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Repo realities

Guy Anker looks at the reasons for the rising repossession rate.

The Council of Mortgage Lenders last week revealed that repossessions last year hit a six-year high. The figure was up to 17,000 from 10,310 in 2005, with the CML predicting that the total could break 20,000 by 2008.

The figures are not totally unexpected, given that the CML had forecast 18,000 a year between 2006 and 2008, but these predictions have become a stark reality.

There has been a huge 65 per cent rise in the space of a year although the rate of increase slowed during the second half of 2006.

This raises questions as to whether the mortgage market has been lending irresponsibly to borrowers who cannot afford repayments, a charge that has been levelled at lenders but with blame also attached to brokers for failing to assess affordability properly.

The CML insists interest rate rises are to blame and predicts that repossessions will rise modestly to 19,000 in 2007 and 20,000 in 2008.

The Royal Institution of Chartered Surveyors expects repossession rates to rise in line with the CML’s forecast this year.

However, John Charcol senior technical director Ray Boulger believes the CML’s estimate of 20,000 by the end of next year is optimistic.

He says the reason that the rate of increase slowed in the second half of last year is a lag from the stable interest rates in 2005 and most of 2006 up to August. He believes that there will probably be yet another bank base rate rise.

He says: “This means there will be a new wave of people coming over the brink and that will come through in the second half of this year so the estimate is a bit too low. Even if the rate starts to fall, it will ease the pressure but there will be a lag.”

Research by repossession litigation specialists Moore & Blatch shows that 20 per cent of lenders think repossessions will rise by at least 15 per cent this year. Head of lender services Paul Walshe says: “The repossession figures do not show the number of people in arrears who choose to sell their property before repossession. They can do this because of the buoyancy of the market. However, if the market cools, we could see repossessions figures rising significantly.”

Interest rates are clearly a huge part of the repossession picture following the rise from 4.5 per cent last August to 5.25 per cent in January but other factors have also been mentioned. These include irresponsible lending, poor payment protection insurance policies and poor advice from many small brokers, as highlighted by the regulator last month.

Boulger says: “It is a broker’s responsibility to give the right advice but repossessions can also be caused by relationship breakdowns and people losing their jobs.”

Liberal Democrat Shadow Chancellor Vince Cable argues that it is time for the Chancellor to sit down with lenders to discuss a code of conduct to prevent repossessions spiralling out of control. Cable says: “These are very worrying figures. It is inevitable that with the bubble in house prices, rising interest rates and irresponsible lending, more and more families are getting into terminal difficulties. Payment protection insurance has too often been shown to be a rip-off, meaning people are left without effective safety nets.”

A number of influential sub-prime experts, such as Kensington chief executive John Maltby, have recently echoed Cable’s thoughts by questioning whether some lending criteria in the adverse sector, particularly among the newer lenders, has become too lax.

That also could have a detrimental effect on the lending community, especially after adverse lender Rooftop was forced to make a number of reserve draws to plug losses in its securitised book due to rising arrears and repossessions over the past year.

Other factors that could put more strain on households include rising house prices and rising energy and tax bills. There is also the issue of high levels of unsecured debt hampering people’s ability to repay their mortgage.

Chancellor Gordon Brown said in the House of Commons in January this year that, as a proportion of income, debt in the UK is around 8.9 per cent compared with around 15 per cent in the early 1990s.

Brown notes that debt is not as high as in the early 1990s but the same can be said for the overall repossession figures despite the current worrying trend. The repossession peak came during the 1991 recession, when 75,540 properties were taken.

It was not all bad news for the market as levels of arrears receded from 112,000 in 2005 to 104,000 last year. The CML expects the figure to rise to 130,000 this year due to the payment shock many will suffer as they come off cheap fixed rate deals into today’s high interest rate environment. The figure is expected to drop to 120,000 next year.

Despite this glimmer of optimism, some brokers believe the rising repossession figures could attract more claim management firms to the industry. One firm, Loancheck, is already committed to seeking compensation for people that have been sold the wrong mortgage and have subsequently had their home repossessed.

Norwest Consultants principal Harry Katz says this will prove fertile ground for claim firms. He says: “Those advisers who did not have the sense to tell clients ‘you can’t afford it’ are going to get caught up in the whirlwind. Sub-prime lenders’ reputation and public image will also suffer as they are forced into accelerating repossessions.”


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