Through the policy maze
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I had been toying with the idea of a Lending Strategy lunch on the subject of arrears and repossessions ever since I attended a round table organised by the Social Market Foundation.
Just before the economic crisis hit, the foundation was taking a radical look at the UK's social safety net and in particular how this could be improved for home owners facing repayment problems.
As might be expected of a left-wing think tank some of the SMF's ideas were indeed radical but intended to feed into a wider debate.
Back then, the framework in place to help home owners in financial difficulty was clearly inadequate.
But as things turned out the foundation's work, as well as a similar initiative by the Joseph Rowntree Foundation, was overtaken by events.
And that's why, instead of having a carefully constructed infrastructure to help home owners who have lost their jobs or experienced a fall in income, we have recently seen a series of knee-jerk policy initiatives designed to give the impression that the government is on top of the situation.
So is there any substance among all the hype and spin? It seemed to me that Professor Steve Wilcox would be the ideal person to put things in perspective.
The professor's CV is too lengthy to detail here but suffice to say he has the ear of government and has written influential reports relating to low income home owners and the limitations of state and private sector safety nets for home owners in financial difficulty.
Indeed, along with Professor Janet Ford of the University of York, he developed the JRF proposal for a sustainable home ownership partnership, or SHOP.
Brian Brodie, managing director of HML, which has a growing third party specialist servicing unit, agreed with me and thought it would be a good idea to open a debate between Professor Wilcox and interested senior executives from the lending industry.
And that's why you find us around the lunch table at a London restaurant.
To start the ball rolling I confess to the professor that I have not been able to keep up-to-speed with the plethora of government initiatives that have been announced in recent months.
But like a good student I have done my homework and refer to Chapter 5 of the Treasury's background paper to the recent Budget.
This goes on at length about the government's mortgage rescue scheme, its support scheme, improved Income Support for Mortgage Interest provisions, the extension of the rescue scheme to include second charge mortgages and the creation of a government-approved lending panel.
It also covers the commitment from some lenders not to initiate repossession proceedings within three months of accounts going into arrears, the pre-action protocol and finally the government's pledge of universal access to debt advice for home owners in difficulty.
So I suggest to Professor Wilcox that, given all this support from the government and the lowest Bank of England base rate in history, home owners and lenders should relax.
I suggest to him that surely there can be no arrears or repossession problem and the Council of Mortgage Lenders' prediction of 75,000 repossessions by the end of this year can only be a case of scaremongering.
The professor likes my gambit but sidetracks the challenge, correctly preferring to move onto ground where intellectual honesty might triumph over journalistic rhetoric or political spin.
What the professor said
The purpose of this meeting is to gather together some thoughts about the current situation with regard to arrears and repossessions, and look at what lenders and the government can do to improve it.
Despite the wrath of the government, the CML has not yet reduced its forecast of 75,000 repossessions this year, so there's obviously a tension there.
We should look at what is likely to happen when we get beyond our immediate difficulties and enter the post-crunch environment, and I'd also like to consider what we can learn from past recessions - is anything new this time around? In terms of key principles and policies I believe there is a tension between the ways lenders are managing the present situation.
Individually responses are rational but collectively they can be part of the cyclical problem so there is a lot of political discussion swirling around the tricky question of trying to develop contra-cyclical economic and housing policies that will lessen the extent of cyclical volatility.
One thing that will affect lenders' operations as well as government policy is the attempt to balance the desire to maintain access to mortgages with the desire to provide security.
It is particularly important that the government should recognise that these factors are connected and that it can't have it both ways. I am sure you are all smarting from the impression the government is giving the public on this issue - that lenders are being awkward.
The most important lesson to be learnt from the last recession concerns forbearance. Last time around forbearance was the preferred option when borrowers got into difficulty.
Moving into shared ownership or rented accommodation was not what the majority of borrowers wanted back then, and I cannot see any reason why that should be different this time.
Even before we got into our present mess we knew that the structure in place to help mortgage holders in trouble was simply not realistic.
The desired take-up for measures that are in place has never been achieved and the model is bust.
In the medium term I believe ISMI is bust because it cannot easily cope with the flexibility of the market.
It is necessary to restructure and define what is an appropriate mortgage and an appropriate level of support.
Frankly, that is now impossible and the only way the Department for Work and Pensions can offer support based on current arrangements is not to ask too many questions.
