Reasons to be gloomy in 2010

Lending Strategy March 2010

It’s that time of year again when we ask repossessions experts from banks, building societies, specialist lenders and servicers for their views on what the next 12 months holds. First, a word of thanks for the responses which were provided anonymously, thus enabling us to reveal genuine views rather than the company line.

The good news is that 2009 ended with far fewer repossessions than had been feared. But as the Ministry of Justice says, these changes should be treated with caution due to a big fall following the introduction of the Mortgage Pre-Action Protocol having a negative effect on the quality of seasonal adjustments.

Meanwhile, experts are far from optimistic about the year ahead, with 67% expecting an increase in repossessions. Of these, 50% expect them to rise by up to 5%, 17% expect rises of between 5% and 15%, and 6% expect an increase of more than 15%.

Part of the reason for this pessimistic outlook is that the Pre-Action Protocol effectively put the brakes on proceedings as it created both an administrative backlog and a degree of uncer- tainty in the whole process. Almost a third of respondents say they are seeing an increase in repossessions.

Of particular interest in this survey is the cause of repossession. Ever since I started in this industry the top three reasons for repossession have been divorce, redundancy and business failure. Debt was a given but the debt itself was never the cause.

This coming year the story could be different as the top cause for repossession is debt itself - not on the first loan but excessive borrowing from other sources. Second is redundancy, third is separation and fourth is the possibility of interest rate rises pushing borrowers over the edge.

The conclusion has to be that borrowers took on debt that was unsustainable just because it was available.

This leads us nicely to the thorny subject of regulation and what help it could provide in ensuring this level of indebtedness doesn’t happen again.

Perhaps unsurprisingly 94% of respondents support increasing the regulation of second charge lending. Way back in 2007 our research indicated that respondents would like the Financial Services Authority to be more active in producing guidelines as to what an acceptable level of total borrowing was, and there was overwhelming agreement that all providers of credit should be obliged to consider total borrowing when offering credit.

Hindsight is a wonderful thing but it would be interesting to see how different the picture would be now if borrowers’ appetite for debt had been curtailed by some sensible controls.

So far from being anti-regulation, respondents see the benefits it can provide, especially in the residential sector rather than the commercial market where caveat emptor can more legitimately apply.

Respondents are also critical of their own industry and its failure to control products. Some 65% believe the FSA should prohibit self-cert mortgages.

While mortgage lenders are responsive to the prohibition of self-cert mortgages 87% are against the notion of the FSA imposing a cap on LTVs. And the vast majority of those who think caps should be imposed believe the maximum should be no higher than 90%.

Buy-to-let is an interesting area because it is still growing, Statistics from the Council of Mortgage Lenders show that gross mortgage lending in the sector grew in Q3 2009, with the number of outstanding buy-to-let loans growing to 1,205,000.

This represented 11% of the market for all mortgages at the time. The value of outstanding buy-to-let loans increased by 2.5% to £144.2bn.

But looking to 2010 lenders express worry about an increase in buy-to-let repossessions. Some 65 % think there will be an increase if rental yields fall, 61% are worried about a downward correction in house prices and 56 % fret about rising interest rates.

One profession that did remarkably well in 2009 was professional negligence litigation lawyers, and that trend looks set to continue in 2010.

Some 72% of those surveyed think litigation will increase against surveyors. Of these, more than half think there will be a significant rise.

Meanwhile, half believe there will be an increase in litigation against lawyers and more than 50% expect mortgage brokers to be at the sharp end of solicitors’ quills.

What is surprising is that more than half of our respondents expect litigation against lenders themselves - a practice that until now has been unusual but one which has gathered pace with an increased willingness to challenge the charges added to accounts.

Mortgage lenders also shared their views on whether they think professional indemnity insurance, including run-off cover, should be made compulsory for companies in the mortgage market, specifically brokers, surveyors and estate agents.

They are almost unanimous in their view that PII should be compulsory for surveyors, with 88% in favour. And 71% agree it should also be made compulsory for both estate agents and mortgage brokers.

In summary, 2010 has the potential to be far from the benign environment that many commentators are both predicting and hoping for.