UK Mortgages 2010: Arrears and Possessions

Datamonitor, July 2010, Pages: 48

Widespread fears of a return to the record high levels of arrears and possessions seen in the recession of the early 1990s have not, so far, been realized. A combination of factors, including low interest rates, have helped to limit the increase in the number of borrowers in difficulty. However, economic difficulties ahead may reverse the recent decline in arrears and possessions.

Scope

- Examines the key trends that have driven arrears and possessions up to Q1 2010.

- Discusses how the government and specific lenders have responded to the threat of greater arrears.

- Sets out The arrears forecasts for the period 2010-2014.

Highlights of this title

Arrears peaked in Q2 2009, and possessions in Q1 2009, and both have fallen steadily since. Datamonitor research confirms that arrears are not currently a significant problem: only 1% of borrowers reported missing more than three payments over the last 12 months, while 9% were making overpayments.

The introduction of the Mortgage Pre-action Protocol in November 2008 directly led to a sharp fall in possession actions in early 2009. Record low interest rates, coupled with lender forbearance, lower-than-expected unemployment and various government support schemes have all helped to minimize arrears and possessions since then.

Arrears may become more problematic in the future. Funding for government schemes is being scaled back, and the risk of higher unemployment in the wake of spending cuts could result in more borrowers finding themselves in difficulty. Increases in VAT and interest rates could also create affordability issues.

Key reasons to purchase this title

- Understand what factors have shaped the arrears situation to date, and what will influence it over the next few years.

- Assess the degree to which the leading providers have been individually affected by arrears to date.

- Use The forecasts to help inform your future plans.

