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Lenders bring up the arrears

Lenders look set to increase their debt management resources following a a surge in the number of borrowers in arrears.

Last week, Bradford & Bingley revealed that accounts three months or more in arrears had risen to 2.16 per cent from 1.63 per cent at the end of December 2007.

This compares with an industry average of 1.15 per cent, according to figures from the Council of Mortgage Lenders.

Last month, state-owned Northern Rock revealed that its mortgages three months or more in arrears had risen to 0.95 per cent at the end of April, up from 0.57 per cent at the end of December.

As a result of its concerns over a continuing increase in arrears, Northern Rock says it plans to double its debt management staff.

The firm has 176 debt management staff but is looking to increase this to 444 by the end of March 2009.

B&B says it will also be increasing its resources in arrears and collections. It pointed out in its results that the arrears’ performance of its organically originated loans, particularly buy to let, proved substantially better than its acquired mortgages.

It says arrears in its recently acquired mortgages from GMAC-RFC have been higher than expected.

The B&B statement says: “We have already cut back our purchases from GMAC to the minimum commitment under our contract.”

The firm also has a contract with Kensington Mortgages to buy whole-loan books for an unknown period but only singles out the GMAC business, which it has been buying since 2006, for criticism over arrears.

B&B says originated mortgages more than three months in arrears rose to 1.87 per cent of its book at the end of April, compared with 1.46 per cent at the end of December.

This contrasts with the number of acquired mortgages three months or more in arrears which jumped to 5.04 per cent of the book at the end of April, up from 3.29 per cent at the end of December.

John Charcol senior technical manager Ray Boulger says this statement by B&B about the level of arrears in GMAC’s books of business may affect what price GMAC can sell its other assets. “GMAC’s underwriting process was completely automated. This could raise questions of how robust it was,” he says.

But a GMAC spokesman has dismissed concerns. He says: “We are confident in the quality of the origination practices and processes we use to build portfolios for our trading partners. All transactions are completed following full and thorough due diligence and we ensure our practices remain of high quality by collecting performance data from our trading partners relating to past portfolios we have sold as well as the performance of the loans on our book.”

He adds that their own more “comprehensive and representative data” shows a significantly superior loan performance compared with the “acquired loan” performance data in B&B’s results. “We attribute this to how the loans are serviced,” he says.

The Mortgage Practitioner sole trader Danny Lovey says: “Bradford & Bingley was a very willing taker. It took a billion pounds of GMAC recently and obviously thought it was a good deal. It is no use now to throw stones at GMAC.

“From my own experience with GMAC, if a case did not fit the criteria, then it did not get through. There was no negotiation. It had fairly stringent processes.”

Independent mortgage consultant Kevin Duffy says: “I would imagine that GMAC will feel a little disappointed by this, especially as, from what I understand, its own arrears’ manage-ment performance and those of its other loan portfolio players has been better than that at Bradford & Bingley.

“It may well point to comparisons between each of the lenders’ back-office systems and processing capabilities, that is, it is not the toxicity of the loan underwritten, it is how it is supervised and vigilated that counts.”

Premier Mortgage Service managing director John Malone says it is certain arrears will increase significantly. He says: “My experience from the 1970s and 1990s is that it takes a good year to 18 months for it to fully materialise after the eye of the storm.”

Malone says once the market gets into the early part of next year, arrears will have risen sharply as well as repossessions.

London & Country mortgage specialist Richard Morea adds: “There are a number of lenders making noises about transferring resources to those particular areas. It is the one growth area in the mortgage market. There is a lot of pressure on them to treat their customers in the fairest possible way.”

Morea points out that firms such as Edeus are offering outsourcing for this type of business. The has re-engineered itself into an “asset management” service business for the UK mortgage market, covering arrears management.

At the time, chief executive Michael Bolton said: “It is a service that will become increasingly in demand as we turn into the credit crunch. Dare I say we are moving the business towards the growth area of the UK mortgage and housing market.”

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