Threat of reducing lender forbearance needs to be tackled

Mortgage forbearance is not new. Political pressure was applied to lenders during the last period of high arrears in the mid-1990s.

But then the pressure was a result of a voluntary agreement between the Council of Mortgage Lenders and the government.

This time round the pressure is backed by the Financial Services Authority’s Treating Customers Fairly initiative and Mortgage Conduct of Business rules.

Paul Diggle, property economist at Capital Economics, recently tried to quantify how important a role forbearance has played in propping up the housing market.

He estimated that without lenders’ leniency, arrears and repossessions could be double the current rate.

He also suggests that had banks been less forgiving, the proportion of mortgages three months or more in arrears would probably be around 5% – matching the 1990s peak.

The Bank of England estimates that 11.8% of borrowers have benefited from some form of forbearance.

Of these, roughly a third thought they’d be in arrears if they hadn’t reached an agreement with their lender.

“It seems the forbearance strategies that some lenders have adopted may run out of steam soon”

But there are other elements that can skew the numbers. Lenders are apparently adopting the increasingly popular tactic of capitalising mortgage arrears, whereby the debt may be increased but the borrower is no longer counted as being in arrears, thus removing them from the statistics.

Last year the Bank said that despite its positive effects, lender forbearance could be obscuring a vast number of struggling borrowers and postponing inevitable repossessions.

It is also important to remember that we are in a low base rate period that has remained stable for a long time, helping keep a ceiling on potential repossession orders.

More recent announcements from lenders have seen some increasing SVRs and that does not help the outlook. It seems that the forbearance strategies that some lenders have adopted may run out of steam soon.

You do not need to speak to many borrowers to realise how many are just about coping with their payments at current rates.

Any increase, either in the base rate or lenders’ SVRs, will push more borrowers into a situation where they cannot manage payments.

Even the CML commented last year that a greater number of stretched households were likely to find it more difficult to cope this year, despite forbearance policies by lenders, as upward pressure on arrears and repossessions will be exacerbated by the weakening employment market.

Recent audits by our team have thrown up some surprising results. As more complex guidelines for measuring and limiting risk are adopted by lenders, we would expect to see improved data and a meaningful understanding of customer needs in this area.

But in some cases we have found lenders could not identify the loans that had been granted any form of forbearance, as the processes and recording procedures were not appropriate.

That combination of lack of accurate data and potentially shrinking forbearance strategies points to a risk that needs addressing soon.