When the phrase ‘think global, act local’ was coined by Sir Patrick Geddes in his 1915 book Cities in Evolution, I’m not sure he could have imagined the number of occasions on which it would be used.
The evaluation of housing stock by lenders can certainly now be counted among this number.
Lenders need to evaluate their overall position in relation to arrears and the housing stock on their books but it’s only when they achieve local knowledge of their assets that meaningful decisions can be made.
The mortgage market is in a bit of a pickle at the moment, to put it mildly, and with unemployment set to top three million by the end of the year it’s hard to hold out any prospect of an early improvement in the situation.
One factor unlikely to improve things is the latest reduction in the Bank of England base rate. This is an unnecessarily harsh kick at those with savings, as it will have little impact on mortgage rates.
In 2008 repossessions hit 40,000 and only the most optimistic professionals could welcome this as being lower than predicted rather than recognising the harsh reality that it is 54% higher than the figure for the previous year.
And there’s more bad news on the horizon, with dire predictions that more than half a million home owners will be in arrears of three months or more this year and 75,000 homes will be repossessed.
All in all, the outlook seems pretty bleak and although we have seen similar situations in the housing market in the past few years I’m not sure lenders have ever known less about their underlying assets. This significance of this will become clear when repossessions rise.
It could be argued that lenders that repossess houses simply because they are at the end of the arrears process without having any recent knowledge of the properties or areas involved are taking a significant risk.
They might confidently assume that if a property was, say, a two-bedroom house when the mortgage was agreed some years back it probably is still a two-bedroom house. But the condition of the property and the circumstances of the local area may have changed radically.
Lenders are increasingly evaluating their arrears strategies at a local level because there is a growing recognition that selling properties may not always be the most prudent option.
So if homes are unlikely to sell based on an evaluation of their condition in conjunction with an assessment of their location, it’s clear that other strategies must be looked at.
Also, factors such as house prices need to be considered, recognising that an increase in the number of distressed sales could drive values down, pushing up the risk of lenders suffering shortfalls from sales.
There is a growing belief that there’s no substitute for physical property assessments when it comes to providing lenders with an accurate appreciation of the value of assets they are looking to dispose of.
Local physical property inspections can allow lenders to flag up any factors that could adversely affect the sale of houses. This is particularly relevant for properties that have been on the market for more than 90 days without attracting any offers.
Recent months have seen a reduction in house prices combined with an increase in the amount of time properties spend on the market.
Some sectors of the housing market are feeling the pinch more than others but the overall number of repossessed homes owned by lenders has almost doubled in the past year and the number of former buy-to-let properties has more than trebled.
This trend has led to lenders adapting their strategies – they can no longer assume that selling their repossessed properties is the best option. This brings to mind the early 1990s when we saw the emergence of schemes designed to allow defaulting borrowers to remain in their homes.
Obviously, when it comes to selling homes it’s important to get the basics right, and lenders must give themselves a fighting chance of getting the maximum value for their repossessed properties.
This strategy benefits the borrowers involved while also helping lenders to avoid shortfalls.
Whether it’s as simple as noticing that a fence needs mending or the fact that a property could do with a fresh coat of paint, dealing with local issues can make the difference between disposing of a property efficiently and not.
We are noticing that switched-on lenders are increasingly asking for this sort of local knowledge and using it to their advantage.
One of the main reasons there is such a dearth of local information in the housing market is that the composition of mortgage distribution has changed fundamentally in recent years.
With the emergence of centralised lenders distributing their products through the intermediary channel came a decline in the amount of natural contact between lenders and borrowers.
This is notably different from the situation that existed previously, when lenders predominantly distributed mortgage products through their branch networks.
Inevitably, borrowers liaising regularly with their lender’s local branches led to the formation of deep and long lasting relationships.
This is not to say that centralised lenders have had poor customer relationships but rather to point out that it is inherently more challenging to build relationships at arm’s length.
It’s important to recognise the significance of branch managers to understand what the market has lost. The role of branch manager was crucial not only in offering loans but also in managing them. This was particularly important in the event of accounts falling into arrears. When managers were responsible for lending borrowers in arrears were invited into branches to receive help and counselling, which at least addressed the problem at an early stage even if it achieved little else.
Also, if borrowers were not able to be contacted by telephone or they failed to respond to letters home visits were easy to arrange. Whether in debt or disease, it’s universally recognised that early action is crucial.
The reason I believe reintroducing local knowledge into the lending process is a good thing has nothing to do with ideology, it’s more about efficiency. If arrears can be managed effectively, borr- owers and lenders will both benefit.
Of course, local inspections can do more than reveal the state of properties, they can also uncover discrepancies in the mortgage situation.
We have recently gone public about our fear that there could be what we call a hidden buy-to-let sector. It’s possible that properties that were originally mortgaged on standard residential loans are being rented out.
It’s hard to put an accurate figure on how many properties might fall into this category but it has been suggested that the problem could affect thousands or even tens of thousands of homes.
What is certain is that there was a significant boom in buy-to-let in recent years. During this time the belief developed that having a buy-to-let property was a rock solid way to make money.
Amateur landlords with no experience of managing investment properties were desperate to leap on the bandwagon. If they didn’t have big enough deposits or needed lower rates, one way they could get on board was to take out residential loans even though their properties were to be let out.
Couples could achieve the same result by using one partner’s name in regard to one property and the other’s for another.
Of course, this situation does not have to be contrived. Some borrowers’ original mortgages may have been for their primary dwellings but their circumstances subsequently changed.
Credit ratings agency Standard & Poor’s recently claimed that up to 40% of buy-to-let landlords could fall into negative equity if house prices keep declining at the present rate.
This is worrying enough but we should also remember that buy-to-let loans were typically at lower LTVs than regular mortgages, so anyone who used a residential loan for a buy-to-let property or subsequently changed the use of their property to buy-to-let is likely to be even closer to negative equity.
This is not simply a case of borrowers being clever in finding a clever way to get rental investments. There could be serious consequences if borrowers are renting out houses that were purchased with residential mortgages without lenders being aware of this.
There are also ramifications for insurances relating to these properties, but local knowledge mainly comes into play when accounts fall into arrears.
A lender may not be aware that an individual living in a property is not the borrower, while letters to borrowers are likely to go unopened by tenants. Lenders could also suffer timing problems if repossession is the only option.
According to recent legislation there must be a moratorium of six months before repossession is requested. If it transpires that an occupant of a property is actually a tenant with an assured agreement, this will cause significant delay and complication in the management of the account involved.
It’s also possible to imagine circumstances whereby tenants are paying their rent but borrowers are not paying their mortgages. It’s vital that lenders should know the facts about the properties on which loans are secured and that both borrowers and tenants are aware of their rights and responsibilities.
This is where field agents can play an important role – not in solving the problems created by delayed repossessions but in supplying information that can help lenders evaluate the most appropriate course of action.
Of course, local knowledge can’t provide all the answers but when difficult choices have to be made it could help lenders make the sort of informed decisions that are so important when it comes to treating customers fairly.