The latest data on jobs paints a picture of a rapidly weakening labour market.
The Office for National Statistics (ONS) says unemployment jumped to a four-year high of 4.7% in the three months to May, up from April to reach the highest level since June 2021 when Britain was only just emerging from lockdowns.
Payroll numbers fell by a provisional 41,000 in June, following a 25,000 decline in May. Pay growth, meanwhile, is falling in both cash and real terms. Average regular pay growth excluding bonuses is now the weakest it has been since June 2022.
Will people be able to get another job? Maybe not: the number of job vacancies is still falling and has now been dropping continuously for three years. Job prospects are bleak.
These dire labour market conditions follow the above-inflation minimum wage hike in April and the increase in National Insurance, both of which have strained employers.
HOUSING MARKET HIT
Higher unemployment will clearly lead to more defaults and delinquencies, hitting lenders’ balance sheets. They will have to tighten lending, increase rates, insist on higher credit scores and reduce loan amounts or shorten terms. With fewer people confident in their financial future, demand for new loans will fall. The housing market will take a hit.
So under normal circumstances, following such a severe weakening in the jobs market, we’d be ramping up the bets on interest rate cuts. We might even be looking forward to the base rate falling to 3.5% in November.
But the rate waters are muddied by inflation which jumped by more than expected in June. ONS figures show that consumer prices rose by 3.6% in the 12 months to June, up from 3.4% in May. This is firmly above the Bank of England’s 2% target which makes it harder for Andrew Bailey to dig Reeves out of her hole by cutting interest rates.
ARREARS FLOOD ON THE HORIZON?
What does this mean for the mortgage industry? Well, we are clearly heading for an absolute tsunami of arrears as households with newly unemployed mortgage-borrowers fall behind on their payments. Unemployed borrowers are going to struggle to meet loan repayments. Missed payments or defaults will increase, damaging credit scores and limiting future borrowing options.
And let’s not forget that plans to relax rules for higher LTI ratios could mean a huge increase in possessions if unemployment rises – to the extent that it could lead to a spike in PRS rents and put further pressure on the provision of social housing. It’s all in the post.
Lenders will need to be on the front foot to ensure their servicing operations have the right colleagues, processes, and platforms in place to handle the increased demand and deliver the proper customer outcomes to meet their regulatory obligations.
HOW SHOULD THEY PREPARE?
First, they should utilise open banking to assess behaviour patterns and identify risk profiles. They will need a real-time view of a customer’s ability to pay to predict those borrowers susceptible to predelinquency.
Second, they should identify, then work with, distressed customers to ensure borrowers know there are multiple ways lenders can help. That needs to happen as early as possible.
Third, lenders need to adopt a multi-channel approach: services need to be accessible to all customers, no matter their ages or digital capabilities.
Fourth, teams need to be ready to offer tailored solutions based on individual circumstances. You will need skilled and qualified colleagues to support the vulnerable when they need it most. Bear in mind it can take 12 months to train someone to full competence in arrears (our staff spend eight weeks in the classroom followed by on-the-job training within their department).
RESOURCING
The right resources, systems, and capacity plans need to be in place to manage the increased workload and default risks. If you’re not properly resourced, a sudden spike in demand could mean customer detriment and missed SLAs, often leading to significant financial and reputational risks. You could also end up with the added headache of a non-performing loan book. Remediating these can be resource-heavy and time-consuming.
Of course, there is another option, outsourcing to a third-party. A servicer could offer a scalable option to help distressed collection operations cope, especially with the added pressure of ever changing regulation.
With the correct regulatory frameworks, collection strategies and resources, all underpinned by clear leadership, you can scale up and down to meet demand, manage risk and maintain your collection revenue. But most importantly, deliver great colleague and customer outcomes simultaneously.
As we start to grapple with the weakening labour market and persistent inflation, the mortgage industry faces a looming wave of arrears driven by job losses and financial strain.
Lenders must not bury their heads in the sand. They can’t ignore escalating risks. With unemployment at a four-year high and pay growth falling, proactive action is essential.
Collections teams must leverage open banking for early risk detection, engage distressed borrowers with tailored, multi-channel support, and ensure robust, scalable servicing operations – potentially via third-party partnerships – to meet Consumer Duty obligations and mitigate financial and reputational risks.
Ignoring these challenges is not an option; only strategic preparation will safeguard customers and maintain a resilient loan book in this turbulent economic climate.
