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Choice cuts

Unless MPPI premiums are cut, big losses on mortgages will be inevitable

The time has come for the mortgage lenders to cut the excessive premiums they charge for mortgage payment protection insurance. Not because the regulator has warned that it is mounting an investigation into the misselling of these products and the massive profits the lenders make from income protection insurance.

But because, if they do not, they will find themselves with rising arrears and, eventually, big losses on mortgages.

Unemployment is rising and so are mortgage arrears. And the situation is likely to get worse before it gets better with the next change in bank base rate more likely to be up than down.

NTL is making 6,000 workers redundant; Littlewoods is laying off 1,200; General Motors is losing 1,000 workers at Ellesmere Port; 2,300 employees are to go at paint and chemicals giant ICI; Orange is to cut 2,000 UK jobs; Electrolux, 500; and car parts business Visteon is to sack 400. This is just a selection of the thousands of job losses announced in the first week of May.

And it is unlikely that the Government will do what it has been doing up until now – soaking up the unemployment by creating jobs in the public sector.

Cutbacks are also the order of the day within the National Health Service, which is losing 10,000 employees, while firefighters, job centre and Child Support Agency workers, not to mention Ministry of Defence staff, have all taken industrial action or are threatening it, over job losses in the public sector.

Combine this with the latest figures on home repossessions and the outlook is not good. Figures from the Department for Constitutional Affairs show a significant increase in repossession proceedings by both landlords and mortgage lenders.

You do not have to be a genius to work out what this means – families cannot meet their mortgage or rent payments and are substantially in arrears.

Clearly, the effects of rising unemployment are beginning to bite. In the first quarter of this year, the number of actions entered rose by 29 per cent compared with the same period last year. It is worth pointing out that this should not be confused with orders for repossession because most households are given time to pay. The Council of Mortgage Lenders is playing down the significance of these increases, but they are alarming all the same.

During the first three months of 2006, there were 33,442 mortgage possession actions entered and 21,997 orders made, of which 11,074 were suspended and not enforced. The figures have been rising slowly since the fourth quarter of 2002 but have accelerated rapidly since the end of 2004.

The number of orders made, as opposed to actions entered by mortgage lenders, has risen dramatically from just 47,829 in 2001 to 70,844 for 2005 and the figures for the first quarter of this year are the highest since the third quarter of 1992.

The situation today is nowhere near as dire as it was back in the early 90s, when homebuyers were struggling with mortgage rates in double digits, having been as high as 15.4 per cent in 1990. But it is still very worrying and is likely to get worse.

Hopefully, the mortgage lenders have been rather more successful than in the past at selling MPPI. The Council of Mortgage Lenders’ own data on the incidence of MPPI policies among homebuyers shows that at the end of 2005 there were 2,450,300 MPPI policies in force, out of 11 million homebuyers. In other words, less than a quarter of all homebuyers have MPPI cover.

But just 104,577 claims were paid – that is just 4.3 per cent of all policies in force. In 2005, insurers paid out roughly 2.5 per cent of gross premiums in claims, illustrating just what a rip off these policies are when sold by the lenders.

Moreover, although the regulator recommends that payment protection cover should be 140 per cent of monthly mortgage payments, with maximum cover available set at 1,500 a month, millions of homebuyers with large mortgages are unable to obtain sufficient cover – even if they could afford the extortionate prices being charged by most lenders.

If the lenders end up with bad press because of rising unemployment and enforced repossessions, they have to ask themselves whether it might have been better to reduce MPPI premiums to an affordable level. Money Marketing50 Poland Street, London W1F 7AX

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