Why haven't we cut our repossessions forecast?
Published: 21 August 2012 | Author: Bernard Clarke
Two main (and, at face value, conflicting) themes emerged from the media coverage of our quarterly data on mortgage arrears and possessions, published earlier this month. On the one hand, we saw welcome surprise at the continuing fall in the number of possession cases, with journalists and commentators pointing out that we were reporting the lowest quarterly total for 18 months. On the other, commentators suggested that, because we had decided not to revise downwards our current forecasts for arrears and possessions this year, we must be expecting to see a significant increase in the numbers in the second half of 2012.
Today’s article looks in more detail at what can be discerned from our data on mortgage arrears and possessions, and explains in more detail why we have chosen to leave our forecasts unchanged at this stage. Our forecasts published earlier in the year anticipated 45,000 cases of possession in 2012, and that the number of mortgages with arrears of 2.5% or more of the outstanding balance would rise to 180,000 by the end of the year.
Mortgage possessions: flat or falling?
The headline of our press release earlier this month referred a fall in mortgage possessions, highlighting a cyclical pattern extending back to 2009 in which the number of cases of possession has fallen in the second quarter of the year. At 8,500, the number of possessions between April and June was significantly lower than the 9,600 cases we reported for the first quarter. As some journalists and commentators have also noted, the total was the lowest since the fourth quarter of 2010 (although it was only slightly lower than the 8,700 cases in the final three months of last year).
A pattern of either broadly flat or steadily improving numbers extends back to 2009, when the number of possessions in the current cycle peaked at 48,300. To begin with, the scale of improvement was pronounced, with the number of possessions declining to 38,100 in 2010. Since then, however, figures have improved more steadily. The number of possessions last year totalled 37,100. Meanwhile, in the first six months of this year, the total was 18,100 – only fractionally lower than the 18,200 cases of possession recorded in the second half of 2011.
But even if the rate of improvement in arrears and possessions data appears to be slowing, the decline we have seen over the last three years is a significant achievement against a challenging economic backdrop. Everyone has been helped by the persistence of official interest rates at an historic low during this period, and by lower-than-expected unemployment. On the downside, however, the recession has been longer and deeper than many predicted, and real household incomes have been eroded over a long period by stubbornly persistent inflation.
Against such a difficult backdrop, a modest decline in mortgage arrears and possessions since 2009 clearly shows that most borrowers, supported by debt advice agencies, have been making the right kinds of decisions in dealing with mortgage payment problems. Two years ago, we helped publish research that highlighted the ability of households to flex their finances in response to changing circumstances, cutting discretionary spending and prioritising their most important commitments like mortgage payments. The data on arrears and possessions since then shows that this is exactly how many home-owners appear to have responded to increasing pressure on household budgets during a difficult period.
Lenders have been helping borrowers manage their way through difficult times by extending forbearance where it is possible to do so. The persistence of low interest rates means that arrears accrue more slowly, and slower accumulation of debt means that lenders are able to extend forbearance for longer. That gives borrowers more time to get back on their feet.
Forecasting payment problems
As we said in our press release earlier this month, the data that we now have for the first half of 2012 indicates that we are currently on a lower trajectory than our prediction of 45,000 cases of possession for the year as a whole. There is a similar pattern with mortgage arrears. The number of borrowers with arrears of 2.5% or more of the balance totalled 157,400 at the end of June this year – a slight decline from the total of 157,800 at the end of 2011 – suggesting that the trend may be below our forecast of a total of 180,000 cases of arrears by the end of 2012.
At this stage, however, we have not formally revised our forecasts, although we will keep them under review. We acknowledge that, on the basis of data now available for the first half of the year, our forecasts may prove to be too pessimistic, but we are not revising them because the economic backdrop remains highly unpredictable – with most of the risks on the downside.
There was a clear illustration of the extent of economic uncertainty on the day before we released our data, when the Bank of England revised down to zero its earlier forecast of economic growth of 0.8% in the UK this year. The Bank had only made its earlier prediction three months earlier, reinforcing the sense of a high degree of uncertainty about the UK’s economic prospects.
This uncertainty provides a stark contrast with the pattern of steady improvement in our mortgage arrears and possessions data since 2009. As the chart shows, we have seen a steady decline in most arrears bands – except for those at the highest levels – since the beginning of 2009.
Over this period, there has been a 31% decrease in the number of borrowers with arrears of between 2.5% and 5% of the outstanding balance, and a 27% decline in those with arrears of between 5% and 7.5% of the balance. As we move into higher arrears bands – of between 7.5% and 10% – we continue to see a decline, but by a more modest 16%. Further up the scale, however, arrears are more stubbornly persistent, with an increase of 3% in the number of those with arrears of more than 10% of the outstanding balance.
Number of mortgages in arrears
While it is difficult to interpret the data and understand precisely what may be happening in the movement of individual households between different arrears bands, those with lower levels of arrears appear more capable of recovering their financial position. The key message for borrowers in difficulty therefore continues to be to talk to their lender at the earliest opportunity. Those with the lowest levels of arrears, and who show a clear commitment to work from the outset with their lender to recover their position, are the most likely to emerge successfully from a period of temporary difficulty.
Government support for borrowers in difficulty
It is not only borrowers, lenders and debt advisers that have an important role to play in keeping mortgage arrears and possessions in check in difficult economic times. Public policy is crucial – but developments here are not so encouraging, at least as far as the future level of support for those with payment difficulties is concerned.
A few days before reporting our arrears and possessions data, we published our submission on the government’s plans for introducing universal credit. In doing so, we highlighted the significance of the government’s temporary decision to make support for mortgage interest available after 13 weeks and to double the maximum size of mortgage covered to £200,000. Unfortunately, however, at this stage the government looks set to revert next year to a qualifying period of 39 weeks and a reduced upper limit on mortgages covered of £100,000.
Our submission argued that that the existing, more generous, provision of support for mortgage interest should remain in place for another year. Under current arrangements, borrowers get help while their problems are still manageable and that, in turn, enables lenders to extend forbearance in a higher proportion of cases. The result is that arrears rise more slowly, and fewer cases result in action for possession.
In highly uncertain economic times, the extent to which we may undershoot our forecasts for mortgage arrears and possessions this year remains difficult to predict. Nor is it clear that our data on mortgage arrears and possessions will continue to show – in the rest of this year and beyond – the encouraging, and familiar, pattern of improvement that has persisted since 2009.
We will continue to monitor developments, and update our forecasts if appropriate later in the year. Despite the high degree of economic uncertainty, it is clear that the government’s temporary arrangements for support for mortgage interest have made an important contribution in helping lenders to contain arrears and possessions, and decisions on how this benefit is administered will be crucial in determining how the number of possessions is influenced in 2013 and beyond.