CML revises arrears forecast 21.11.2008

Author: David Whittaker Posted on: 21 November 2008

The number of cases in arrears at the end of September was 168,000, 8% higher than the 155,600 at the end of June.

The CML also reports that 0.1% of all mortgaged properties were repossessed in the third quarter of 2008, up slightly from 0.09% in the second quarter. By number, this equates to 11,300, 12% higher than the 10,100 in the second quarter. The CML continues to expect the total number of repossessions this year to be around 45,000, as forecast in October 2007.

Buy to let mortgages have in the past shown better performance than the overall market in terms of payment profile. But in the third quarter the payment profile of Buy to Let lending has worsened more rapidly than the market as a whole. Reasons include falling rents and an over-supply of rental property in some areas, resulting in some landlords being unable to let their property or achieve high enough rents to support their borrowing commitments. Fraud is also likely to have been a contributory factor. In addition, in line with the rest of the market, it is more difficult to sell as an exit strategy, while the availability of new Buy to Let mortgage finance has contracted and criteria have tightened.

At the end of September, 1.58% of Buy to Let loans were in arrears (up from 1.10% at the end of June), compared with 1.44% of all mortgages. The number of Buy to Let mortgages taken into possession in the third quarter was 900, the same as in the first and second quarters of the year, representing 0.08% of all Buy to Let mortgages (compared with 0.1% across the mortgage market as a whole). On the basis of the arrears experience, it seems this lower repossession rate in the Buy to Let sector is unlikely to be maintained looking ahead. However, a range of factors will affect the number of Buy to Let repossessions, including the extent to which Buy to Let lenders appoint receivers of rent as an alternative to repossession. This may be a preferable strategy in many cases where tenants are paying their rent but the landlord is not paying the mortgage.

CML director general Michael Coogan said: "The CML and lenders are absolutely committed to ensuring that repossession is only ever a last resort. Most borrowers who face payment problems successfully keep their home by working with their lender - anyone worried about mortgage payments should contact their lender at the earliest opportunity, before arrears start to build up.

"The government has taken some helpful steps towards targeted support for some of the most vulnerable households, but with a worsening economy now needs to make it a priority to go further. Increased help with housing costs is needed for a wider range of borrowers facing unforeseen repayment difficulties where there would otherwise be little prospect of early improvement. Next week's pre-Budget report should concentrate on making much more assistance with mortgage payments available for people whose income is reduced, as help is currently far too limited.

"Looking ahead, conditions in the wider economy suggest a worsening picture for mortgage arrears, however carefully lenders handle their treatment of borrowers in difficulty. But while lenders cannot change the underlying causes of financial difficulty, such as unemployment, they can make sure that their response to borrowers is constructive and seeks to avoid repossession wherever other solutions can be found.

"That is what lenders are doing, meaning that the number of repossessions is likely to be contained to the levels we forecast at the beginning of the year, despite the worsening in economic and funding conditions through the year. We and our members are continuing to look at every possible way of minimising repossessions, consistent with considerations of the borrower's financial prospects."

Simon Rubinsohn, RICS chief economist said: "CML data released this morning demonstrates that the worsening economic climate is beginning to have a marked impact on both the levels of arrears and repossessions in the property market. And with unemployment set to rise sharply as the recession bites, it is inevitable that both indicators will rise further in 2009. The full impact may, however, be mitigated to some extent by the actions of lenders and the government, both of whom are devising strategies to limit the fall-out from the current crisis.

“The aggressive response from the Bank of England should also provide some much needed support. Base rates are likely to fall to a low of 1.5% over the coming months helping to cut borrowing costs and ease the pain of financing existing mortgages.

"Ominously, however, the buy to let market is now accounting for an increasing share of mortgage arrears. The latest RICS survey of the residential lettings market shows rents are now declining which, if persistent, could exacerbate the pain in this sector."