View more on these topics

Lend me your arrears

With sources such as the CBI reporting the biggest growth in

Christmas consumer spending since 1987, this month will find many

people realising that their overspending has turned into the grim

reality of higher debt levels.

It is all too easy to delay paying the major monthly bills but the

consequences of mortgage default are by far the most serious. Once a

payment is missed, it is very hard to catch up again and persistent

default leads only one way, which is repossession by the lender, no

matter how hard the lender works with the borrower to avoid it.

It is true to say that lenders and borrowers seem to have managed the

problem of arrears and repossessions much better over the last

decade. In 1991, properties taken into possession peaked at 75,540

following base rates soaring to 15 per cent in the preceding couple

of years. In the 12 months to July 2001, there were 21,000

possessions – a dramatic reduction over a period when the overall

number of mortgages rose by around 1.4 million.

Arrears are also in decline. At the end of 1992, mortgages more than

six months in arrears totalled more than 350,000 but by the end of

June 2001 this total had fallen to 63,000.

Yet there is no room for complacency about arrears and repossessions

as there is no guarantee that these statistics will keep declining.

Recent downsizing in the IT, travel and manufacturing industries – to

say nothing of 30,000 jobs losses at the Post Office – will have a

knock-on effect on household budgets.

With interest rates at their lowest level for 40 years, should we be

content that, at the last count, more than 153,000 mortgage accounts

had arrears of three months or more? If economic factors get worse,

many borrowers may find they do not have enough of a financial

cushion to prevent arrears building up.

Overall consumer debt is massive and spiralling out of control.

Latest figures from the Bank of England show there is a total of

£137bn of consumer debt (not including mortgages), which works

out at around £2,300 for every man, woman and child in the UK.

Personal savings have declined from more than 10 per cent of

disposable income in the early 1990s to around 5 per cent in 2000.

It would seem that saving for a rainy day is a thing of the past and

if earnings&#39 income disappears, most people are going to have no

reserves of cash to see them through.

Accident, sickness and unemployment insurance cover could provide the

safety net which will stop arrears and repossessions rising steeply

again. However, the industry is struggling to improve take-up of

mortgage payment protection insurance. This stands at 25 per cent of

all new mortgages so a target of 50 per cent by 2004 is looking

somewhat over-optimistic.

The Council of Mortgage Lenders has pointed out that borrower

complacency is a threat to sustainable homeownership. With the last

repossession crisis having peaked 10 years ago, many borrowers may

not regard repossession as a threat. CML research has shown that only

5 per cent of borrowers feel they would be unable to pay their

mortgage if they or their partner lost their income for three months

or more.

This shows that complacency about the consequences of mortgage

arrears is widespread despite statutory health warnings.

Lenders in the non-conforming/sub-prime field have first-hand

knowledge of how difficult some people have found it to manage their

income and spending successfully, as their customer bases contain a

substantial proportion of borrowers who have had credit problems.

Southern Pacific Mortgage has had to evolve and put in systems that

remind borrowers of the importance of keeping up mortgage payments

and encour- age them to make the mortgage their top priority.

In the current highly competitive mortgage market, this is not just

for the good of the borrower. In the first place, experience has

shown that chasing arrears and going as far as repossession is

expensive and time-consuming. Keeping loans performing properly is

the most profitable option. Second, as with all lenders that

securitise their loans, the quality of the loan book must be

maintained to gain high quality ratings.

Best practice in sub-prime mortgage collection is a matter of

educating, counselling and reminding borrowers about their mortgage

payment obligations immediately a payment is missed. This approach

needs careful and systematic management.

The most effective way to control arrears is through early and

practical phone contact. Within bigger lending institutions, huge

customer volumes result in greater dependence on automated arrears&#39

letters generated by a computer and followed up by periodic reminder

calls to the customer.

The danger is that such a generalised approach to arrears&#39 collection

may allow arrears to build up over three or four months before they

come to warrant special attention.

This seemingly soft approach may seem user-friendly but it does no

favours to borrowers, many of whom need individual ass-istance. After

three missed payments, it is often very difficult to get back. A

repossession order bec-omes more likely the lon-ger the arrears

persist.

Our experience shows that early personal contact is vital to

maintaining a viable lender/borrower relationship. The best approach

to arrears&#39 management works from the outset on a one-to-one basis to

help the borrower understand the situation, assess the viability of

their overall financial standing and, hopefully, negotiate the

resumption of the flow of payments.

Taking a pragmatic approach, Southern Pacific Mortgage has

established a team of experienced professional collectors who form a

relationship with the customer and establish the need to make the

mortgage payment the top priority.

As one of the main reasons for arrears is financial mismanagement,

offering the customer the services of an independent professional

counsellor at an early stage can often produce a quick and effective

solution.

Recommended

Edinburgh&#39s Isa factsheets promote investment trusts

Edinburgh Fund Managers is issuing a series of Isa fact guides aimedat demystifying the world of investment trusts.The guides are designed for IFAs to use with their clients to providereassurance through current uncertain stockmarket conditions.The series, written by Edinburgh investment trust manager RobertWaugh, begins by answering simple investment questions such as whyinvest in UK stocks […]

Standard & Poor&#39s Top 10s

Merrill Lynch Investment Manager&#39s gold & general fund is back ontop of the unit trust table with a return of 46.68 per cent for thepast 12 months. But despite rising returns at the top of the table,the average unit trust return has fallen to -17.53 per cent fromaround 14 per cent at the start of […]

Links boost L&G sales

Legal & General&#39s new business leapt by 27 per cent in 2001following strong UK fourth-quarter sales through its tie-ups withAlliance & Leicester and Barclays.New business reached £801m on an equivalent prem-ium incomebasis from £630m in 2000, with UK business rising by 32 per centto £710m from £536m after ales in the three months toDecember shot […]

Lewis joins Screen Pages

AssureSoft founder David Lewis is joining IFA website solutions provider Screen Pages to develop an internet-based employee benefit and workside marketing tool. The Staffcare product is designed to allow updating of pensions information directly from product providers. Lewis will hook up with Screen Pages managing director Philip Hollingdale, a former AssureSoft colleague.

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

    Leave a comment