Servicers need to be prepared for the bad times ahead, writes Eric Stoclet, CEO of Crown Mortgage Management
When servicing mortgages, it’s vital to see potential problems before they develop and to work to nip them in the bud before default and repossession become necessary. That’s the best way to ensure you’re TCF compliant and to stay on the right side of regulators.
Currently, you don’t need to be an expert to see the year ahead will be tough for borrowers. Consumer spending is falling, taxes are rising and the inevitable rise in rates could push many borrowers into arrears. But actually, the scale of the problems posed in the fiscal and economic future could be a good thing for borrowers in the long term. Because the threats to borrower finances are palpable, it’s possible that prudence, rather than overconfidence is characterising a majority of households’ financial decisions.
Take housing equity withdrawal. The latest figures (for Q1 2011) show net lending was down by more than £7 billion. That’s a new record for the amount of capital absorbed by lenders in a single quarter. Of course, we must remember lenders are playing their part in this – monthly gross lending have been between £10.5 billion and £12 billion since the end of 2009. But that doesn’t explain why net lending fell so far at the end of 2010. Could it be that borrowers are battening down the hatches, holding back on spending and prudently paying down capital?
In the context of the wider economy, this would hardly be a major surprise. Even though last month CPI inflation fell to merely double the target rate from its highest point in nine years in February, prices are still rising twice as fast as wages, with average earnings growth standing at 2% in February. Thanks to runaway inflation, borrowers’ purchasing power is dropping and appears to be taking its toll on confidence.
This position cannot be maintained. It’s probable the MPC will feel exonerated by the latest drop in inflation, but the truth is the pressure remains to push rates up. Inflation expectations have risen from 2.5% at the beginning of last year to 4% today and unless rates rise soon, this level of expectation could rise further, necessitating a draconian response from the Bank further down the line. Borrowers seem to be realising the MPC will either push rates up soon, or be forced to do so down the line to a much larger extent. Either way, the losers will be those on tracker rates who will suddenly be faced with much larger mortgage repayments.
All this pressure from monetary policy is being increased by fiscal policy, which has not only taken money out of households’ pockets, but will also lead to a still unknown number of public sector jobs losses. The latest unemployment estimate from the OBR shows 610,000 public sector jobs are set to be lost. With growth unlikely to jump far after disappointing GDP figures for the final quarter of 2010, it’s hard to see how the public sector will be able to absorb this many people.
The next 12 months will provide plenty of bad news for borrowers and unfortunately there isn’t much the mortgage industry can do to stop it. But the threat of a sharp rise in repossessions, accompanied by falling house prices may be mitigated by the prudence of borrowers who are making the most of low rates to pay down capital and minimise their exposure as the austerity package bites harder and deeper into their pockets. By identifying those responding to the prospect of tougher times now, lenders and servicers can focus their energies efficiently to minimise the damage caused when rates rise and jobs are lost.