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A consumer’s view

The recent rise in short-term mortgage arrears could be the precursor to a much more serious situation.

The headline on the recent press release from the Council of Mortgage Lenders fooled nobody – “No increase in long-term arrears or possessions but small increase in short term arrears.”

Any mortgage lender will tell you that long-term arrears start off as short-term arrears but have a nasty habit of persisting.

Repossessions are low at only 6,230 in 2004 out of more than 11.5 million mortgaged homes. This compares with a massive 58,540 repossessions out of 10.1 million mortgages back in 1993 when millions of homeowners were in negative equity following the collapse of the property market.

But there are no grounds for complacency. Although the number of long-term arrears has remained flat at 38,130 homebuyers who were more than six months behind with their mortgage repayments during the second half of 2004, there has been a sizeable jump in the number of short-term arrears of three to six months, the biggest increase since 1998. They rose from 49,720 in the first six months of 2004 to 53,960 in the second half to December 2004.

This is a rise of 8 per cent and accounts for one in 220 of all mortgages.

These figures are historically low but this is the first upturn in arrears since the CML started collecting data in 1993-94.

The change has implications, not just for mortgage lenders but also for banks, credit card issuers and for anyone who lends money because most people would sooner let the credit card companies go sing for their money rather than risk losing their home. These will be the first to lose.

The situation could easily get worse quite quickly. Much of the real unemployment of the past few years has been masked by a huge increase in public sector recruitment.

Well over 500,000 new jobs have been created in the public sector since Labour took office in 1997 and the turn-round from job losses to recruitment was immediate.

The Office for National Statistics confirms that employment in the public sector is now 10 per cent higher than in 1998 due to the creation of an additional 509,000 jobs. Before this, the number of public sector jobs had fallen for over 15 years. These figures only run to June 2003 and are therefore over 18 months out of date so the real figure is much higher.

Whichever party is re-elected in the expected spring general election, both have pledged to reduce waste as well as cut the number of civil servants and other public sector employees.

There is a real incentive for the Government to do this as the cost of index-linked final-salary pensions is rising fast and is a big factor in the decision.

If this coincides with a slowdown in the economy, then we could see unemployment rising fast.

There are other factors at work in the housing market which could exacerbate the situation.

The level of first time buyers is at its lowest for decades, accounting for around 30 per cent of all house purchase mortgages compared with the long-term average of 50 per cent.

First-time buyers are necessary for the health of the housing market as a whole. First-time sellers sell to first-time buyers on the whole and they cannot move on if there are no new buyers coming into the mar-ket. Those who are forced to move because of job changes could find themselves distressed sellers.

This is good for first-time buyers in the long run but, in the short term, falling prices makes all homebuyers wary of taking on a new commitment. More-over, in the short term, the proportion of first-time buyers could drop even lower.

Who gets the sack when times are tough? It is usually a last-in-first-out decision which will affect younger employees disproportionately. Those who are still renting will not be able to afford to buy and those who are already homeowners will not be able to afford to keep up mortgage repayments. With little or no equity in their properties, the lenders will be left holding the baby.

Perhaps it is time that the industry had a blitz on selling mortgage payment protection insurance again or lobbied the Government to restore the balance between housing benefit, payable more or less immediately a tenant becomes unemployed, and ISMI, only payable to homebuyers after nine months of unemployment.

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