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Understanding arrears is vital

Information is key to formulating strategies to get a grip on repossessions for lenders and policy-makers alike, says Neil Warman, chief commercial and finance officer at HML, sponsor of Lending Strategy’s round table

Repossessions were predicted to rise over the past year but a combination of favourable macroeconomic conditions and lenders’ credit management strategies means fewer borrowers than anticipated have debts they cannot service.

But while it’s difficult to say how the next 12 months is going to play out there can be no doubt that information, analysis and the further development of arrears strategies that involve customers at every step will have a vital role to play.

At Lending Strategy’s arrears and repossessions round table it quickly became clear that low interest rates along with lenders’ and servicers’ proactive engagement with borrowers had combined to give them hope, and lenders a reason for forbearance.

But now we have a new government intent on cutting the national debt, the prospect of many thousands of public sector job losses and interest rates that can surely only go one way – up. Any of these factors could tip the balance for borrowers.

For the past year or so borrowers who found themselves in arrears have been able to work with their lenders to get out of their predicament. The value of their assets started rising again and interest rates remained at low levels.

That means borrowers in difficulty have been doing their best to keep their repayments ticking over. And who can blame them? Anyone on a Bank of England base rate tracker is getting a roof over their head for a song in comparison with what they would pay in normal times which makes it worth fight- ing for, or at least prioritising the mortgage over holidays and luxuries.

The more lenders contribute information to our pool system, the better we can develop repossessions strategies that balance government help, lender forbearance and the TCF initiative

But a rise in interest rates combined with increasing unemployment is likely to stall or even reverse any housing market recovery.

And if asset prices start falling and debt repayments rise the incentive will be lost, along with borrowers’ determination to do the right thing.

Of course, none of this may happen but what is clear, as the Confederation of British Industry’s chief economic adviser Ian McCafferty recently told business leaders at a lunch in Leeds, is that we have come out of an unusually benign economic cycle between the mid-1990s and 2007 into a less pleasant but more normal one.

What this means for lenders is the work they have done in the past couple of years in anticipation of a rise in repossessions has not been a waste.

In fact, quite the opposite, as lenders will need specialist staff and tools so they can help borrowers in arrears and ensure they are dealt with in accordance with the principles of Treating Customers Fairly.

Fairer outcomes
But there is little information available to help lenders formulate their strategies or identify borrowers who can be rehabilitated, along with those whose financial position will deteriorate to a point where their asset value will not cover their debt.

The sooner these borrowers can be identified, the fairer the outcome will be for borrowers and lenders alike.

But predicting trends is easier for some lenders than others.

For example, if you have a lending book the size of Lloyds Banking Group you have a lot of history and information to interrogate.

On the other hand, if you are a small building society or specialist lender your information is limited at best, and could even run contrary to the mainstream market.

Last year the Scottish Executive was so concerned about the impact of anticipated levels of repossessions that it formed a repossessions group to report on the efficacy of existing systems and recommend how things could be improved.

One of the group’s findings was that a lack of information on a regional basis made it difficult for the administration to assess what it called the effectiveness of “those measures introduced to address rising repossessions in the downturn, and whether further action is required”.

It recommended that the Financial Services Authority “be asked to require lenders to provide regional data on a regular basis to better understand the number of repossessions in Scotland and other parts of the UK to the benefit of policy-makers”.

The report was published last June and the industry, like Scotland, is still no further forward.

A pool of data
Reliable information based on a pool of borrowers across prime, sub-prime and buy-to-let sectors, broken down by region and identifying those who are likely to go into arrears would be a powerful tool for policy-makers and lenders alike.

And it’s something we have developed. A pool of more than 320,000 mortgages from a variety of lenders enables arrears information to be broken down regionally.

And by using a scorecard it’s possible to predict those who are likely to have their homes repossessed. Analysis such as this offers a granular view of the market. And lenders can add their own information to the system. Using it, they can identify groups of individuals and their likely behaviour if faced with a sudden change in economic circumstances.

We are keen to put our capability to use and have already been in touch with the Scottish administration to say we think we can help provide it with information to inform its strategies.

Basically, the more lenders contribute their data to the pool, the better we can develop arrears and repossessions strategies that achieve the right balance between government help, lender forbearance and TCF.

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