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Debt charges

The Council of Mortgage Lenders believes repossessions will soar this year because of the boom in specialist lending.

It expects a 46 per cent leap on 2005’s figure of 10,310 to 15,000 by the end of this year – 3,000 more than it predicted in February’s repossession risk review. It expects the 15,000 figure to remain fairly steady until at least 2008.

It says the main reason for the sudden jump is that specialist lenders, particularly in the sub-prime field, are more likely to take firmer action against defaulters and sub-prime borrowers are more likely to get into arrears.

Brokers and lenders insist the figures must be viewed in the context of historical trends, which remain well below the dark days of the late 1980s and early 1990s when annual repossessions hit the 75,000 mark. Yet 15,000 repossessions would represent the highest figure for several years and one of the worst rates during a relatively benign period in economic terms.

Leaked documents from the CML’s executive committee meeting at the end of last month show senior economist Jim Cunningham and head of research and information Bob Pannell explaining why the trade body has revised its earlier forecasts.

They say: “The proportion of mortgages in long-term arrears moving to possession has more than doubled since 2004 and is at its highest since the early 1990s.

“This is consistent with lenders taking firmer action and there are more cases of second-charge lenders taking possession. It is also consistent with the growing importance of specialist lending when lenders take firmer action with defaulters. Rises in arrears might reflect maturing portfolios following earlier rapid growth.”

One of the most surprising revelations to emerge from the document is the CML’s frank revelation that it does not have sufficient data on the non-conforming market to be taken seriously as an informed commentator. However, its predictions appear to be in line with views from the wider marketplace.

One point from the debate is that high levels of debt in the unsecured lending market are having a dramatic effect on borrowers’ ability to repay their mortgages.

Hamptons International Mortgages managing director Kevin Duffy claims the mortgage market has not done enough to share ideas with the credit card and personal loan markets to ensure borrowers are being advanced suitable sums.

Pink Home Loans managing director Tony Jones says some unscrupulous lenders are also to blame. He says: “A lot of the lending has been fine and responsible but some have maybe bitten off a bit more than they can chew. A 15,000 figure would be a sharp increase and in the scheme of things it is high but it is from a low base and is not high historically.”

The CML’s forecast also brings into sharp focus the issue of whether consumers are getting a good deal with sub-prime mortgages. As Jones hints, not all lenders are giving consumers the best deals at present. Last month, Edeus chief executive Michael Bolton claimed that many people were getting ripped off with poor deals while the FSA is committed to a further investigation of the market in September as it is not happy with some practices.

Jones points to numerous announcements in the major banks’ half-yearly results last week which indicate that more and more people are falling into arrears and financial institutions are having to set aside hundreds of millions of pounds to offset any losses.

Duffy says: “The availability of unsecured credit is undermining the secured side. Unfortunately, the great majority of the population do not realise they need to look after their mortgage. Some of the credit card charges are very high and the Government needs to get its teeth into the unsecured lending sector, particularly on the way credit is promoted on television.”

The CML also pointed out at its executive committee meeting that any future interest rate rises could further increase its repossession predictions. Right on cue, the Bank of England decided to raise rates last week by 25 basis points to 4.75 per cent.

Jones says: “We are going into a period of rising interest rates and the FSA recently came out with data showing more people are on the edge of financial problems. Any rise in rates could push people over the edge.”

But it is not all doom and gloom on repossessions. HBOS intermediaries managing director Nigel Stockton points out: “The base we were starting from is still very low and although the figures may well be going up, they cannot really go down as there were so few in the first place.

“There is no doubt that changes in bankruptcy laws and people using those changes are meaning a greater level of indebtedness.

“At HBOS, we look at repossessions on a case-by-case basis but we will look very carefully at our impairment losses. We are very confident about the long-term growth potential and quite positive about the outlook for the housing market.”

London & Country head of communications David Hollingworth says: “The figures sound quite frightening and could increase as interest rates go up. It will come down to the fact that people are experiencing greater levels of debt but hopefully the predictions will be proved wrong.”


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