There can be few scarier concepts for a home owner than repossession. Losing the property you call home and being forced into an unknown future is a prospect no one wishes to face. Yet, with five Bank Base Rate increases in 11 months, the screw is tightening on many people’s finances and along with it, their ability to meet mortgage repayments. As such, lenders and intermediaries are bracing themselves for a rise in repossession figures later in the year as the effects of the rises start to properly kick in.
Threat masked?
Yet, is the true threat repossession poses being masked? Moore Blatch believes so and claims the number of forced sales belies the potential for repossessions. It says at least an equal number of forced sales occur for every repossession and figures fail to take into account the ‘hidden majority’ of sales to avoid a repossession occurring.
It points to the Department of Constitutional Affairs figures for 2006 that recorded the highest number of Court possession orders since 1993 at 89,857. Of these, 19 per cent resulted in the repossession of the property compared to 56 per cent of the 105, 283 possession orders made in 1993.
However, Ray Boulger, senior technical manager for John Charcol, rubbishes the idea figures are being skewed and points out that the early 1990s was a very different market. He says: “Anyone struggling with repayments is going to be better off selling their property and the advice brokers will give those struggling with repayments is to downsize. If you compare figures now to previous ones, there is no reason why there should be significantly more or less people selling to avoid repossession.”
While Boulger admits the housing market is not as good as it has been, he maintains: “People are more financially aware than in the 90s with arguably better advice. If people are selling before they get repossessed, they will come out better because there are all sorts of costs that get added in repossessing and ultimately the borrower comes out worse.”
Distress sales
Darren Pescod, managing director of The Mortgage Broker Ltd, backs Boulger’s comments and highlights a growing industry of companies aggressively marketing ‘distress sales’ where the company buys the house from the owner and rents it back.
He says: “These companies are popping up everywhere. They buy the property at a 15 to 20 per cent discount and then the person pays rent and they don’t have to move. For the right people in the right circumstances, such as if they are under imminent threat of repossession in the next seven days, it has to be a legitimate option. But for other people, why sell under value? Why not sell for market value and realise the cash.”
Yet, even with selling up, Pescod notes that things are never simple, as getting a tenancy could prove easier said than done with the credit checks landlords routinely run nowadays.
Colin Snowdon, chief executive of Wave, comments: “We are coming out of the part of the cycle that’s been incredibly benign and moving into a more challenging cycle. However, we must remember the repossession figures will be rising from a very low base. Things are going to get tougher and not just for the mortgage industry.”
On the verge of a crisis?
Matthew Wyles, group development director at Portman BS, agrees, and says it will be the unsecured lenders that will feel the pain of defaults first. He adds that he has seen no evidence to suggest forced sales are mounting, but notes: “There is some evidence that amateur landlords are getting shaken out of the market as it becomes less economically compelling, and if a lender has done a lot of lending with high multiples, then that also might cause issues. However, do I think we are on the verge of a credit crisis? No, I don’t.”
Snowdon also defends any suggestion that lenders do not take affordability seriously and are lending too liberally to borrowers. He says: “There are bound to be some people that can’t afford the mortgage, yet lenders do everything they can to avoid it. Repossessions are not just caused by affordability, but such events as a break down or losing a job; it’s not just the effect of rising interest rates. That just piles on the pressure.”
So, while a rise in repossession appears inevitable, everyone knows that it is in no one’s interest for it to happen. At such a time, advice for struggling borrowers is paramount before the situation gets too bad, and brokers would do well to keep tabs on customers who may be feeling the strain. A forced sale may not be a palatable idea, but it remains far better than a repossession for all concerned.
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