Will very low mortgage repossessions continue?

The Council for Mortgage Lenders latest statistics for July-September 2015 showed repossessions stable, with 2,500 properties taken into possession in the third quarter, the same number as in the second quarter, and 50% down on the 5,000 reported in the third quarter of 2014.

The quarterly repossession rate is at its lowest level since the CML’s quarterly records began:

Repossessions often have major repercussions beyond the purely financial, from effects on people’s physical, mental and emotional health to disruption of children’s schooling. So falling rates are very good news, both for the families concerned and the local authorities that often have to deal with resulting homelessness. But will the current low levels continue?

Reasons to be optimistic

1) Continuing low interest rates

The small rate rise in November 2017 only takes the level back to the low pre-Brexit referendum level.

2) Stricter lending criteria

Going further into the future, the ending of self-cert mortgages and the generally stricter mortgage lending criteria should mean that more recent mortgagors are better able to manage increases in interest rates and other problems for their finances.

Reasons to be worried

1) “Technical issues”

The CML says “For technical reasons relating to lenders’ processes, the number of repossessions in 2015 so far show an overstated reduction. This is likely to continue into the fourth quarter of this year but is expected to unwind progressively in 2016. Subsequent quarters will therefore show a compensating effect.” The explanation for this is the Bank of Scotland v Rea case in August 2014, which is summarised here:  Mortgage possession: Lloyds and the arrears that weren’t.

The difficulties arose where after consolidating mortgage arrears, further arrears built up. The bank complained: “There is accordingly no simple and straightforward way … to provide a breakdown of the portion of the monthly instalment attributable to payment of arrears without a manually intensive account reconstruction on a case by case basis which would result in considerable expense and delay.”

The judgment basically said that was what the bank had to do if it hoped to win future possession cases. It seems that various other lenders have also paused some possession proceedings whilst they consider this, perhaps having to get out their calculators and manually reconstruct each account…  As a result the figures for the last year, and probably the next quarter as well, will have been lower than they would otherwise have been. And some of these “postponed” cases will at some point increase the numbers of possessions above the normal level.

In October 2016, the FCA announced a consultation on customer redress where banks have incorrectly capitalised arrears but also asked for the arrears to be repaid. It says, “Firms are impacted by this issue to different extents, for some it may affect most of their arrears book and for others a small subset.” 

2) Reduction in Support for Mortgage Interest

From April 2016, claimants have to wait 39 weeks, up from 13 weeks, to get help with mortgage interest. As a result, many people will have built up 6-9 months of mortgage arrears before they can get any help.

From April 2018, this benefit has been replaced by a loan on which interest will be charged, which will have to be repaid when the house is sold or on death.

This means that banks deciding between forbearance or repossession will have to take into account the fact that long-term reliance on SMI may be unrealistic. As the CML said: “The systems and risk challenges for our members arising from such a change are potentially huge”.

3) Interest-only mortgages

There is expected to be a spike in the number of interest-only mortgages ending in 2017/2018 when large numbers of endowment mortgages sold in the 1990s come to an end. A significant number of the people affected will find it hard to remortgage because of their age and the stricter mortgage lending criteria – for these people there may be no nice options at all and if they don’t get good debt advice repossessions could be the result.

4) Mortgage arrears start to increase

After several years of falls in the numbers of mortgages in arrears, they rose in both of the first two quarters of 2016. In Q2 2016 there were 218,279 mortgages with arrears of more than 1.5% of the balance. This is 5% up on Q1 2016 and 14% up on the low at the end of 2015.

Conclusion

With the “technical reasons” perhaps pointing to higher repossession in 2017 as the postponed cases come to court, interest rate increases at some point and SMI changes in 2017, the current low levels of repossessions may prove to be the low point.

This article was updated in May 2018

---