The recent news about the poor performance of HSBC’s sub-prime lending portfolio in the US gives all of us food for thought.
There are clear differences between the US and UK housing markets but the spectre of arrears can pose opportunities and threats for brokers and IFAs.
At the end of January, the CML released its latest repossession figures, which perhaps hide as much as they show.
Repossessions have risen to 18,000 – a mere 25 per cent of their 1991 peak – the CML is anticipating 130,000 mortgages to be in arrears of three months or more by the end of this year.
This is supported by a recent survey of lenders by lawyers Moore & Blatch which show that 75 per cent of lenders expect repossessions to increase by at least 5 per cent in the short term (see graph).
It is tempting to compare 2007 with the figures of the early 1990s but the world has changed and this presents opportunities and problems for those in the mortgage market.
The nature of lenders has changed. In the 1990s, before consolidation, the market was divided among banks and building societies but today there are many new entrants along with subsidiary companies, resulting in innovative product development and wider access to mortgages funded by the investment market’s hunger for asset-backed securities.
Securitisation has created the opportunity but investors in securitised portfolios do not have the patience of banks and building societies and look for a consistent and constant return.
Building societies will continue to work with borrowers to protect their regional reputations but centralised lenders with securitised portfolios are under enormous pressure to ensure the portfolio performs and will start repossession proceedings much faster.
In our experience, collection rates of over 95 per cent of the interest falling due in any period is achieved on a securitised portfolio. This requires the ability to act as soon as an issue is identified, which needs robust systems and technology, as well as the relevant experience.
Few lenders have strong experience in managing a securitised portfolio, particularly one which has performance issues. Many are likely to find the demands of investors a shock.
Furthermore, the rise of the housing market over the last decade means many in the mortgage sector have no experience of handling repossessions or arrears.
The rise of buy to let is also likely to cause lenders problems. The BTL boom has seen residential lenders enter a market that has more similarities to the commercial market.
The CML believes that market fundamentals remain positive but some landlords, particularly the more recent, will come under pressure from rising rates.
This view is supported by Moore & Blatch’s survey which reveals that one in five lenders believes buy-to-let properties to be most at risk of repossession and the greatest causes of this risk to be – reduced rental yields (75 per cent), rises in interest rates (55 per cent) and a correction in house prices (65 per cent) – all issues which the housing market may well face in the coming months.
It remains to be seen whether borrowers and lenders have appreciated just how different a buyto-let portfolio is from an owner-occupied one. The properties may be residential but the manner in which the portfolio behaves has much more in common with a commercial one.
If the market sours. this will be very much brought to lenders’ attention and we believe it could cause some lenders to pull back from buy to let and provide many an amateur landlord with a significant shock at the commercial reality of their investments.
Finally, the profile of borrowers is changing. As well as ever higher LTVs, lenders are having to deal with the social factors that affect borrowers’ ability to pay. The breakdown of relationships, unemployment, changing family circumstances and consumer debt are all contributory factors in most repossessions.
Moore & Blatch’s survey shows that 75 per cent of lenders believe excessive borrowing from other sources to be the main cause of repossessions.
These factors combine to make it an interesting time in the mortgage market. While rates rise and people’s circumstances change, brokers will have business but they may find their customers under more pressure and refinancing more difficult than anticipated.
Furthermore, some lenders, if their portfolios cease to perform as planned, will face unprecedented pressure. It remains to be seen if all are equipped with the expertise or systems to maximise collection and manage investor concerns.