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Raise Your Guard or Endure a Battering - Potential Dangers of the Mortgage Business

The Council of Mortgage Lenders Repossession Risk Review shows a significant rise in the number of repossessions and mortgage arrears. Numbers of people with arrears of more than six months rose to 46,290 in the second half of last year, up from 38,130 in same period in 2004. That is a jump of nearly 21 per cent.

Arrears of more than 12 months grew 23 per cent in the same period. At the same time, there has been a marked decrease in the stimulus provided by mortgage brokers and IFAs, provoking customers to review their financial commitments.

Let us get the numbers into perspective. The total number of borrowers with arrears of six months or more represents just 0.4 per cent of total mortgages in the UK, but it is a significant number.

The CML draws some comfort from this being a historically low number, but the underlying picture may be a lot worse due to two factors.

First, strong house price inflation over the last decade, has meant lenders could take lenient arrears management policies. Second, low interest rates and aggressive lending programs have pushed lending levels to new highs. Getting credit has been free and easy, well almost free.

There is a clear correlation between mortgage payment problems and households that have a high loan-to-value ratio. Last year the ratio of households with a LTV greater than 100 per cent was 5 per cent, down from 8 per cent in 2004.

But once you add on the typical consumer debt nasties of credit cards, store accounts, car loans and friends, things start to get a little shaky when its time to balance the household accounts.

The CML in its review recognises the high and rising level of unsecured debt and concludes that a segment of mortgage borrowers will have a raised sensitivity to changes in interest rates and income levels. But even the CML confesses it is not able to accurately assess the trigger points or estimate the number at risk. A qualified IFA or mortgage broker can accurately assess the risk if they get in front of these clients early enough and complete a full financial review.

Reckoning

The day of reckoning for many mortgage customers may be ever closer and last year the number of properties taken into possession reached 5630, up from 3000 in 2004. This represents just 0.1 per cent of total mortgages, but it is a number that is set to climb, and many consumers could find themselves in above their means. Slower property growth, rising unemployment and spiralling levels of consumer debt could spell disaster for many mortgagees.

Add to this the burden of rate shock as honeymoon deals expire, and slower growth in household incomes and it is clear some serious belt tightening needs to be done fast. The ratio of mortgage payments to household income rose by about 20 per cent between the end of 2003 and the middle of last year.

So what to do, if your finances are out of control? The problem for many consumers is knowing where to turn. Citizens Advice has been swamped with record levels of enquiries, but realistically what can it reasonably be expected to do? Under-funded and under-resourced no doubt.

Commenting on the repossession figures, Michael Coogan director general of the CML said that now would be a good time for borrowers to review their financial commitments. Cutting unnecessary spending, ensuring they have a suitable mortgage deal and taking out suitable insurance such as mortgage payment protection insurance could make the difference between coping and falling into trouble.

Let us explore that a little deeper. How many consumers pro-actively review their financial commitments? The minority of course. If everybody did, there would be nobody sitting on any bank standard variable rates and the banks would be bleating about horrendous losses. In fact, how many consumers are even privy to CML data?

IMpetus

On top of the gloomy picture on the repossession front there is some significant impetus missing from the mortgage market. There are two key factors at play here. First, pre M-Day outbound calling to generate mortgage enquiries was legal. Post M-Day it was banned. It was banned unilaterally by the FSA, without, dare I say it, any qualitative research undertaken to see what impact banning outbound calling would have on the market particularly with consumers who are not proactive about reviewing their finances. Clearly the major banks lobbied hard to have outbound calling banned, and for good reason.

We estimate that more than a million outbound mortgage lead calls were made in the UK each week before M-Day. Forget the semantics about whether outbound calling should be allowed or not - if you really object you can ring BT and get your number blocked - there is a lot of activity that simply is not happening anymore. There are many consumers out there, who just do not know where to turn until it is too late. Outbound calling certainly was a direct approach, and how many of those calls are not being made to those consumers who desperately need help and do not know where to get it?

I am certainly not talking about the London set or our policymakers at Canary Wharf, I am talking about lower socio-economic and the not so financially astute borrowers, who have been flooded with credit card and loan offers, and lost control of it all. In marketing terms I am talking about C and D grade clients, not As and Bs who get most of the focus. Without help, they will not be clearing credit card and loan offers from their mailbox but repossession orders. No outbound calling means there is a major stimulus missing from the mortgage market. Total lending volumes were significantly down in last year, and some of that must be attributable to that factor alone.

Many IFAs have turned their back on mortgage business. It is difficult to quantify how many, but at the UK Mortgage Summit held in Jerez last year, it was estimated that up to 30 per cent of mortgage brokers and IFAs who completed mortgage business pre M-Day would stop doing so with 18 months of regulation. Doing mortgage business in a heavily regulated environment has all of a sudden become a whole lot harder.

There is quite literally twice the amount of paperwork to complete now, hefty FSA fees to pay and significant fines to pay if you fall foul of the industry watchdog, and yes that is how the FSA refers to itself, as a watchdog. Picture a dobermann, gnashing its teeth and foaming at the mouth. It is enough to put anyone off writing mortgage business, especially if you are a one man IFA outfit who does not want to risk the years of hard work put into building a healthy pipeline of life, pension and insurance business.

Protection

That also leads on to the thorny issue of payment protection insurance. The CML points out there are continuing low levels of consumer awareness about payment risk and the ways it may be managed. There is a real danger that the seemingly endless reviews and commentary about lump sum accident, sickness and unemployment payments versus monthly premium policies will scare more IFAs and mortgage brokers away from the sale of either. It is a difficult one to resolve, but in our experience with sub-prime clients it is easy for them to cancel a direct debit when things get tight, and that is exactly the time they need the payment protection insurance to help them out.

That is a topic for another time, but with repossessions on the rise, it is an issue not to be ignored by the IFA and mortgage broker community. Cover yourself and discuss payment protection with all your clients, make sure it is written down as well, or in the FSA's eyes it never happened.

The industry needs to heed Michael Coogan's advice, now is a good time for borrowers to review their financial commitments, but it is IFAs and mortgage brokers that desperately need to be the pro-active ones. Pick up the phone and ring your customers, a call that could save them money and relieve the stress and headaches of finances that are out of control; surely that is not such a bad thing.

There is no doubt that the combined impact of no outbound calling and far fewer IFAs chasing mortgage business means there are fewer options for customers to access a review of their financial commitments, and that could spell disaster. The UK economy is heavily dependent on consumer confidence, and a sharp rise in repossessions would be a significant body blow to that confidence.

About the Author

Matt Davies writes articles on the finance industry for www.blackandwhite.co.uk, who offer secured loans to all kinds of people, even those with bad credit.

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