As many as 12% of mortgage borrowers could be in arrears, but the figures are being masked by lenders’ forbearance measures, says the Bank of England.
In its Financial Stability Report it says if these measures were not in place as much as 12% of borrowers could be in arrears.
The report says: “Assume as a worst case scenario, the flow into forbearance has persisted for two years and that non of these loans were recovered or foreclosed on.
“This would imply that, as an upper bound, 12% of residential mortgages could be receiving some kind of forbearance at present.”
Sir Mervyn King, governor of the Bank of England and governor and chairman of the FPC, says when lenders choose not to take action against borrowers who are in arrears or in breach of covenants it is important that adequate provisions are set aside for prospective losses.
He says: “This is not to suggest that forbearance is wrong; it may well make sense for both parties to a loan. But if provisioning is inadequate, banks’ reported profits and levels of capital may provide a misleading picture of their financial health.”
The report also suggests forbearance has been widespread in the commercial property sector.
It adds: “Where borrowers continue to service their loans, some lenders have reportedly waived breaches of LTV covenants and been willing to extend the duration of maturing lending or restructure loans on non-commercial terms.”