The government, the mortgage lending industry and consumer groups all have a vested interest in predicting which mortgages are likely to fall into arrears and end up in repossession because they all want to keep the numbers as low as possible.
But there is little publicly available information the industry can use for an informed debate about the right way to support customers who fall behind with their payments, who should pick up the tab and how big that tab is likely to be.
One of the stumbling blocks is that information on actual repossessions and those forecasted is only compiled at a national level, whereas all lenders know that significant regional variations exist.
And it is an issue we felt well placed to address, because our business intelligence unit maintains a database of information on 320,000 live mortgage accounts.
This means we are able to take a detailed look at what’s happening with arrears and repossessions on a region-by-region basis and get a clearer insight into what is likely to happen. Our forecast uses a technique called ’survival analysis’ which has been used to predict the likelihood of mortgages being repossessed.
This statistical technique will be familiar to colleagues in the insurance industry, who use the method to forecast ’time until’ behaviour, such as predicting when an insured person is likely to die.
In the mortgage market, the focus to date has understandably been on ’if’ rather than ’when’ a mortgage account will be repossessed.
By cross referencing the results of survival analysis with household data provided by the Office for National Statistics, we have been able to generate a national and regional picture of what is likely to happen to repossessions in the year ahead.
“A total of 33,257 homes will be repossessed this year. Unfortunately, we also believe the upward climb will continue into 2012”
We believe this year will be a game of two halves, with 15,557 repossessions in the first half of the year climbing to 17,700 during the second half, as rising inflation, higher interest rates and continued job losses start to take effect.
We are forecasting that 33,257 homes will be repossessed in total this year – 0.3% of all mortgaged properties.
Unfortunately, we also believe the upward climb will continue into 2012, as public sector and benefit cuts start to bite. We anticipate the total number of repossessions rising to between 35,000 and 40,000 next year.
On a regional basis, the picture varies dramatically between areas such as Northern Ireland, where the rate of repossessions is expected to hit 0.83%, nearly three times the national average of 0.3%, and the South-West where the rate of repossessions is forecast to be 0.18%, just over half the national average.
Not only has Northern Ireland experienced an average house price fall of 10.2% last year but it has also suffered as a consequence of its links to the troubled economy of the Republic of Ireland.
The South-West, on the other hand, has benefited from house price increases of 5.3% last year – one of the highest increases in the UK – and a below-average rate of unemployment. Other regions where we anticipate repossessions could rise above the national average this year include Wales at 0.37%, London at 0.34%, the West Midlands at 0.33% and the North-East at 0.33%.
So what are the factors that will drive the lower the level of repossessions during the first six months of this year?
Many of the mortgages taken out at the height of the boom in 2006 and 2007 that will end in repossession have already come through and fed into higher figures last year.
Lenders have also tightened lending criteria, meaning that the risk profile of those obtaining mortgages in the last two to three years has, on average, been significantly better than in the years before the credit crunch.
Consequently, such borrowers have been more able to maintain repayments on their homes and so avoid repossession.
There have also been fewer first-time buyers. While this is not a good omen for the market, first-time buyers do represent a group that is statistically more likely to have their home repossessed than someone buying a subsequent home.
This takes us to the second half of the year, when a number of factors will combine to increase the number of repossessions once again.
Affordability pressures, combined with a continued tightening of lending criteria, may well lead to a fall in house prices this year. This may lead some lenders to repossess properties with high LTVs to avoid potential losses that would materialise as a result of falling asset values.
And finally, the government has reduced the interest payments for unemployed mortgage holders. While the majority of mortgages should not be seriously affected by the change, a considerable minority will be pushed into arrears as the relief payments they receive fail fully to meet their contractual repayment obligations.
These figures in themselves don’t provide the answers to the challenges facing lenders this year but they are an indicator of what’s likely to be in store and, as the saying goes, forewarned is forearmed.