So given that background, what kind of framework could there be for mortgage security going forward? What should such a structure should look like and how could the government best support this?
Of course, the government has its own forbearance scheme in place but you lenders are not terribly keen on it, which I can understand.
There has been some discussion about a provisional equivalent of forbearance as well as a recognition of the cost of repossession in terms of this not becoming an overhang on the market.
Again, we learnt these lessons last time around but that won't be much help until we have a calculation that brings together all the components in the equation.
At the moment, the lenders that are incurring the costs of forbearance as well as the indirect costs caused by other institutions acting more aggressively towards borrowers are obviously at a commercial disadvantage.
So the question is - how can the industry find a framework for a more consistent approach?
The answer is partly by lenders protecting their own interests but also by recognising that there are important reputational issues at stake.
The way the crunch has affected everyone in the market and the consequences of saying no to the government's forbearance scheme have resulted in lenders not coming out of this episode particularly well. In short, the perception is that the government is doing all it can but lenders are not signing off deals.
Last time around there was a contract between the industry and the government by which the latter agreed to carry the cost indirectly, but we have not seen that approach this time.
There are issues for the lending industry and the government that indicate it would be helpful to have a consistent view on the subject of forbearance and this should be addressed immediately.
Longer term, we know government schemes will result in a tighter regulatory regime although we don't know the details of this.
This throws up questions about access to mortgages involving LTVs, validation of income and the future of sub-prime products.
So there are many tricky issues in the mix and the government should recognise the importance of consistency in its objectives when it considers these.
But I'd like to emphasise that there is little point in the government coming up with a robust and rigorous plan for mortgage lending if it does nothing about the provision of credit.
After all, if all you do is effectively restrict mortgage lending so consumers have to go to other sources of lending, that is doing nothing. For example, the government should address the issue of unsecured loans more urgently than any in the mortgage sector.
Also, the government has failed to recognise the importance of an active private rental sector. We have a legacy of government policies that have been based on the notion that you either have social housing or home ownership, with perhaps shared ownership as a bridge.
The assumption was that the rental sector was dead. The government has conducted a review of management in the private rental sector but it has not asked what view it should take when it comes to stimulating social lending and home ownership.
It should look into where renting sits with regard to consumers' aspirations of home ownership and traditional social housing provision.
The crunch has affected all industries but lenders are having a particularly hard time and this should be recognised.
If we are moving towards restrictions on LTVs, the big question may become about access to mortgages rather than affordability. It may be more appropriate for the government to think about policy instruments that guarantee access to mortgages for households with limited savings rather than focus on forms of shared ownership.
In addressing the difficult question of designing something to replace current arrangements, I have been involved with the SHOP proposal. I know there was not a great deal of enthusiasm among lenders for this but I'm not irrevocably tied to the details of that proposal.
But something has to come forward to replace what was there before. When we have a secure idea of where we are going in the medium term it will make things easier in the short term.
Differences between this recession and the last
Nigel Stockton: The impact of unsecured credit is the main difference between now and 1991/92.
Andy Golding: In the 1990s when the base rate was 15% we were able to share data and there was a degree of equalisation between debt services. In the first-time buyer and shared ownership sectors we have seen a bit of that approach this time but we're starting to notice difficulties developing in the relationship. Everything is factored around a huge build-up of unsecured credit this time around.
Keith Street: If you combine the fact we now live in a world in which everything including a mortgage is considered disposable with a political environment in which banks have caused problems, there is a distinctly different level of commitment from customers this time.
Chris Taylor: There was not the same prevalence of sub-prime in the early 1990s when I started in the mortgage industry. Also, policy and legal changes have made it much easier for consumers to walk away from their responsibilities. Individuals seem to be less responsible and more willing to walk away. But is that a question for mortgage lenders or the government to address?
Paul Fenn: The customer dynamic is different now. If you look back to the early 1990s it's easy to see the attitudes of baby boomers and Generation Xers were different from those of today. They accepted and dealt with debt in a different way. We've been looking at how we work with our staff of that generation and are transferring this to our customers. My parents would have expected a letter through the door from their mortgage lender whereas customers now want messages sent to their iPhones because they won't be home for days.
