The FSA has accused UK banks of attempting to disguise the actual size of mortgage arrears. There is plenty of anecdotal evidence that, despite low interest rates, large numbers are in financial difficulties and are relying upon the generosity of mortgage lenders to stay in their homes. The issue the FSA have focused upon is the lack of transparency in terms of the number of people, who, but for the forbearance of their bank, would have defaulted on their mortgage.
Going into the recession the then Labour Government asked banks and building societies to find ways to allow customers to stay in their homes. They were particularly thinking of people who had been made redundant and had little hope of paying their mortgage in the short term. All kinds of measures were deployed, such as moving to interest only mortgages, extending the mortgage term and offering payment holidays. With many of the largest lenders relying upon Sate support, they were obliged to go along with the Government's pre-election determination to avoid a repetition of the large scale repossessions of the early 1990s.
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The concern of the FSA is that the banks are allowing too many people to delay the pain of meeting their financial obligations and consequently are accumulating even more debt. As inflation has roared away, those getting back into work, or trying to get their finances straight after short time working, are finding their everyday bills are coming in front of increasing their mortgage repayments. The underlying concern is that people in this position are just running up more debt and they will lose their homes in any event.
The FSA's data shows that around 300,000 people have switched over £163 billion worth of mortgage debt, to interest-only payment plans since late 2007. Interest only deals were offered by many lenders in the hope that the economy might bounce back quickly and the numbers in financial difficulty reduce. By mid 2011 the concern is now that interest only masks the true extent of indebtedness and therefore the quality of the lenders mortgage account. Given UK interest rates are going to rise sooner rather than later, even a modest increase will place a massive strain on people already struggling with the pressures of inflation. This is likely to see even more bank customers, especially those currently on tracker deals, seek to move to interest only mortgages. Meanwhile, those already on interest only will see their repayments jump.
What happens when people are unable to meet interest only mortgage payments? The banks have offered payment holidays, however this was seen as a stop gap, say during the period between jobs. In reality, if someone has been forced into accepting a much lower wage to get work, they may struggle to even return to interest only payments.
Consequently, with so many people unable to afford to pay back what should be a repayment mortgage, how much of the banks exposure should be described as potential bad debt? How much negative equity is also hidden by avoiding repossessions? If there was a tightening of the rules for customers who fall behind with their payments, how much further would the property market fall if there was a surge of lender property disposals?
Bank auditors have been ordered by the FSA to take "a tougher stance on forbearance practices." The regulator has stated "We require firms to report accurately and transparently the impairment of their mortgage book." However the FSA also accepts that the considered arrears support given by the lenders "...has a beneficial impact for both the firm and the customer". This puts the banks in an impossible position. They are damned if they do help customers and condemned if they don't. In the British tradition they are expected to muddle through and continue broadly with the same strategy. Much depends upon the strength of the recovery and pressure upon interest rates. Should the regulator decide to force the banks to come clean about the true impact of their mortgage forbearance, this could prove the undoing of customers currently hanging on to their homes by their fingertips.
The Government certainly does not want another knock to consumer confidence created by a landslide of repossessions forcing house prices down even further. The banks are desperate to avoid anything that might drive down house prices, as it would expose them to even more negative equity. Furthermore, a spike of repossessions would trigger a bashing by taxpayers already indignant for paying to bail them out. This has the hallmarks of a good conspiracy, will the FSA be told to stop blowing the whistle?
In the meantime, anyone in work should be mindful that the banks are being forced to become less generous in terms of arrears support. It is very likely that far fewer customers will be offered interest only deals in an endeavor to placate the FSA. Therefore, people who want to keep their homes if they are made redundant, should look to making private provision. For example, through buying Mortgage Payment Protection Insurance or short term Income Protection cover. These policies typically pay up to £1,500 per month whilst the policyholder is out of work due to accident sickness or unemployment. The best deals are found on line with premiums of around £40 per month.
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