The Council of Mortgage Lenders has today published its half-yearly data on mortgage arrears and possessions. The CML has also substantially revised its previously published data back to the beginning of 2003. More lenders have begun to contribute to the CML’s arrears and possessions survey (68 CML members accounting for 94% of members’ mortgage business). This has revealed that the previous sample was less representative of the total market than previously believed.
As a result, the CML has introduced weightings to reflect the changing composition of lending when grossing up the numbers to provide its estimate for the whole of the market. A fuller explanation of the revisions is given in a separate note. Taking into account the revisions, the number of mortgages in arrears of three months or more at the end of June rose to an estimated 125,100, up 4% compared with the end of December but 3% lower than at the end of June 2006. Of these, the majority (71,800) were in arrears of 3-6 months, while 38,300 were in arrears of 6-12 months, and 15,000 more than 12 months.
Around 1% of all mortgages were in arrears – this proportion has been stable at low levels for several years. At 14,000, the number of properties taken into possession in the first six months of the year rose by nearly 18% compared with the previous half-year, and nearly 30% compared with the first half of 2006. Although significantly higher than in the recent past, when possessions reached extremely low levels, the number remains low by historical standards. It equates to around 1 in 840 mortgages ending in possession in the first half of this year. Possessions have risen more sharply than arrears for the past two years. This is likely to reflect a number of factors, notably:
The impact of an increasing amount of sub-prime lending within the overall market, where the higher risk nature of the business means that arrears are more likely to translate through to possessions, and that this is likely to happen at an earlier stage. Increasingly active arrears management by all lenders – lenders now typically seek contact with the borrower to establish a repayment plan as soon as one payment is missed, so it is likely that many households avoid falling further into arrears unless their financial situation makes this unavoidable. In the light of the data revisions, the CML has withdrawn its forecasts for arrears and possessions issued at the start of the year. It will not be issuing new forecasts until it has gained more information to enable it to assess the likely future performance of arrears and possessions within the various different segments of the sub-prime mortgage market. This market varies considerably – from high value self-certified lending, through the whole spectrum of borrowers with past credit problems that can range from occasional missed payments through to serious past problems such as bankruptcy.
Levels of risk are very different within the various segments of the sub-prime market and this can influence arrears and possessions experience substantially. Michael Coogan, CML director general, commented:
“The sharp rise in repossessions in the first half of this year has been driven by a combination of factors, but the absolute number of repossessions is still low by historical standards. “Interest rates are clearly higher than many were expecting, and are set to remain so. And the greater risks inherent in sub-prime lending are resulting in significantly higher levels of repossession in that part of the market compared to mainstream experience. This impact has been underestimated in our past market data, which we have now revised. While the revisions are naturally unwelcome, more accurate market information is important. We will work to further improve data on both mainstream and specialist sectors. “Overall, the vast majority of mortgage borrowers will continue to cope, even in a market where affordability is stretched. But anyone who thinks they may face difficulties should talk to their lender early to explore their options – lenders see possession as a last resort, but allowing arrears to mount up makes repayment difficulties more difficult to deal with, and is not a sustainable strategy for everyone.”
The Royal Institution of Chartered Surveyors (RICS) has blamed the 32 per cent increase in auctioned properties on rising repossessions.
The number of residential properties offered at auction rose by 32 per cent in Q2 2007 and RICS believed the increase was pushed by repossessions, as affordability conditions deteriorated following interest rate hikes. In the second quarter of 2007 there were 5,120 residential properties sold at auction, the highest number of sales in over two years and a 22 per cent rise on the previous quarter.
Rising interest rates in 2007 have increased the number of repossessions which have been showing up in the number of lots offered for auction. Residential lots offered at auction should continue to pick up with the RICS estimating that repossessions could rise to in excess of 45,000 in 2008, amounting to 124 repossessions per day. The highest concentration of auction activity took place in the North West of England, where 826 properties were sold. The North West has seen the biggest quarterly pick up in repossession orders of any UK region and has also witnessed the largest number of repossession orders outside London six months prior, which may be now materialising into actual repossessions. Merseyside previously saw a particularly acute rise in growth in repossession orders during Q4 2006 rising by 60 per cent on the previous year. There were 1,228 commercial property lots sold at auction, an 18 per cent rise on the previous quarter.
The highest concentration of auction activity took place in the South West but only 49 commercial properties were sold at auction in London which saw the lowest number of properties offered for sale in a year. RICS surveys show that the retail market has rebounded in the capital which may have reduced the number of repossessed secondary properties. RICS economist, Oliver Gilmartin, said: “With the full impact of interest rate rises in 2007 yet to filter through into higher mortgage costs we continue to expect a rise in the number of homes going under the hammer into 2008. The auction house will continue to a quick means to foreclose mortgages where properties have been repossessed. “Encouragingly, the annual growth rate in repossession orders has eased back in 2007 having risen quite sharply during the back end of 2006. However, RICS estimate that repossessions will continue to climb higher into 2008 and could exceed 45,000, a rise of 50 percent from current annualised rates.
“The commercial property market may also see a rise in lots offered at auction as tougher conditions return to the high street as consumers tighten their belts."
Commenting on the figures, Robert Bryant-Pearson, chief executive of Allied Surveyors, said: “The rise in the number of repossessed houses is a worrying trend as these houses typically get sold below true value to investors and speculative buyers rather than owner occupiers. Too many of such sales can destabilise a market particularly in poorer urban districts. However, the number of repossessions are still relatively modest in proportion to the total number of house sales transactions and thus should not cause undue concern at this stage. “I fear that in future, repossessions will not just be a function of high interest rates or economic downturn but a feature of ordinary life, dependent upon personal circumstances. With housing costs taking such a high proportion of net disposable income, the ongoing misery hanging over the heads of millions of families throughout the UK looks set to continue, especially as the market has not yet felt the true effect of the 2007 interest rate rises.”
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