House of Commons - Mortgage arrears and access to mortgage finance

Mortgage arrears and access to mortgage finance - Treasury Contents

2 Mortgage arrears and repossession levels

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.[5] 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.[6] Arrears had risen by 6% compared to the previous quarter and one third compared to one year earlier.[7]

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.[8] 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]

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.[10] FSA data showed 14,825 new cases were taken into possession[11] in Q1 2009.[12] This was 13% higher than Q4 2008 and 62% higher than Q1 2008.[13] 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.[14]

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 characteristics included:

those at the lower end of the income range at which home ownership is possible;
those made redundant or who have had their income reduced;
those experiencing relationship breakdown;
vulnerable households, first-time buyers and the self-employed;
those who lack basic financial capability and with significant other debts.[15]

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"[16] and delaying contact with their lender until the situation becomes "too serious". [17]

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.[18] They explained that there was too much uncertainty to produce longer term forecasts.[19] They believed there would be 360,000 borrowers in arrears and 65,000 repossessions by the end of 2009.[20] Volterra Consulting predicted repossessions in 2009 to be slightly higher at 67,000.[21] 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.[22] 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.[23] The Government also told us that they did not forecast repossessions.[24]

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.)[25]

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 markets.

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:[26]

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.[27] 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.[28]

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.[29] 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".[30]

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.[31] Perhaps most notably, mortgage interest rates stayed at 14% from 1990 until autumn 1992 while today interest rates have fallen dramatically.[32] The FSA reasoned that the key factors contributing to repossessions today were not the same as those in the last recession.[33] 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.[34] 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.[35] This could trigger an increase in repossession.[36] 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[37]

…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."[38]

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

6 Financial Services Authority, Statistics on Mortgage Lending, June 2009, para 17 Back

7 Ibid. Back

8 Ev 76, 81 Back

9 Ev 77; Financial Services Authority, Statistics on Mortgage Lending, June 2009, para 15 Back

10 "First quarter figures suggest 75,000 repossessions this year now looks pessimistic, say CML", Council of Mortgage Lenders press release, 15 May 2009 Back

11 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

12 Financial Services Authority, Statistics on Mortgage Lending, June 2009, para 20 Back

13 Ibid. Back

14 Ibid. Back

15 Ev 130 Back

16 Ev 55 Back