We need a credible plan to repay debt

8 March 2010

Liberal Democrat shadow chancellor Vince Cable’s warning that a rise in repossessions has been delayed rather than averted mirrors a presentation I gave recently which focussed on the performance of 2007 securitised mortgage loans.

We analysed six residential mortgage-backed security issues from 13 originators and found that arrears of four months or more significantly spiked in 2009 from about 6% to 15%, while repossessions stayed flat.

Government intervention is clearly playing a big role in keeping people in their homes.

The biggest loan modification in history has taken place in that the Bank of England base rate is at an unprecedented low, so many people are only staying afloat due to low mortgage payments. Also, lender forbearance is at an all-time high.

Cable is right when he says the repossession crisis may have only been postponed and if interest rates and unemployment go up repossessions will follow. Even in the most robust economic circumstances that statement would hold true.

The government must let the steam out of this problem slowly and wait for unemployment to normalise before considering interest rate rises.

But it could lose control of interest rates - for example, if hyperinflation kicks in or the country loses its AAA rating.

The new government must quickly lay out credible plans to deal with the national debt.