Although the latest official figures show lower than expected repossession rates, the Council of Mortgage Lenders has predicted that we will see ’a bulge’ in repossessions in coming years. Do you agree that we have yet to see the worst of the repossessions?
Cornell: One of the things keeping repossessions down is the fact the base rate is incredibly low. For many people coming off fixed rates, as long as they are with a large lender, their payment on SVR is lower than it would have been on a fixed rate.
Also the fact that house prices have been relatively depressed over the last year to 18 months means many people would have been in negative equity so there will have been quite a few lenders thinking: “What is the point of repossessing if we are going to lose a stack of money?If a borrower is trying to do the right thing, get back on the feet we will give them a chance.” If they don’t manage to get back on track, house prices are going up, so the lenders will be in a better position. So yes I do agree, which is sad.
Lovey: I fear they are right because it is a question of how long can you keep the wolf away from the door. I don’t want to agree but, being realistic, that is the way I see it as well. At the moment, the lenders are holding back on repossession and the more house prices rise, the more likely they are to want to force a sale.
They are more likely to force a sale on people they consider no-hopers if they think there is going to be a better market price. What they don’t want to do is flood the market with repossessions that will force prices down again because it is a very delicate balance.
Wright: I agree with the theory because the figures show that we are coming out of the recession but it is the wake that follows recovery.
A lot of people, if they are in financial trouble, will try to do the human thing and carry on, borrow more, use a credit card or use savings up and after that, if the problem has not resolved itself, then eventually repossessions will come.
Following the sharp increase in inflation announced last week, do you expect to see the Bank of England raise interest rates this year?
Cornell: That inflation figure was something of a bubble and it should flush its way through the system. Mervyn King outlined a number of factors that caused a surge in inflation and once those things have flushed their way through the system it should get back down. But I think the base rate will go up during the course of this year.
Lovey: There is a possibility that the Bank of England rates may go up by a small margin at the end of the year.
However, the interest rate weapon is a pretty blunt tool and I do tend to think that inflationary pressures will abate because we are going through a period where things are inflated against last year. Inflationary pressures will subside. There are also two types of inflation, one is imported and one is from demand.
’There are an awful lot of people out there who have mortgages that they probably should not have had’
There is nothing that raising interest rates can do about inflation that is imported.
I think any rise in interest rates will be small. One of the reasons why is because there will be very tough fiscal decisions that will have to be made that are more than likely to contain any internal inflation pressures.
Wright: This is the big worry and is my overall concern for the standard variable raters who have all come off their fixed deal and are sitting on a standard variable rate that is not in tune with proper lending. Off the back of the increase you are going to have interest rate rises.
The Government will play the fact they have got us out of the recession, the figures are going up and that will need controlling by interest rate movement.
The question is whether we are ready for interest rate movements or not? I don’t think we are. We have been in recession and now we are coming out of it. What is fixed? Nothing.
The debt that got us into recession is still to manifest itself and as soon as the debt starts to become more expensive you are going to start to see more cracks appear.
How significant a move was the decision by the Skipton to scrap the ceiling of 3 per cent over base rate on its standard variable rate mortgages? Do you expect any other lenders to follow suit?
Cornell: It was a highly significant decision. It is obviously not one that Skipton would have taken lightly. I am sure they would have realised the degree of poor media coverage they would receive.
There will be definitely be more building societies that will do it. The building societies are having to fight incredibly hard for savings business and the mechanics of having a vast number of people on a very low SVR just do not work for building societies.
We have seen building societies push up their rates because they are having funding problems, no doubt about that, but I hope there are no other clauses out there that will be broken by others. I would hope that others do not follow.
Wright: The funny thing is that this has just shown the weakness in the structure in the lending rates before. My mortgage rate is on 0.75 per cent above base and lenders never expected for a minute that would happen.
What is worrying is we have got this massive gap now between a realistic base rate and what lenders are charging.
All new products that are offered from now will have favourable terms towards the lender in case this ever happened again.
But maybe this should never happened in the first place. It is just correcting a problem that should not have happened in the first place. They are just protecting themselves, which any lender or business should do.
Rating agency Moody’s recently suggested that it expects to see more consolidation of mortgage lenders in 2010 and 2011 as smaller lenders and building societies in particular, struggle to find funding. Do you agree?
Cornell: It is unlikely among banks as they are all so big that if there is any more consolidation then there will be some horrendous problems from the lack of competition. But among the building societies, yes, they are in a weak position and consolidation is highly likely.
Lovey: I agree and regrettably it is inevitable while these tight conditions remain and I cannot see conditions abating for a considerable period of time.
Wright: The building societies tend to fund their own lending and they have ticked along nicely but the trouble is attracting new deposits in to lend further money. With the building societies, if they want to buy more market share, then mergers will happen.
With smaller lenders, you tend to get better service. I do not think it is good for us that the main four lenders are taking most of the business. I think there will be more mergers but I do not think it will be good for the market at all.
Last week, housing minister John Healy said repossession might be best for some people in some situations. He was widely criticised for his remarks but with house prices climbing again, high LTVs difficult to find and interest rates potentially about to rise, is homeownership a realistic option for many people?
Cornell: If the FSA has its way, there will be a number of people who will not make it into the housing market. The FSA is quite anti-homeowner-ship for all. It seems to perceive homeownership as applicable to some people but not others. I have mixed feelings about that.
From a regulatory point of view, I am not sure it is a regulator’s position to say who should get houses and who shouldn’t. I think ultimately this decision should be with the borrower and the regulator’s job should be to ensure the borrower can receive advice about any decisions and has all the information to understand the pros and cons and the risks.
If the FSA starts to say these people shouldn’t be buying houses it is overstepping the role of a regulator.
Lovey: Mr Healy is trying to do a bit of social engineering to try and peddle the view that renting is better than buying. I oppose anyone that is trying to kill the aspirations of people, young people in particular, to buy their own home.
Mr Healy does not go on to say that if someone were to rent all their life, they will continue to rent into retirement and the cost of that to the taxpayer, to pay the rent rather than a non-existent, now paid-up mortgage, would be considerable.
If you have a nation of pensioners who are all renting, how is it going to be paid? Those who have bought their owns homes are not going to become a burden on society.
Wright: This why the credit crunch/recession has yet to show its ugly face. There are an awful lot of people out there who have mortgages that they probably should not have had.
You can say, well they shouldn’t have done it but there has to be responsibility on both sides. The lenders have to take responsibility. If their systems only required a signature for borrowers to get what they want, up to a ridiculously high loan to value at very cheap rates, then that is not the respon-sibility of the consumer. The consumer is always going to go for the best deal.
Yes, everyone needs to bear the brunt of their own decisions but the lenders need to stand up and say we caused this as well and help people out. Maybe the Government should be thinking about ploughing money into subsidising some of these mortgages that are going to be problems.
If you are a sub-prime lender and you have half your book coming out into two years time, then the rates are going to go from under 4 or 5 per cent to 9 and 10 per cent. They will not be able to do a thing about it and essentially force further financial problems or repossession. The difficulty is deciding who to help, who created their own problem and who was a victim of lenders’ greed.
Jonathan Cornell – head of communications, First Action Finance
Danny Lovey – mortgage broker, The Mortgage Practitioner
Peter Wright – IFA, CBK Colchester