THE EVOLUTION OF

ARREARSAt the end of 2011, HML was managing nearly one in five of all

arrears cases in the UK. HML’s chief executive Andrew Jones talks

about how the servicing industry has adjusted to the challenges and

how it can help lenders go about their business in the future

Five years ago managing mortgage arrears wasn’t something that concerned the mainstream lenders, today it’s a skill that’s in demand across the UK and Ireland that takes quite a bit of perfecting.

But there are positive signs the industry as a whole is getting better at managing homeowners in arrears. Since the height of the problem at the end of 2008 HML has seen arrears reduce in arrears. Since the height of the problem at the end of 2008 HML has seen arrears reduce by a quarter and they are continuing to fall on a monthly basis.

In March, we saw a reduction of around 2 per cent from February’s count, while in April that figure reduced by a further 1 per cent.

In part, the fall can be attributed to a lot of the bad cases ‘coming out’ or defaulting early on when some borrowers had no buffer to a change in financial circumstances brought about by the credit crunch.

It can also be attributed to an evolution in the skills needed to help borrowers in arrears come to a sustainable arrangement that means the loan is performing for the lender and the payments are affordable for the borrower.

Predicting default

Anticipating default is a key weapon in the industry’s armoury. Predictive analytics means lenders can forecast when a borrower is likely to miss a payment based on the performance of similar accounts and previous behaviour.

And many are backing up the science with a good dose of common sense that has seen the evolution of potential impairment indicators. Instead of accepting it as normal for a borrower to switch their monthly payment date, it’s now normal to ask why.

Have they lost their job? Are they going part-time? Have they taken out a short-term loan to cover their payments, or have they changed job?

This level of detail helps alert lenders to a potential problem so they can decide what action, if any, they want to take. It also creates a more transparent view of balance sheets to satisfy the regulator. Completing income and expenditure statements that result in maintained arrangements to pay are another yardstick to measure progress against, and a skill.

Sticky arrangements to pay are good for the borrower and good for the lender, but rely on customer insight, trust and realistic expectations on both sides.

All this is being done against a background of reduced contract modifications. And in some cases where it is appropriate, customers are now switching their interest-only mortgage to capital and interest repayments.

Threats to further recovery

But that doesn’t mean the industry can be complacent. A recent survey by consumer watchdog, Which?, found that a £100 increase in monthly mortgage repayments would leave a fifth of borrowers without enough money for daily essentials like food.

Even though interest rates are not going to rise until late 2013 at the earliest according to the Bank of England, lenders are already increasing their standard variable rates to reflect the reality of what is happening in the wholesale funding markets. The question remains when are borrowers going to be hit by higher mortgage repayments, not if.

There’s also the challenge of the hundreds of thousands of people with interest-only mortgages and without adequate repayment strategies. It is, and will, remain a major concern for everyone in the industry until a solution that is fair to the borrower and the lender is found.

What’s more, increasing pressure on lenders’ for the risk associated with their lending to be completely transparent could force them to repossess, rather than continue an expensive strategy of forbearance. In some instances it will be fairer to the homeowner to force an early sale and leave them with less debt, than keep them in a home they cannot sustainably afford.

Director general of the CML Paul Smee confirmed this in its latest repossession and arrears forecast: “Anyone worried about their mortgage should be assured that lenders will try to help them get back on track, as long as it’s a realistic prospect.” And while selling repossessed houses in a flat market is also an issue for lenders and borrowers, there is some cause to be optimistic. During 2011 HML sold 94 per cent of repossessed properties through estate agents, recouping an average of 99 per cent of open market value.

www.hml.co.uk

The future

Forecasting is and will become an ever more valuable tool for lenders to use when assessing the strategy they want to follow with their borrowers.

By using predictive analytics to inform contact and collection strategies, lenders will see an increase in the number of paying accounts and the amount of cash collected across all arrears segments.

While arrears will be a challenge for the UK for some time to come, lenders have learnt valuable lessons over the last five years and those lessons will keep people in their homes when it’s appropriate and generate cash for lenders.

Originally produced for Mortgage Finance Gazette, 2 June 2012