Landlords and lenders: trends in arrears and possessions
Published: 21 August 2015 | Author: Bernard Clarke
Improvements we have made to our data on mortgage arrears and possessions mean that we are now able to provide more insights into the market than in the past – and offer some interesting new perspectives on what is happening in different areas of lending activity.
One example of this is that in our figures for the second quarter of this year – published last week – we were able to provide for the first time data on arrears in both the buy-to-let and owner-occupied sectors. We have been publishing similar data for the whole market since 2008, but without being able to give a detailed split between the two sectors.
In this article, we look in more detail at what is happening with owner-occupied and buy-to-let arrears, which are showing contrasting trends. We also look at how technical issues may be under-stating the current level of possessions. And we compare what is happening to possessions cases in the owner-occupied and rental sectors.
What does our new data show?
The welcome news is that our enhanced data confirm a well-established trend – one that we have seen for more than five years now – of steadily declining mortgage arrears and possessions across the market as a whole. By the end of June this year, the total number of mortgages in arrears of 2.5% or more of the balance had fallen to 106,400 – the lowest number since quarterly records began in 2008.
When we look at what the data showed about arrears levels in the owner-occupied and buy-to-let sectors, however, there are some pronounced differences. The vast majority of mortgages in arrears (100,700) were in the owner-occupied sector. This meant that almost one in 100 (0.96%) of all owner-occupier mortgages were in arrears. By contrast, only 5,700 buy-to-let mortgages were in arrears of 2.5% or more of the balance – accounting for just one in 300 (0.33%) of all buy-to-let loans. So, the rate of owner-occupied arrears is currently almost three times the level we are seeing in the buy-to-let sector.
If we look at the data for mortgage possessions, however, we see a reversal of this trend. In the second quarter, 1,800 owner-occupied homes (0.02% of the total) were taken into possession, compared to 700 (0.04%) buy-to-let properties. So, the possession rate for buy-to-let properties is currently twice as high as it is in the owner-occupied sector – even though buy-to-let arrears are running at a much lower level. At this stage, of course, we do not know if this trend will persist in future.
What happens when a buy-to-let property is taken into possession?
A buy-to-let borrower facing action for possession should not be resident in the property and so does not risk losing a home, unlike an owner-occupier. The lender’s primary concern must be its relationship with the borrower, but firms are also acutely aware that third parties, and in particular tenants, will be affected by what happens.
In 2009, we published industry guidance on buy-to-let arrears and possessions. Our guidance explained that lenders would act fairly towards borrowers – taking into account their individual circumstances – and would also be sympathetic to the position of tenants.
The guidance highlighted the distinction between an order for possession against a borrower and similar action against a tenant. Lenders wishing to obtain vacant tenancy of a property obviously must do so in accordance with tenant law.
In practice, however, many lenders are happy for tenants to continue to occupy the property as long as they are still paying their rent and fulfilling the other obligations of their tenancy agreement. In such cases, the lender may appoint a receiver of rent to fulfil the role of the landlord and maintain a relationship with the tenant.
Should a lender wish to do this, our guidance says that the firm should seek to write to the tenant personally, explaining what they are planning to do. As well as providing contact details for the receiver, the lender should explain what receivers are and how they operate. The guidance also says that the lender should explain to the tenant the importance of obtaining independent advice.
In many cases, the receiver can successfully continue to fulfil the role and responsibilities of the landlord, and the lender is happy for the tenant to carry on living in the property and paying the rent.
What is happening to possession numbers?
An idiosyncrasy emerging from our recent data is the low number of possessions overall. Looking at the first six months of this year, a total of 5,500 homes have been taken into possession – some 40% fewer than in the second half of 2014, and the lowest six-month figure since the second half of 2004.
A significant fall in the number of possession cases is, of course, welcome, but we believe that the numbers for the first half of this year are likely to be showing a reduction that is over-stated. This has arisen as a result of technical issues affecting some lenders’ processes. Arrears figures are not affected.
The total of 5,500 cases of possession in the first half of 2015 may bring into question our forecast of 16,000 cases for the year as a whole. But the over-stated reduction in numbers in the first half of the year will eventually work through our data, with subsequent quarters showing a compensating effect in the figures.
The key point is that the overall underlying trend is unchanged and remains one of continuing gentle downward movement in the number of cases of possession.
Court action in the owner-occupied and rental sectors
On the same day we published our data on mortgage arrears and possessions for the second quarter, the Ministry of Justice (MoJ) released figures on the number of possessions sought by both lenders and landlords in courts in England and Wales. As Chart 1 shows, the MoJ figures confirm that the number of court actions for possession by landlords is continuing to dwarf the number of actions being pursued by lenders.
Chart 1: Possession sought by lenders and landlords, England and Wales
While owner-occupation is by far the largest tenure (63% of the UK population are owner-occupiers, compared to 37% who rent their homes), the number of possessions by landlords (at 36,212) in the second quarter was more than seven times the number of those being pursued by lenders.
At 4,849, the number of possession claims made by lenders between April and June was 55% lower than a year earlier, and the lowest quarterly total since the MoJ began to collect data in its current form in 1999. Claims by lenders have now been on a downward trend since 2008. The number of claims by landlords was also lower – down 6% year-on-year – and the lowest total for three years. Most claims by landlords (58%) were in the social rented sector.
How we have improved our data
In the past, we drew upon two separate surveys to produce our arrears and possessions data. Over the last year, however, we have been developing a new single data return, which provides arrears and possessions numbers for both the owner-occupied and buy-to-let sectors. Lenders representing 94% of the market contribute data to this return, and we gross up for the rest of the market.
While it is only in the most recent quarter that we have published our first figures from this new run of data, we have been able to extend these numbers back to the beginning of the second quarter of 2014. So, our tables now contain data based on the new return for the last five quarters. This means, of course, that there is a break in the data series between the first and second quarters of 2014 – but our figures are directly comparable back to the latter date.
The important point is that, although there are revisions to our numbers and a break in the series, our market coverage is more robust as a result of the changes we have made.
Our data now provides more detailed information about mortgage arrears and possessions, but the key message is one of a continuing decline in overall numbers. This trend is very welcome, but we must not forget that low interest rates are continuing to provide support for home-owners and may, in particular, be helping stave off low level arrears for financially stretched households.
Predictions for the first rise in official rates continue to ebb and flow with the publication of the latest economic indicator, but we are seeing clearer messaging from the Bank of England about the likelihood of a future increase. Many new borrowers will initially be protected from higher rates because the overwhelming majority – more than 80% – are choosing to take out a fixed-rate loan. This is an encouraging sign that borrowers are thinking ahead to when rates will rise and how their finances may be affected – and we would urge them to retain this focus. As ever, of course, they contact their lender without delay if they anticipate any repayment difficulty.