More by luck than judgement we meet for our Lending Strategy round table lunch to consider arrears and repossessions on the day the Council of Mortgage Lenders publishes its Q1 2010 data on these areas.
And to top this our guest speaker Paul Broadhead, head of mortgages at the Building Societies Association, confirms that the BSA, along with the CML, Citizens Advice and Shelter, has just written to chancellor George Osborne and business secretary Vince Cable, urging the government to make a commitment in its first Budget to continue supporting home owners in financial difficulty.
The letter advises that recent modest falls in mortgage arrears and repossessions are deeply dependent on low interest rates and public policy measures that currently apply.
The government, the missive suggests, needs to make a long-term commitment to help borrowers in most need because, as Broadhead helpfully points out in his opening remarks, while government rescue schemes have not been taken up in big numbers the fact they are in place gives borrowers the confidence to talk to lenders, which is half the battle.
As for the arrears and repossession figures the good news is that they fell in the first quarter of this year, although everyone present at the round table agrees the statistics offer no reason for complacency.
And those present include Karl Wise, head of business planning and strategy at Lloyds Banking Group, Keith Street, chief executive officer of Kensington, Mark Dowling, head of risk and planning at Kent Reliance Building Society, Peter Hill, operations director at Leeds Building Society, Phil Basford, controller of strategy and recoveries, lending control, at Nationwide Building Society and James Hillon, function leader, home and long-term savings at The Co-operative Financial Services.
Also present from sponsor HML are Joanne Gill, head of PR, Damian Riley, director of business intelligence and Mark Webster, head of sales.
For the record, repossessions as a proportion of all mortgages remained steady in Q1 at 0.09%, the same proportion as in the previous quarter and down from 0.12% in Q1 2009.
The proportion of mortgages in arrears also fell but the decline was considerably more marked in lower arrears bands than among those with more substantial arrears.
According to Broadhead, this suggests that low interest rates and relatively stable employment levels have been helping to prevent new households getting into difficulty but that many with more entrenched problems are still struggling.
Broadhead isn’t into making long speeches and in practical terms he has 15 minutes to get the table talk going or he’s in danger of missing the first course of lunch, so he proposes a number of questions we should consider.
“Let’s talk about the current position with regard to mortgage arrears and repossessions, what happened in 2009 and the outlook,” he says. “And we should also look at factors that might affect arrears in 2010 and beyond.”
He also suggests that we talk about safety nets.
“What will a safety net look like in future, and should what we currently have in place be changed?” he asks. “Also, is there an opportunity for the private sector and the public sector to come together in some sense?
“At the start of 2009 the CML expected that we would see around 75,000 repossessions in the year. We had just launched the BSA mortgage service at that point and from the beginning we concentrated on trying to understand what was happening. We were also looking at how financial advice, the government and the wider industry could work together.
“There was a media focus on the wave of repossessions that was happening at that time,” he adds. “There was a sense of panic in what was being written, and this certainly extended to the government.”
But he says the government could not be accused of sitting on its hands.
Borrowers may think that their home is going to be safe which could lead them to ask whether it is best to give preference to he who shouts loudest – they may not understand the risk of doing this
Table talk: the ticklish topic of proactive intervention and the role of technology”In January 2009 we saw changes to Income Support for Mortgage Interest,” he says. “It was rebranded as Support for Mortgage Interest but more importantly there was a shortening of the qualifying period before borrowers could access it.
“Almost at the same time we saw the launch of the Mortgage Rescue Scheme. And in the background in the same period there was consultation on the Homeowners Mortgage Support scheme. Similar to the MRS, this allowed borrowers to defer interest for up to two years.
”The BSA works closely with the Money Advice Trust and Citizens Advice to try to demystify what is happening with arrears,” he adds. “An oft-repeated mantra back then was ’if you think you are going to have difficulty making a payment, talk to your lender’ but nobody explained to borrowers what this meant.
“We produced a leaflet explaining that when a borrower who is finding it difficult to make repayments talks to their lender their house will not immediately be taken back.
“It explains the process that will be followed, and similarly with independent financial advice. We had 16,000 copies in the branch networks of our members and all MPs had copies in their constituency offices.”
The Financial Services Authority also carried out the second part of its thematic review of mortgage arrears and processes at about this time.
“This led to some actions later in the year,” says Broadhead. “We ended up not with 75,000 repossessions for the year but 46,000.”
He attributes this outcome to three main factors.