Paul de Hoest: I agree with all that but I'd also like to look at quality of lending - I'm not so sure it was much better back then. In the late 1980s high LTV loans and so-called non-status mortgages were prevalent. We didn't have credit scoring either so underwriting was in some respects poorer then. These days we call this sort of lending sub-prime and when borrowers have defaulted once, it feels easier for them to do it again.
Nigel Stockton: It's nothing to do with sub-prime or buy-to-let - the issue is the same as it's always been. It's easy to concentrate on the sub-prime aspect, which only makes up 4% of the mortgage market, and end up apportioning blame incorrectly. Yes, repossessions are likely to be higher in some parts of the country but it's important to realise that the causes of the problems we faced in 1991 are the same as those that created our present difficulties.
Bob Young: We talk about ourselves as the lending industry but for years a lot of organisations in this sector have been mortgage aggregators - they are not lenders but glorified brokers. We are professionals who lend. We don't only originate lending but also manage it and take an interest in what happens to borrowers. Fundamentally, organisations buying portfolios cheaply are not lenders so there's nothing the Council of Mortgage Lenders can do other than flag to the media and government that there are some lenders that operate on different lines.
Mike Lazenby: It seems that we are trying to find a single cause for the predicament we are in and I don't think there is one. If we had not had all the sub-prime issues coming over from the US, which a lot of the UK banks got involved with, would we be in such a bad position currently? Also, if consumers looked at their homes more as places to live than as investments, would we be in such a bad position?
Andy Golding: The consensus seems to be that we have priced for the sub-prime market but that's not true. The criteria that we have applied to sub-prime, self-cert and buy-to-let mortgage lending are close to prime. For building societies, in the old days when savers wanted 4% and borrowers were happy to pay 6% it was easy to make money. This changed to a situation whereby savers wanted 6% and borrowers wanted to pay 4%, whether properties were buy-to-let or to live in. The market became dysfunctional because of greed.
Regulation
Mike Lazenby: There is one notable difference between this recession and previous ones - this time, the regulator is far more intrusive and that is my biggest worry. When some of its messages emerge they are hard for the industry to interpret.
The regulators are dabbling in our business and delaying economic recovery because they are so intrusive. The amount of information they require does not add any value to the issues we face.
Andy Golding: It's not just the intrusive nature of regulation but also the pro-cyclical way in we are regulated that's a problem this time around. The trouble is that we are being forced to behave in a pro-cyclical way - indeed, we have to behave like accountants.
Mike Lazenby: I agree. If we had the money right now we would be lending in the prime market and getting margins we could only have dreamt of a decade ago. We'd be making profits and everybody would be happy. High liquidity is inefficient because it means institutions are not lending to consumers.
Paul de Hoest: There is no joined-up thinking among the authorities. On one hand the government expects us to lend, but which lender can grow when the regulators are more interested in us holding increasing amounts of liquidity?Tracker mortgages John Murray: The only thing I can contribute on the subject of liquidity is to say that some beneficiaries of tracker mortgages are doing their best to accelerate repayments.
Andy Golding: That's a good point and reflects something I have raised before in the media. A minority of customers are being sensible, trying to keep their payments stable. It could be argued that low interest rates in the US caused the credit crunch in the first place.
Consumers on low incomes borrowed money to buy property they could not afford when interest rates went up again. We could be storing up phase two of the crunch with the way we are lending at the moment, especially with the media shouting about £1 mortgages.
Bob Young: Yes, the emphasis on trackers seems ominous to me - this can only go one way.
Andy Golding: Unfortunately, as a nation we are keen on living beyond our means and low interest rates have created more means for consumers. Most are not repaying unsecured debts or overpaying mortgages but rather using the extra money to fund their existing lifestyles.safety nets in other countriesBrian Brodie: Do any other countries have social safety nets that work more efficiently than ours? There must be some examples we could copy.
Professor Wilcox: There are many dimensions to this question but on the housing benefit side, one of the key things in most European countries is that there is a relatively low base level of state benefit provision offset by higher social insurance cover.
For example, if any of us here were to become unemployed tomorrow we would have to survive on basic Jobseeker's Allowance but most European countries have what are known as earning ratio schemes that kick in when individuals lose their jobs.
As a result, the unemployed in those countries have access to more income through employment insurance than they would have through state welfare. The upshot is that most of these countries do not help households through housing benefit schemes.
Source:
Lending Strategy
