Get your head out of the sand

The speed with which the financial pundits can suddenly change their opinion never ceases to amaze. One week, a further quarter point interest rate hike to 6 per cent is a done deal. A week later, it seems rates may already have peaked and the next change could even be a cut. Whichever scenario proves more accurate, it’s likely that the figures for repossessions will continue to worsen over the coming months.

According to the Council of Mortgage Lenders (CML), the first six months of this year have already seen a total of 14,000 repossessions, or 30 per cent more than for the first half of 2006. As the CML pointed out, the figure is relatively modest compared with the boom-bust that occurred in the early 90s – for example, 76,000 homes were repossessed between January and June 1991.

Nonetheless it’s still the highest total in eight years, and equivalent to 77 properties a day. That still amounts to a great deal of human misery – much of which was avoidable. I suspect the most recent data will subsequently be revised upwards and reveal a more serious situation. Not only does it fail to fully reflect the rate rises in January and May, it only covers the period prior to the most recent hike to 5.75 per cent in July.

That’s also assuming we’re now at the end of the cycle. The recent alarming volatility in the stock markets mean that we’re probably off the hook for the moment as regards another jump in borrowing costs from the Bank of England. But if the dust settles quickly enough, there’s still more than a chance we could see 6 per cent before the year-end and possibly 6.50 per cent in 2008.

Still struggling

Even if the Bank of England decides that it doesn’t need to tighten the screws further after all, more home owners are going to find they are struggling. Firstly, between now and the end of next year some two million borrowers are going to come to the end of the period in which they have enjoyed cheap fixed rate mortgages and will find their monthly payments rising steeply. Secondly, the price of a whole basket of commodities from oil to wheat are moving sharply higher and will feed through into higher bills this Autumn. Our dismal Summer weather and the serious flooding will exacerbate this further.

Top this off with the fact that the long-awaited credit crunch has suddenly and dramatically arrived, bringing down the final curtain on the era of cheap money. Mortgage rates are set to edge higher even without the Bank’s assistance if the big investment institutions decide to play it safe from now on. Witness Northern Rock’s sudden exit from the adverse market and the move to make its fixed rates more expensive.

Given that the big share sell-off occurred in the middle of the holiday season, it's an even bet that the markets haven't finished yet and will head even lower in September.

That’s likely to mean dearer long-term fixed rate mortgages, which will affect first-time buyers and anyone with a chequered credit history. It has already been reported that seven million individuals had their applications for credit turned down by the mainstream lenders in 2006 – the first time in many years that the figure increased. It’s predicted it will go on steadily rising to reach 8.6 million by 2011. The reverberations of the US non-conforming fallout are obviously going to continue for some time.

Digging deeper

In this tougher environment, even consumers whose jobs are fairly secure will need to dig much deeper into their pockets. But it’s also likely that unemployment has moved as low as it is going too and the total is about to start climbing again. A slowing economy will generate fewer new jobs and consolidation is set to continue.

If times are about to get tougher, the extent to which state support for home owners has slumped over the past decade will become evident. The government has cut income support for mortgage interest (ISMI), the main benefit paid to homeowners. In 1994-95 it paid out just over £1 billion in ISMI payments to non-working home owners unable to meet their mortgage payments. By 2004-05, the figure was down to £237 million.

So it’s a timely opportunity to emphasise the value of mortgage payment protection insurance (MPPI), and to clarify to the public that payment protection insurance (PPI) and MPPI are separate covers.

Knight in armour?

I wouldn’t attempt to estimate just how many of those who have recently had their home repossessed or fallen into debt could have been rescued by having taken out MPPI cover. But it’s likely to be a significant proportion. Buyers have been stretching their financial resources almost to breaking point in recent years and doing so just as MPPI was attracting a hostile press.

Many individuals, who would otherwise have bought cover, will have been dissuaded against buying it by the relentlessly negative campaign pursued by much of the media in recent years. One of the mid-market tabloids informed its readers that they’d be better off putting their money in an ordinary bank account – attracting a negligible rate of interest – than buying cover.

Of course, it would be no surprise to find that as more consumers find themselves in difficulty, the same papers that once deemed MPPI cover to be a waste of money will change their tone and instead write about the protection it offers in times of redundancy or sickness. One encouraging sign has been the more measured tone of television consumer programmes, which have generally been better informed and better researched than the tabloids. Their presenters appear to be more savvy and aware that PPI and MPPI are not one and the same.

If only I could say as much for the Financial Services Authority (FSA). It has merely added to the confusion by failing to clearly spell out the differences between the two and bears a large proportion of the blame for people being unable to clearly differentiate between very different products. If the watchdog itself is unable distinguish between them, it’s little wonder that the public is baffled.

Maybe we’ve only ourselves to blame for showing too much deference to the FSA. It’s clearly not living up to its remit, yet few are willing to criticise its shortcomings. If we continue to be reverential, there is little chance of it getting its act together – or doing so with any great speed.

The result is that there are plenty of smaller brokers with fair-value MPPI offerings who are reluctant to promote them because of the adverse publicity of recent years. Yet some of the major banks and building societies have no such qualms and even carry on regardless with some of the practices that have rightly been slated. Many consumers still wrongly believe that MPPI comes as part of their mortgage package, unaware that better value and cover is available away from their mortgage lender.

We all get tainted as a result. We’ve already witnessed this with the continuing rip-off of single premium policies. They have been widely condemned and should have been banned years ago. Some firms that were ordered to provide customer refunds have still not repaid them. Yet it takes an inordinate amount of time for any action to be taken.

It's certainly an opportunity for CETA to proclaim the advantages of its system, which offers the smaller insurance broker a comprehensive range of quotes. And also to emphasise that its own MPPI products may not be the cheapest, but can give any other a run for their money in the benefits that they provide.

get the daily news delivered to your inbox
find the latest industry jobs
download our news ticker