The FSA has accused the banks of trying to mask the true scale of the problem of mortgage arrears. We all know of people up and down the country hanging on by a thread. What we do not know is just how big this problem is.
The apparent compassion is understandable. It is important to avoid the mass repossessions of the early 1990s. They also have precious little choice but to be accommodating in many instances, given that so many of the lenders are state-backed. There is pressure from the Government to keep repossessions down and it has launched initiatives of its own to help keep people afloat.
But the FSA is right to be concerned about lifelines offered by the banks. Too many people are simply delaying the pain for another day, accumulating even more debt before they lose their home anyway. According to FSA figures, as many as 300,000 customers have switched £60bn worth of mortgage debt to interest-only payment plans since late 2007. In the case of one lender, 95 per cent of all people who applied to switch to interest-only mortgages were in financial difficulties. This is not sustainable. All it will take is one little interest rate rise.
Even more alarming is that this practice is covering up the banks’ exposure to bad debt. Are they no longer haunted by the words “toxic debt”? Does negative equity no longer put the fear of God into them? America is facing a double dip, with property prices at 2002 levels. In some areas of Britain, the same double-dip scenario is emerging, with several experts suggesting a further 10 to 15 per cent drop over the next 12 to 24 months.
The FSA has ordered “a tougher stance on forbearance practices” from the banks’ auditors. It says: “We require firms to report accurately and transparently the impairment of their mortgage book.” The regulator accepts, however, that arrears support provided with due care “…has a beneficial impact for both the firm and the customer”. Herein lies the problem for the banks – they have no alternative but to carry on as they are, keeping repossessions at bay in the hope the tide will turn. If not, there will be a flood of repossessions.
Dominik Lipnicki is director of Your Mortgage Decisions