy has not been agreed by the lender. However, the new Mortgage Repossessions (Protection of Tenants) Act, due to come into effect on 1 October, enshrines a statutory notice period for tenants inadvertently caught in this position. Even so, home-owner mortgages are not designed to be used by borrowers who let out the property on which the mortgage is secured, and it is essential that home-owners planning to let out their property seek their lender’s consent and make the necessary amendments to their mortgage.

Looking ahead

Our revised forecasts are published in a separate article, but it is worth reflecting on the influences lying ahead that may influence mortgage arrears and mortgage repossessions.

In the immortal quote of Donald Rumsfeld: “There are known knowns. These are things we know that we know. There are known unknowns. That is to say, there are things that we know we don't know. But there are also unknown unknowns. There are things we don't know we don't know.” In the arrears landscape, the known knowns are that the payment rate for Support for Mortgage Interest is being cut dramatically from October, and that the government has a budget deficit plan that will cause pain in the economy which can be expected to be felt in the housing market too. The known unknowns are, perhaps, the factors such as unemployment and interest rates, which we know will eventually rise, but we don’t know when and by how much. There’s also the known unknown of whether the government will cut the Mortgage Rescue Scheme, which has proved useful but is vulnerable to cost-cutting policy measures.The unknown unknowns may, of course, be good or bad. Perhaps the pain will be less severe than commentators fear – perhaps not.

Whatever the other influences, lenders have shown great forbearance to their borrowers facing difficulty, as the lower-than-expected repossession numbers indicate. They will undoubtedly continue to do so. But forbearance alone is not the only influence on the level of arrears and repossessions, whose future trajectory over the medium term is still uncertain and dependent on the wider economy.