Concerted effort can help keep possessions in check
Published: 16 May 2012 | Author: Bernard Clarke
Most commentators responded positively to our figures showing that the number of cases of mortgage possession levelled off in the first three months of this year, breaking a pattern of modest year-on-year increases. Although the number of possessions, at 9,600, was higher than in the preceding three months, this reflects a normal seasonal pattern. But the total was the same as for the first three months of 2011, indicating that the number of cases of possession appears to have stabilised for now.
This article looks at trends in mortgage arrears and possession, the measures that have helped struggling households remain in their homes, and what is needed to keep problems in check in the future.
Despite a persistently difficult economic backdrop since the onset of the financial crisis in 2007 – with rising unemployment, erosion of household finances by a combination of inflation and stalled incomes, continuing euro zone uncertainty and the return of the UK economy to recession – the number of possessions in the UK has not been as high as predicted. Chart One shows possession cases peaked in 2009, and have gently declined since then.
Chart One: Number of properties taken into possession, quarterly
Last year’s total of 37,100 cases of possession was the lowest since 2007 (25,900), and almost 3,000 lower than we had originally predicted. The number of possession cases in this cycle is also considerably lower than in the last housing market downturn. In 1991, the number of possession cases totalled 75,500. Given that there are now 1.4 million more borrowers than there were two decades ago, the 2009 peak of 48,300 cases means that the possession rate at its high point was only a little over half the level we saw in the last housing market downturn.
In publishing our data for the first three months, we also noted that we may revise downwards our prediction of 45,000 possession cases this year. There is, however, still considerable economic uncertainty, and we will make a careful assessment of the outlook when we update our market forecasts later this summer.
The first quarter of 2012 also saw an encouraging improvement in the number of mortgages in arrears. The total of loans with arrears of 2.5% or more of the outstanding balance declined from 160,300 at the end of December to 157,800 three months later. Year-on-year, there was a 7% decline in the number of mortgages in arrears, from 170,500 at the end of March 2011.
Chart Two: Number of mortgages in arrears
Among all mortgages in arrears, the largest improvements in the last quarter were in the middle bands (see Chart Two). The number in arrears of between 5% and 7.5% fell by 12% to the lowest total since the end of 2008. Meanwhile, those in arrears of between 7.5% and 10% declined by 13% to the lowest number since the third quarter of 2008. Only those mortgages with arrears of more than 10% showed an increase over the year. At the end of March, there were 28,000 loans in this category, 300 more than a year earlier. Although the increase was modest, the total is now the highest in this category since June 2000.
Borrowers, lenders, the government and debt advisers have made a concerted effort to keep the number of mortgage possessions in check. The downturn in numbers since 2009, and the possibility of undershooting our forecast for this year, shows that these efforts have been successful (although all parties have been favoured by the persistence of official interest rate at an historical low for more than three years now.)
But although interest rates will remain low for the foreseeable future, a sustained commitment will be needed to keep future problems in check. Continuing pressure on household finances, changes to welfare benefits and an upward drift in funding costs (and therefore mortgage rates) all have the potential to contribute to an increase in the number of possessions.
Lender commitment to minimising possessions
Lenders remain committed to helping borrowers in arrears remain in their homes wherever possible, and will only seek possession as a last resort. They deploy a wide range of tools to help borrowers with payment problems, working with them to use the best options available having considered carefully what is appropriate in individual circumstances. Measures that lenders use to help borrowers include:
- Early intervention. Attempting to contact the borrower as soon as a payment is missed can quickly resolve cases in which the borrower may simply have made an administrative error. In those cases where the customer is genuinely experiencing difficulty, trying to start a dialogue at the earliest opportunity will enable the lender to consider the widest possible range of solutions. Some lenders have even sought to identify, contact and assist customers they believe may be at risk of experiencing problems, even if they have not yet missed a payment.
- Employing specialist staff to provide debt advice and help borrowers resolve payment problems. Some lenders operate teams of staff that are available to discuss problems with borrowers outside of normal office hours.
- Working directly with dedicated debt advice agencies or local authorities, to which borrowers may be referred for specialist help and advice.
- Agreeing to give customers time to adjust to a change in their personal circumstances. The extent to which it is appropriate for lenders to extend forbearance will depend on individual circumstances, and is based on a careful assessment of the borrower’s ability to recover his or her financial position. But most periods of payment difficulty are temporary, and the majority of borrowers are able to get back on track.