“First, we can’t ignore the low interest rate environment,” he says. “Many borrowers have seen much lower interest payments. Some who were on fixed rate mortgages have not but many on tracker mortgages are not doing too badly.
“Second, in the early 1990s repossessions peaked at 75,000 and we now have far more mortgage holders than then. Lenders have learnt lessons. Their systems are more advanced and intuitive than they used to be. Systems now flag up borrowers who might be going into arrears and lenders have developed hardship tools to help get borrowers over short-term issues.
“The final point is the provision of independent financial advice and the public money that has been put into this through various projects,” he adds. “This has helped, alongside government schemes. While the schemes have not helped a huge number of people they have promoted the need for borrowers to speak to advisers or their lenders.”
So that is the BSA’s view on why last year’s repossession figure was lower than anticipated and it’s one that is broadly shared around the table.
Wise observes that Lloyds group has seen a fall in the number of clients going into arrears in line with interest rate cuts, and Hill adds that without a doubt low rates have had a big impact.
“Lenders with low SVRs or a high proportion of tracker mortgages will have arrears ratios that are at the low end of the range,” says Hill. “This has clearly been helped by low interest rates.”
Hill also believes that the reforms to SMI have been a significant benefit and describes some other schemes as useful bricks in an overall construction.
“Certainly, the number of borrowers who have taken advantage of support schemes is quite small,” he says. “But looking at this as part of a coordinated effort, with all the things the government was doing and the media coverage that these got, they have been useful.”
But what about the accusation by some consumer groups that repossessions have been so low because lenders were reluctant to take action while house prices were falling? The point is raised by Broadhead presumably with the intention of refuting it, but to liven things up I chime in with the suggestion that no lender would want to realise losses on their balance sheet right now.
Hill gives me short shrift.
“I don’t think that stands up to scrutiny because those distressed cases would be sitting in the arrears statistics,” he says. “Borrowers are either performing, in arrears or in repossession so you can’t hide it. The CML statistics showing a further fall indicate that that accusation is simply not right.”
And Broadhead supports Hill.
“That’s right. It’s not in a lender’s interest to repossess, whatever the environment. First, you have the PR implications of taking people’s homes from them. And it’s an expensive process to go through anyway. The regulator also tells us that repossession has to be a last resort so I don’t believe the accusation stands up.”
Nationwide’s Basford agrees.
“You can’t hide things because while the regulator is saying ’forbearance, forbearance, forbearance’ there’s also a lot of emphasis on ensuring lenders report the right numbers,” he says.
Hillon adds that there’s a significant audit focus on that space and confirms there’s no way of masking figures.
Broadhead returns to the forbearance mantra and reminds us that the previous government asked big banks for three and six-month moratoria on arrears.
“That’s fine, but the difference between now and the 1990s is that many households now have greater levels of unsecured and credit card debt,” he says. “So does a lender forbearing on a mortgage mean that borrowers can find themselves in a difficult position?
“Borrowers think their lender is looking after them. They may think their home is going to be safe which could lead them to ask whether it’s best to give preference to he who shouts loudest. They may not understand the risk of doing this at the expense of paying their mortgage.”
Dowling judges this to be a fair point.
“We’ve always had a tradition of forbearance and as a building society we have found some of the government focus on forbearance unfair,” he says. “Maybe big banks were not forbearing before but we were, and we have not felt the need to change any of our practices.
“But we’ve been looking at the other side of the problem and asking the same question – whether we are encouraging borrowers to look after unsecured creditors who shout and charge monthly fees. Forbearance could be encouraging borrowers to do the wrong thing.”
Broadhead proposes that by showing too much forbearance lenders could be treating customers unfairly because they are putting them in a difficult situation.
Dowling adds that forbearance encourages overall debt to rise.
“That’s what forbearance means,” he says. “We let debt get worse until we repossess. So we are making the debt at repossession far bigger, along with the likelihood of repossession.”
This prompts Basford to recall a statement from the Royal Bank of Scotland that the bank would not take any action until a borrower was at least six months in arrears, with the suggestion that this was a good thing. But it’s not good in all cases, he suggests.
“To have a blanket approach to all cases is unproductive for a lot of people,” he says. “You might be making their position worse for a longer time than is necessary.
“What’s important is what we have always had – the ability to treat people as individuals and take actions that are appropriate for them.”
Dowling says that’s why his society is now more frequently suggesting to borrowers in arrears that they should consider selling.
“These are borrowers with a significant amount of equity and a significant amount of arrears who could escape from their situation if they sell up rather than go into repossession,” he says.
