Up to 12% of borrowers could be in arrears
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As many as 12% of mortgage borrowers could be in arrears, but the figures are being masked by lenders’ forbearance measures, says the Bank of England.
In its Financial Stability Report it says if these measures were not in place as much as 12% of borrowers could be in arrears.
The report says: “Assume as a worst case scenario, the flow into forbearance has persisted for two years and that non of these loans were recovered or foreclosed on.
“This would imply that, as an upper bound, 12% of residential mortgages could be receiving some kind of forbearance at present.”
Sir Mervyn King, governor of the Bank of England and governor and chairman of the FPC, says when lenders choose not to take action against borrowers who are in arrears or in breach of covenants it is important that adequate provisions are set aside for prospective losses.
He says: “This is not to suggest that forbearance is wrong; it may well make sense for both parties to a loan. But if provisioning is inadequate, banks’ reported profits and levels of capital may provide a misleading picture of their financial health.”
The report also suggests forbearance has been widespread in the commercial property sector.
It adds: “Where borrowers continue to service their loans, some lenders have reportedly waived breaches of LTV covenants and been willing to extend the duration of maturing lending or restructure loans on non-commercial terms.”
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Readers' comments (3)
Anonymous | 27 Jun 2011 11:30 am
So, Mervyn King is now saying that banks will need to set aside more capital because of the forebearance measures that were forced on them by the FSA, government, Civil Justice system et al! This will mean even less money to lend and the economy not recovering as fast or at all! God help us all - the lunatics are really in charge of the asylum these days.........
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Roger Johnson | 27 Jun 2011 6:15 pm
Um, I don't think you'll find that 'forebearance' was forced on the lenders by anyone other than themselves. Higher numbers of arrears and potenial default cases in 07/08 were of concern to most lenders who realised that they either took the losses, and undermined an already fragile market with increasing repossessions or, with the unique benefit of historically low interest rates, enter into arrangements that allowed borrowers to stay in their properties, avoid repossession, avoid any loss, and lower provisions - a 'no brainer' if there ever was one.
However, it was a no brainer with an uncertain future - based more in hope than reality that the market would recover. Three or more years later, the market remains uncertain and prices are drifting off. A rise in interest rates, would put pressure on the arrangements and the consequent provisioning.
The boy with his finger in the dyke might just be about to slip on the mud.....
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Anonymous | 28 Jun 2011 8:39 am
Forbearance was a neccessary tool at a time it was needed most, however for many it's long since been time to admit you simply can't afford the mortgage.
12% seems light in my view however the biggest issue still to emerge are all the Sub Prime customers who never had anything but negative equity.
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