2 Mortgage arrears and repossession
The picture today: mortgage arrears
7. The most cited sources of mortgage arrears
levels in our evidence were those from the Council for Mortgage
Lenders (CML) and the Financial Services Authority (FSA), who
both regularly release such figures. The CML suggested that there
were 205,300 cases of arrears in the first quarter of 2009, an
increase of 12% from the previous quarter.
The FSA also produced statistics on mortgage lending in the first
quarter of 2009. At the end of that quarter, their data showed
that 399,000 loan accounts were in arrears of at least 1.5% of
the current loan balance.
Arrears had risen by 6% compared to the previous quarter and one
third compared to one year earlier.
8. The two organisations' measures of arrears
differed largely because of the different mortgage types each
counted in their statistics and the different maximum level of
arrears that they chose to include. For example, the CML's measure
of arrears included buy-to-let mortgages but did not include second
charge mortgages. Also
the CML measure of arrears only counted loans with arrears of
2.5% or more of the mortgage balance while the FSA's figure included
all loans with arrears of at least 1.5% of the outstanding balance.
9. Statistics on arrears are usually reported
in one of two ways:
- either, the number of households
more than a certain number of months in arrears;
- or, the number of households where arrears total
x% of the outstanding balance of the mortgage.
The first measure is calculated as accumulated arrears
divided by the current monthly payment. Monthly payments are a
function of the mortgage interest rate charged, which varies over
time. When a household's mortgage interest rate changes, that
household can instantly switch from being in arrears to being
excluded from the statistics. Thus the interest rate affects the
number of months measure more than the percentage of outstanding
balance measure. The strength of the influence of the interest
rate on the number of months measure also distorts historic comparisons
of arrears levels. For these reasons, we have considered only
the second measure of arrears.
The picture today: repossessions
10. The CML informed us there were 12,800 repossessions
in the first quarter of 2009, an increase of 19% from the previous
quarter and over a third from the previous year.
FSA data showed 14,825 new cases were taken into possession
in Q1 2009. This
was 13% higher than Q4 2008 and 62% higher than Q1 2008.
Despite the large increases in possessions, The FSA figures showed
the rate of increase had slowed in the past two quarters, compared
to the first three quarters of 2008.
Figure 1: New possessions per quarter
Source: Financial Services Authority, Statistics
on Mortgage Lending, June 2009
11. We received evidence about the characteristics
of those likely to be repossessed. Shelter informed us that common
- those at the lower end of the
income range at which home ownership is possible;
- those made redundant or who have had their income
- those experiencing relationship breakdown;
- vulnerable households, first-time buyers and
- those who lack basic financial capability and
with significant other debts.
As well as this, the Building Societies Association
suggested that the characteristics of those who have been repossessed
included being "unwilling to make realistic arrangement,
based upon their circumstances"
and delaying contact with their lender until the situation becomes
"too serious". 
A bleak future?
12. One of the few areas in which the evidence
from the charities, consumer groups, the mortgage industry and
the regulator concurred was that arrears and repossessions are
likely to rise in the future. However, there was much variation
around the potential magnitude of the increases. The CML only
provided us with forecasts for 2009.
They explained that there was too much uncertainty to produce
longer term forecasts.
They believed there would be 360,000 borrowers in arrears and
65,000 repossessions by the end of 2009.
Volterra Consulting predicted repossessions in 2009 to be slightly
higher at 67,000.
The FSA told us that they did not produce forecasts, though in
written evidence they stated that mortgage arrears and repossessions
were likely to reach levels similar to those seen in the early
1990s, when annual repossessions were over 70,000.
The highest forecast for future repossessions we received was
that from Ian Shepherdson, Chief U.S Economist at High Frequency
Economics, who estimated repossession levels would reach 100,000-120,000
by 2011. The Government
also told us that they did not forecast repossessions.
13. Some witnesses suggested that repossession
could sometimes be in the longer term interests of the consumer.
The Financial Services Consumer Panel explained that
If someone cannot afford the interest payments on
their [mortgage] loan their debt will increase. If they struggle
to make whatever payments that can be negotiated at the same time
as their debt is increasing experience is that within 6 months
to 2 years they see that they are better off giving up, realising
whatever equity that may still be available, and moving to rented
accommodation (where they may be eligible for Housing Benefit.)