- Agreeing that borrowers can sell their property voluntarily, if they wish to do so, and offering various levels of assistance where necessary. Last September, the National Homelessness Advice Service and the housing charity Shelter published a helpful report exploring the potential of assisted voluntary sales as an alternative to possession. We support the use of this option in the right circumstances, although borrowers may require independent advice to consider all their options carefully before choosing to go through this process.
- Capitalising arrears and adding them to the outstanding mortgage balance may be appropriate for some borrowers, but this option will only be considered in the right circumstances. The Financial Services Authority (FSA) has issued guidance for lenders on how this should be used and recorded by firms, so that they are aware of – and monitor – any prudential risks. The FSA’s data shows that there has been a decline for some time now in the capitalisation of arrears, with 9,550 cases in the third quarter to 2010, compared to 6,726 in the final quarter of last year.
The government has made a major contribution to keeping mortgage possession in check through payments of support for mortgage interest (SMI). Although it now pays SMI at a less generous standard rate, saving hundreds of millions of pounds a year as a result, the continuing availability of financial support to borrowers after a 13-week waiting period, with cover for mortgages of up to £200,000, has been a major factor in helping lenders and borrowers avoid possession.
We are concerned, however, that these measures are only temporary. From January 2013, the qualifying period for SMI is due to be extended to 39 weeks and its coverage limited to loans of up to £100,000.
As well as helping to keep mortgage possessions in check, payments of SMI have produced a considerable cost saving for the government in re-housing families that are unable to remain in owner-occupation. Payments of SMI after 13 weeks make it much easier for lenders to extend forbearance – and for borrowers to limit arrears to manageable levels. Reverting to a 39-week qualifying period will reduce significantly the capacity of lenders to extend forbearance until help from the government becomes available.
On the day we published our recent data on arrears and possessions, the chief executive of Shelter, Campbell Robb, said: "Changes to support for mortgage interest mean that families who face re-possession will find there is little support available for them. We’re really concerned that government policy to cut the safety net for borrowers at a time of increasing unemployment will inevitably lead to more households facing the devastation of losing their home."
On the same day, the housing minister, Grant Shapps, said: "Even though figures today show that re-possession figures are stable, now is not the time to rest on our laurels."
The government’s mortgage rescue scheme has also played a vital role in keeping the most vulnerable households in their homes. Since its launch in 2009, several thousand borrowers have accepted an offer under the scheme, and many more have been given free, independent debt advice. But with funding due to end in 2013-14, we will be pressing the government to carry the scheme forward into future years.
A lower than expected number of mortgage possessions indicates that many borrowers are heeding the crucial message to talk to their lender about their problems at the earliest opportunity. Most are usually able to recover their position and remain in owner-occupation if they do so.
Borrowers have also shown a significant capacity to adjust their spending priorities in response to changes in household finances. In November 2010, the consultancy Policis published research into household behaviour, highlighting "the flex in consumer budgets and their ability to prioritise mortgage payments." The ability to do this can help them manage their way through periods of pressure on household budgets.
A number of debt advisers make a useful contribution in managing mortgage payment problems by providing helpful guidance for borrowers. The Money Advice Service co-ordinates consumer advice on mortgage debt, and its website provides a series of ‘top tips.’ It offers advice on how to deal with problems, things to avoid, and what to for those faced with possession or struggling to repay other debts.
There is also helpful information for borrowers with mortgage problems from a number of other sources, including on the Directgov website, and from Citizens Advice, the Consumer Credit Counselling Service, the National Debtline, Payplan and Shelter.
Our recent data shows that a concerted effort by borrowers, lenders, the government and debt advisers to keep mortgage possessions in check is having a positive effect. Despite the continuing economic challenges, the number of possessions in the current cycle peaked in 2009 and appears to be stable for now.
There is, however, no room for complacency. Lenders will continue to help borrowers with payment problems, and try to develop solutions tailored to individual circumstances. Possession, as ever, remains the last resort. Generally, borrowers, supported by appropriate debt advice, are responding by working with lenders to resolve their problems. They also appear to be prioritising their mortgage payments when household budgets come under pressure.
The government is also playing a key role, particularly in maintaining a 13-week qualifying period for SMI. That allows lenders to extend forbearance to borrowers in the knowledge that help will be available before their debts become unsustainable. Given the economic backdrop, the outlook for mortgage arrears and possessions will remain challenging, and making government help available after 13 weeks will be crucial in keeping future problems in check.