ISMI cut gives rise to arrears fears

25 October 2010 | By Christine Toner

With “spending cuts”, “cutting the deficit” and “tightening our belts” constantly bandied about in the press, most of us will have gathered that money is tight at the moment. And for thousands of borrowers it’s about to get even tighter.

From October 1 the standard rate used to calculate Income Support for Mortgage Interest dropped to 3.63% from 6.08%, almost 50% less. Anyone receiving the benefit will be subject to the reduced rate, regardless of the size of their mortgage.

The cuts were announced in chancellor George Osborne’s emergency Budget in June, with ISMI payments set at the level of the Bank of England’s published average mortgage rate - currently 3.63%. And industry experts are warning that the lower rate could affect arrears and repossessions.

Last month financial advice agency Advice NI warned that the change would leave many at risk of plunging into arrears and losing their homes. Anything that could potentially lead to a fall in income and impact borrowers’ ability to repay their mortgage will be of concern to lenders. But the way lenders manage arrears and repossessions is also a concern and has been under the spotlight already this year.

In March Which? accused the Financial Services Authority of dragging its heels in its investigation into the way lenders and third party firms treat customers in arrears.

The FSA revealed in June that four firms had been referred to the regulator’s enforcement division with several more assessed for referral over their handling of mortgage arrears and repossessions.

Specialist lenders and third party administrators were highlighted by the regulator as having weaknesses in their arrears management processes. Now, with the possibility of increased arrears, will lenders be able to cope?

Andrew Fairburn, business consultant at Target Group, believes that while it’s possible the ISMI change could lead to more repossessions it’s not a certainty.

“Obviously many of the government’s schemes centre around having a bit of forbearance and keeping people in their homes,” he says.

“If someone is struggling to the extent of facing repossession as a result of this benefit being cut, it’s will be interesting to see how they will be treated. A lot of lenders are taking the view that sometimes it is more beneficial to keep people in their homes than to repossess the property, particularly in these times.

“It’s inevitable we might see a few more but maybe not as many as we would have seen during previous recessions and times of difficulty,” he adds.

Fairburn thinks while changes had to be made to the benefit,
they may not have been thought through properly.

“The rate was high at over 6%,” he says. “Some people may have legacy fixed rates and they may be struggling now but a lot of people will be on SVRs that are lower. It’s those who are on a fixed rate that are going to be hit hard by this.”

Fairburn understands why there’s a blanket rate but says it’s difficult to justify how the people whose rate is below the new ISMI rate will continue to receive the excess.

“This goes towards any mortgage arrears and capital payment as well,” he says. “That seems unfair on those who can no longer cover all the interest on their mortgage. It needed to be reduced but the government should have thought a bit more about people who are on fixed rates above the ISMI rate.”

Ian Carr, operations director of special servicing at HML, is also unsure what impact the changes will have.

“No-one knows what the effect will be,” he says. “The way lenders deal with these cases will differ and this will determine whether there is an increase in repossessions or not.”

But Kevin Friend, strategic partnerships director at Mortgages. co.uk, is adamant the changes will not result in an increase in repossessions.

“If you look at the amount of people who qualified for it, even if it was scrapped I’m not convinced it will have a big impact on repossessions,” he says.

“Repossession figures are driven by far bigger things than this. Even if it does have an impact on some people, it will be minimal. A lot of such measures are countered by the implementation of the new arrears handling regulations that came into force on June 30.”

As of June 30 lenders must follow certain rules in relation to arrears and repossessions. They must not apply a monthly arrears charge where an agreement is already in place to pay the arrears. Payments from customers in difficulties must be used to clear the missed monthly payment as opposed to paying off arrears charges. Also, lenders must consider all options for borrowers and repossessions should only be the last resort.

Friend believes there will be a decrease in repossessions next year.

“This will be partly due to the new regulations but also the fact that lenders are at risk of being exposed for having potentially mis-sold mortgages in the first place,” he says.

“Also, lenders have issues over their portfolio values and if they are too keen to repossess this has an impact on the value on the rest of their portfolios.”

However, his view is not shared by everyone in the industry. Last week we saw the government announce its spending cuts meaning there is yet more uncertainty in the market regarding their long-term impact and Fairburn says we are not out of the woods yet.

“We’ve been looking at economic trends and last year everyone was talking about the threat of interest rates increasing again,” he says.

“That threat appears to have gone away or at least isn’t as much of a threat for the near future. But that’s been replaced with the announcement that up to 600,000 public sector jobs are going to go as a result of the Spending Review, so that has become more of a problem.”

With that in mind, how can lenders deal with extra arrears? Carr believes it’s difficult to know until the full impact of the cuts is felt.

“The challenge has been quantifying the impact,” he says. “Lenders knew it was coming but were unable to communicate to borrowers what it would mean for them, and the final implications will not be known until the end of November.”

Fairburn says lenders will have to manage cases on an individual basis.

“Cases where the customer is in receipt of benefit already are always difficult and you have to assess them individually,” he says. “Lenders need to ensure customers are receiving all the benefits they can and then assess cases individually.”

But Fairburn says there are some cases where lenders can see that the customer cannot afford to be in the property.

“It’s then a case of working with them and figuring out a plan to go forward,” he adds. “And if they genuinely can’t afford their mortgage then maybe they can look at a way of assisting with a sale to maximise what they’ve got.”

Outsourcing is one way of managing arrears and HML and Target both offer arrears management services.

“We’ve seen a big trend in books that are closed to any new lending,” says Fairburn. “The administration of those books and the arrears on those books is costly if you’re not originating to replenish that loan book. Outsourcing has increased from that point of view, which has been beneficial to us.”

Not everyone is in favour of third party outsourcing. Friend says he has heard some horror stories.

“If third parties are involved there should be a robust process in place whereby lenders that are employing that third party have ultimate sign-off on an eviction or repossession,” he says. “The way some of these are managed is appalling and I have seen some sad cases.”

But Carr says lenders usually have the final say. “We never make the decision to repossess, it is always referred to the client and it’s their decision,” he says.

As has been the way throughout much of the recession, consumers and lenders must adopt a wait and see approach as the industry braces itself for the impact of both the changes to ISMI and the spending cuts.

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