OUR VIEW
Catalyst
Summary
ANALYSIS
The climate for arrears and possessions has proved to be more benign than expected
The incidence of arrears and possessions in 2009 was lower than feared at the start of the year
Possessions ended the year at 47,700 cases, compared to an initial prediction of 75,000
Arrears also came in well below initial forecasts
Possessions have risen more slowly than arrears
The prevalence of arrears has started to differ depending on what definition is used
The incidence of arrears peaked in the first half of 2009
Possessions have declined markedly since the middle of 2009
Homeowners with the highest level of arrears are struggling the most to restore their finances
Loss of job or income was the single biggest factor contributing to arrears incidences
The prospects for arrears and possessions beyond 2010 are uncertain
Possessions and arrears in 2010 are likely to be below the levels seen in 2009
The climate is likely to be much less favorable thereafter
The FSA is concerned that lenders may be under-reporting the full extent of arrears in their accounts
Lenders are expecting default rates and losses to start rising once more
The FSA has introduced new rules on arrears handling that may help to lessen future problems
Datamonitor forecasts a modest increase in arrears after 2010
The non-standard population will rise during 2010-12 before starting to fall
Datamonitor expects the sub-prime population to peak in 2013
Several factors have combined to keep arrears and possessions at manageable levels
There were several reasons for arrears and possessions falling below expectations
Lender forbearance has played a significant role in limiting possessions
The fall in possession claims coincided with the introduction of the Pre-Action Protocol
Lenders have entered into increasing numbers of arrangements with borrowers in arrears
Possessions are less common than during the recession in the early 1990s
There are several government initiatives to help homeowners in difficulty
The MRS allows borrowers to sell all or part of their home to their local authority
HMS enables borrowers to defer their interest payments for up to two years
SMI is aimed at assisting those on longer-term benefits
Financial assistance available from government schemes is being reduced in the wake of budget cuts
The interest rate that is applied to the SMI initiative is to be cut
Grants available through the MRS are to be reduced
Borrowers have proved very willing to contact their lenders as soon as they have experienced difficulties
Research by Datamonitor confirms that arrears are currently an isolated problem
More borrowers are overpaying on their mortgages than are in serious arrears
Affordability is a key driver of arrears incidence
All socioeconomic groups have been equally affected by arrears
Some lenders have been more affected by arrears than others
All the main lenders ended 2009 with arrears rates at or below the market average
The lending criteria of some providers have helped to reduce their exposure to arrears
Barclays and Nationwide are best placed to deal with any future falls in property prices
LBG has had to make the greatest provision for impairment of all the major lenders
All major lenders have policies in place to minimize the incidence of possessions
Building societies appear less reluctant to follow the possession route than some of the banks
APPENDIX
Supplementary data
Definitions
Formal arrangements
Non-standard
Sub-prime
Temporary concessions
Methodology
Further reading
Ask the analyst
Datamonitor consulting
Disclaimer
List of Tables
Table 1: Forecasts for the number of mortgages more than three months in arrears, 2010-14
Table 2: Forecasts for the number of possessions in 2009 versus actual
Table 3: Forecasts for the number of mortgages at least 2.5% in arrears in 2009 versus actual
Table 4: Annual arrears and possessions
Table 5: Comparison of arrears by number of months outstanding and by percentage of outstanding balance
Table 6: Mortgages more than 2.5% in arrears
Table 7: Properties taken into possession
Table 8: Mortgages in arrears (%), by balance in arrears
Table 9: Factors causing mortgage arrears
Table 10: Net balance of lenders reporting increases on default rate and losses on secured loans
Table 11: Size of non-standard population, 2009-14
Table 12: Size of sub-prime population, 2009-14
Table 13: Possession actions on mortgaged properties
Table 14: Number of formal arrangements and temporary concessions
Table 15: Comparison of number of possessions between current downturn and previous downturn
Table 16: Applications under Mortgage Rescue Scheme
Table 17: Stage at which borrowers in difficulty contacted their lender
Table 18: Repayment history over the last year (%), by size of mortgage
Table 19: Borrowers who have missed at least one payment in the last 12 months (%), by affordability
Table 20: Borrowers who have missed at least one payment in the last 12 months (%), by socioeconomic group
Table 21: Mortgages more than three months in arrears at the end of 2009 (%)
Table 22: Average LTVs on new and existing mortgages in 2009 (%)
Table 23: Impairment allowances in 2009
List of Figures
Figure 1: The number of possessions in 2009 came in considerably below expectations
Figure 2: Arrears also ended the year below forecasts
Figure 3: Arrears and possessions have risen significantly since the start of the downturn
Figure 4: Arrears are rising faster based on months outstanding rather than as a proportion of total balance
Figure 5: Arrears peaked in the second quarter of 2009 before gradually falling
Figure 6: The number of possessions on mortgaged properties fell over the course of 2009
Figure 7: There has only been a fall in mortgages that are less than 5% in arrears
Figure 8: Loss of income is by far the biggest factor driving arrears
Figure 9: Following 12 months of improvement, lenders are expecting defaults and losses to start rising
Figure 10: The number of mortgages in arrears will reach 239,100 in 2014 in Datamonitor's view
Figure 11: The non-standard population will peak in 2012
Figure 12: The sub-prime population will rise up to 2013 before starting to fall
Figure 13: Possession actions on mortgaged properties fell sharply in late 2008
Figure 14: Formal arrangements to repay arrears rose rapidly throughout 2008
Figure 15: Possessions are considerably below the levels experienced during the 1990s
Figure 16: The MRS has provided help for a limited number of households
Figure 17: Over half of borrowers in arrears contacted their lender before or as soon as they got into difficulty
Figure 18: Only a small proportion of borrowers are in significant arrears at present
Figure 19: The likelihood of arrears rises in line with the lack of affordability
Figure 20: All social classes have proved equally susceptible to missed payments
Figure 21: Summary of lenders' mortgage books in 2009
Figure 22: The arrears rates of the major providers are either in line with or below the market average
Figure 23: Barclays and Nationwide enjoy the lowest LTVs on their mortgage books
Figure 24: LBG has had to make the largest provision for impairments
Figure 25: Nationwide's Mortgage Charter outlines the help that it will provide to homeowners in difficulty

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