“For a long time we were scared to do this but now I think it’s the right course of action in some cases. Borrowers can get out with some money, rent a house and not mess up their credit history. Previously, we would have let them go into arrears and eventually repossess.”
Developing the theme, Hill says that in the past year there has been a build-up of experience in the financial advice sector.
“A year ago we would see proposals coming in that didn’t give sufficient priority to some debts or treat unsecured credit in the right way,” he says. “More recently we have seen a much better understanding of how to build a strategy that helps borrowers in the long term.”
Broadhead suggests that a blanket six-month moratorium is effectively saying that all cases are the same, but it’s important to take individual borrowers’ circumstances into account.
“A blanket moratorium doesn’t do this,” he says. “Such an approach may do more harm than good.”
Riley then moves the conversation on to the macroeconomic environment, citing almost unprecedented government spending along with
£200bn of quantitative easing. He suggests this is bound to have had an effect in the economy.
“Now quantitative easing has stopped it will be interesting to see what effect this will have,” he says. Table talk: regulatory proposals “Given the new political landscape and the fact that there will be £6bn coming out of the economy this year, how will jobs be affected? And what will be the effect on arrears and repossessions?”
Broadhead picks up the theme and focusses on unemployment.
“What I found interesting last year was that unemployment was concentrated mainly in the under-25s, and it didn’t reach the heights that were expected,” he says. “There was a lot of flexibility in the way employers dealt with the situation. There were pay freezes, reductions in working hours and so on. It’s interesting to consider whether this has had a big effect and whether it’s sustainable.”
Hillon agrees that unemployment did not get anywhere near the levels that were forecast, partly because of the low interest rate environment.
“That’s the worry this year,” he says. “The government withdrawing funding and cutting jobs in the public sector is the thing we are most wary of.”
Street argues that the situation is finely balanced. As interest rates fell he noticed people’s ability to pay improved, and a huge upsurge in them trying their best to meet their repayments.
“State of mind is key,” he says. “If we suddenly see interest rates going up consumers may think that there’s no hope.”
Broadhead reminds us of the CML’s latest arrears and repossession figures.
“I was in front of the Treasury Select Committee last year, along with Shelter and the CML, he says. “At the time Shelter was predicting that 2010 would bring a second wave of repossessions.
“We now have a new government and schemes that are changing. There are going to be temporary changes to SMI and the coalition is accelerating deficit reduction. Meanwhile, there’s only one way for interest rates to go.
“This doesn’t bode well for an optimistic view,” he adds. “The most significant variables are how quickly interest rates go up, how deep the cuts related to deficit reduction will be, what impact will that have on public sector workers and where those workers go.
“If we take away the increased benefit of SMI at the same time the situation could become difficult.”
Hillon too believes unemployment is critical, and has something to add.
“One subject the industry doesn’t seem to be talking a lot about is the withdrawal of the Special Liquidity Scheme from 2012,” he says.
He’s concerned that this isn’t going to be replaced, and asks what impact this will have on lender pricing.
Broadhead says it means that borrowers in trouble won’t be able to remortgage out of their problems Riley agrees and asserts that there’s an even higher level consideration involved – what happens regarding sovereign debt in the eurozone?
“That could be a catastrophe waiting to hit us,” he says.
“Yes, I can imagine a perfect storm of sovereign credit rating downgrades leading to higher interest rates along with public sector unemployment,” he says. “Low interest rates have helped people to manage. If that becomes an issue we could see a big increase in stress for borrowers, and that would flow through into repossessions. In turn, this would affect confidence and house prices.”
Wise agrees these factors present risks.
“When we look purely at the numbers, none of those things will hit in 2010 as lenders work with borrowers – it takes time for a case to get into the legal process,” he says. “But I agree they could could present risks in 2011/12.”
With this, the conversation turns to question of whether or nor the social safety net has been truly tested, and considering how it might be improved.
Broadhead believes it needs a fundamental overhaul.
“We now have a more complicated safety net than ever before,” he asserts. “We have plenty of government initiatives plus mortgage payment protection insurance. From a consumer perspective, they’ve read in the newspapers about bank bailouts, and the rapid introduction of these schemes as we came out of recession cut the incentive for people to take responsibility for repaying their debts.
“Are they thinking ’I’ve read about MPPI but I’m not sure about it, and if I lose my job the government will bail me out anyway’?
“This needs looking at holistically,” he adds. “We must ensure there’s still an incentive for consumers to take responsibility if they get into difficulty through some sort of MPPI.”
