The impact of increased arrears on UK mortgage providers

As the economic situation deteriorates, more borrowers are falling into arrears on their mortgage repayments. This has led to an increase in repossessions although measures are being taken by lenders and the government to advise those in difficulty and actively help those most at risk. This brief looks at what is being done by all parties to reduce arrears and prevent repossessions.

Report Highlights
The percentage of mortgages three or more months in arrears grew from 1.10% in Q4 2007 to 1.88% in Q4 2008. The fourth quarter of 2008 saw 10,400 repossessions, a decline from the 11,100 seen in Q3 but greater than the 6,900 in Q4 2007.

Voluntary abandonment cases are on the increase. Mortgage providers such as Northern Rock have commented that they have been seeing an increase in cases since the summer of 2008, although the figure does not show up on official repossessions data because no court order has been issued during the process.

The Homeowner Mortgage Support Scheme does not go far enough. Credit Action has warned that the repayment holiday would only bring temporary relief as interest would continue to accumulate and be added to the overall loan. Meanwhile the Income Support for Mortgage Interest Scheme only aids those on long term benefits.
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DATAMONITOR VIEW 1
CATALYST 1
SUMMARY 1
ANALYSIS 2
As the level of arrears increases, lenders need to find ways to help consumers 2
Around 1.88% of mortgages were in arrears at the end of 2008 2
The loss of one's job or the failure of one's business are the main drivers of arrears 3
Northern Rock's extravagant lending has led to arrears levels well above average 3
Datamonitor's Megatrends framework can provide more insight into why consumers fall into arrears 4
A lack of Financial Intelligence can hinder a consumer's ability to cope with financial uncertainty 4
Borrowers are looking for a degree of Comfort from their lender 4
The Wealth Complexity is another trend that can be used to explain how some consumers fall into arrears 4
Communication with borrowers is seen as a vital tool against increased arrears 5
Mortgage providers tend to supply advice leaflets with arrears statements 5
External debt counselors present a face-to-face option for banks 5
Some lenders direct borrowers towards Citizens Advice or the FSA's Money Made Clear online guides 5
Nationwide's website has debt advice that is much easier to find than most of its peers 6
Lloyds TSB provides advice for those who are or anticipate falling into arrears on its website 8
Special servicers help lenders to manage arrears more efficiently 8
Lenders have a variety of measures in place to help borrowers who are in arrears 9
Repossession is seen as a last resort as it can be costly for both parties 10
Repossession levels were lower than anticipated in 2008 10
A few lenders have introduced a controversial six-month delay on repossession orders 11
A delay in repossessions may not be entirely beneficial for the economy 11
Most lenders follow a standard process when taking possession of a property 11
Lenders are often forced to take a big write down when selling repossessed property 12
Some providers have noticed an increase in voluntary abandonment cases 12
Various regulatory measures are being introduced to reduce arrears and repossessions 13
The Homeowner Mortgage Support Scheme has been set up to help defer repayments 13
The Homeowner Mortgage Support Scheme does not go far enough 13
The Income Support for Mortgage Interest scheme has had an overhaul to make it more effective 14
The mortgage rescue scheme allows housing associations to rent property back 14
The Pre-action Protocol is a government initiative to further postpone repossessions 14
Borrowers need to be made aware that they have certain legal rights 15
There has been a call for laws to be relaxed that allow those in arrears more time to pay off the loan 15
The cut in stamp duty may have caused more problems than it has solved 16
APPENDIX 17
Supplementary data 17
Definitions 17
Voluntary abandonment 17
Further reading 18
Ask the analyst 18
Datamonitor consulting 18
Disclaimer 18
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Table 1: % of all mortgages at least three months in arrears 17
Table 2: % of all mortgages taken into possession during each half yearly period 17
Figure 1: The percentage of mortgages in arrears grew significantly in Q4 2008 3
Figure 2: The FSA's Money made clear guides offer clear advice on all mortgage-related issues 6
Figure 3: Nationwide's website provides a convenient source of information on useful debt advice bodies 7
Figure 4: Lloyds TSB stresses the importance of action on the part of those facing financial difficulty 8
Figure 5: The percentage of properties taken into possession in H1 2008 was 0.16% 10
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