14. Being in arrears and facing
the threat of repossession are distressing experiences. The evidence
we have reviewed shows that both mortgage arrears and repossession
levels are on an upward trend, which is expected to continue in
the next few years. As recent global events have shown, the fortunes
of economies are intimately bound up with that of their housing
What drives repossession?
15. It is important to understand the drivers
of repossession in order to provide solutions whether these come
from the Government, lenders or regulators.
16. Shelter listed the main factors which could
lead to a second wave of repossessions. These included:
- interest rate rises;
- an expected increase in unemployment;
- the lack of mortgage availability; and
- the time-limited nature of Government schemes
to help those with mortgage difficulties.
17. One potential issue which provoked disagreement
among those who submitted evidence was whether lender forbearance
would diminish as house prices recovered, leading to further repossessions.
Shelter and Citizens Advice believed that lenders would respond
to house price rises by being quicker to repossess.
Ms Edwards, Head of Consumer Policy at Citizens Advice, had seen
this happen during the last recovery in the housing market, when
she worked as a debt advisor:
In 1996-7 as we began to see house prices increase
in East London we certainly saw a lot of lenders who had been
forbearing for a while suddenly take possession action because
house prices were increasing.
However this view was not universally accepted. Lord
Myners, Financial Services Secretary to the Treasury, told us
that he did not agree that lenders would forbear less once the
housing market started to improve.
He explained that in an environment where people were confident
about the economic outlook, lenders would not be willing to "curtail
the size of their books".
COMPARISON WITH THE LAST RECESSION
18. The FSA described current repossession levels
as similar to those of the 1990s, despite significant differences
in the housing market and wider economy.
Perhaps most notably, mortgage interest rates stayed at 14% from
1990 until autumn 1992 while today interest rates have fallen
FSA reasoned that the key factors contributing to repossessions
today were not the same as those in the last recession.
It explained how the shape of the mortgage market had altered
over the past 20 years. Mortgage equity withdrawal was far more
prevalent in 2007 relative to the 1990s as borrowers topped up
their income by remortgaging.
The FSA believed that the increasing reliance on equity withdrawal
could not endure. They described how throughout 2009-10, a fall
in house prices, increasingly restrictive lending criteria and
the effective termination of the specialist lending market would
mean that borrowers with high debt levels would not be able to
refinance outstanding debts.
This could trigger an increase in repossession.
The FSA also noted the increasing use of unregulated credit and
buy-to-let mortgages in recent years which led to losses for landlords
when house prices fell
even where the original lending decision looked
to be affordable, affordability was severely compromised by the
overall level of debt secured against their home, including second
charges and other forms of unregulated credit."
19. Much uncertainty remains
as to whether any recovery in the housing market would mitigate
or exacerbate the scale of repossession. We recommend that the
FSA monitors the forbearance policies of mortgage lenders to ensure
that repossession is only a tool of last resort.
5 Ev 77 Back
Financial Services Authority, Statistics on Mortgage Lending,
June 2009, para 17 Back
Ev 76, 81 Back
Ev 77; Financial Services Authority, Statistics on Mortgage
Lending, June 2009, para 15 Back
"First quarter figures suggest 75,000 repossessions this
year now looks pessimistic, say CML", Council of Mortgage
Lenders press release, 15 May 2009 Back
The FSA define a possession as 'an arrears case where the lender,
having formally been granted a Possession Order by a Court, is
then able to sell the underlying property and use the proceeds
to reduce or pay-off the mortgage debt'. Back
Financial Services Authority, Statistics on Mortgage Lending,
June 2009, para 20 Back
Ev 130 Back
Ev 55 Back
Ev 77 Back
Q 188 Back
Ev 77 Back
Ev 139 Back
Q 205, Ev 121 Back
Ev 130 Back
Q 272 Back
Ev 151 Back
Ev 131 Back
Ev 132, Q 25 Back
Q 25 Back
Q 270 Back
Ev 121 Back
Ev 121 Back
Ev 122 Back