At this point, HML’s Gill asks the panel to consider whether the answer could be compulsory MPPI.
Dowling says that all of the campaigns against mis-selling of MPPI mean hardly anyone buys it anymore.
“Not many of our arrears customers have it – most depend on SMI,” he says.
“Yes, and SMI worries me because as rates increase I can’t see it tracking upwards,” he says. “It’s treading a fine line at the moment. As a society, we haven’t got anybody who is paying more than the SMI rate. In fact, it matches our SVR exactly and that’s no coincidence. So nobody is building up arrears on SMI but I’m sure it won’t stay that way.”
Some have called for some sort of government-approved MPPI product with standard rules and rates. Broadhead agrees with such a concept but is concerned that we’ve seen standard products before and nobody has wanted them.
Table talk: the ticklish topic of proactive intervention and the role of technology
At one point the conversation gets technical. Of course, it’s when we turn to the possibility of using technology and processes to contact borrowers who might be heading for trouble.
HML’s Riley identifies the technology and systems available but says such an approach presupposes a degree of sophistication among lenders. It assumes that they all have the tools to hand and this may not be true. And even if they do, there are still problems.
“There are early warning signs such as the first failed direct debit,” says Hill. “At that stage if the borrower and lender engage in dialogue immediately the case is far from lost. That’s the way it has been traditionally. Sophisticated tools are great but often tried and tested methods are the ones that work best.”
Street adds that quality of staff is important.
“This is a challenging time for borrowers, with an element of fear,” he says. “You need to have quality staff who can achieve a working level of communication and engagement. Without that it can be difficult to get a borrower to talk to you even if they want to. It’s important to help them understand you are not there to trip them up or to induce them to commit to something that they can’t afford.”
Riley agrees, and goes further.
“I’d reinforce that point and add that the predelinquency space is interesting for us,” he says. “When we see a borrower starting to get into difficulties we need to ask at what point the Treating Customers Fairly rules allow you to begin the process of intervention and have a conversation. And how do we have that conversation?
“You can use the best analytics in the world but it’s the translation of that into a sensible conversation at the right stage that will get the best results.”
And it’s a difficult conversation, points out Basford.
“The unsecured word has done a lot of triage work,” he says. “It is an interesting concept, telephoning borrowers who may or may not realise that according to your statistics, they are heading south.
“It’s a question of how to phrase it. On the unsecured side they say things such as ’I notice your direct debit has bounced’. There needs to be some way to have a counselling conversation.”
Dowling proposes that there should be some sort of trigger, like a missed payment or a bounced direct debit.
“Your client might still be paying,” says Riley. “They might even be prepaid, but the level of prepayment may be decreasing. It’s important to consider at what stage you intervene and on what basis.
“And again, how do you guide the conversation? It’s difficult to say to a borrower ’We’ve some information about you in a little black box that leads us to believe you are spending too much’. Guidance on this issue is important.”
Broadhead reckons it all sounds a bit Big Brother.
“It does, and as I say – how does it square with TCF?” asks Riley. “We think it’s right to speak to borrowers as early as possible but you don’t want to overplay your hand.”
“Yes, I don’t think I’d want to phone someone who’s prepaid and say, ’Hey, our box reckons that you’re going to go into arrears next month’,” he says.
Table talk: regulatory proposals
“We’ve now seen a consultation paper from the Financial Services Authority that includes its detailed proposals on what lenders should do with regard to managing arrears,” says Broadhead. “Are these the right ideas? Are they proportionate? Are they effective? Will they work?”
His view on the subject is clear.
“We’ve seen a thematic review in the past two years,” he says. “We’ve seen a number of changes in regulation and we’ve also seen prudential changes in terms of managing risk. Would it not be best to wait until the results of all this activity feed through and we can see where consumer detriment still exists, then amend the rules?
“Consider the enforcement actions in the past year. These could be seen not as a failing of the rules themselves but rather a failing of the enforcement and supervision process. There’s a need for regulation to be close to business and I question whether rules about, say, having to record every phone call from an arrears borrower and not being allowed to make early repayment charges where these have accrued are proportionate.
“We did some work on ERCs,” he adds. “We found that on average, if you took someone’s arrears charges along with the ERC element the total detriment was £12.
“But the cost of system changes could put everybody’s mortgages up by considerably more than that. Where’s the prevention of consumer detriment there? We should get the supervision process in order first, rather than rush headlong into this matter.”
Few around the table dissent from Broadhead’s view, with several participants pointing out that there is some fairly immature thinking in some of the FSA’s discussion documents.