It’s not hard to explain why the government’s scheme is struggling to fulfil its rationale, argues Debby Cattell, head of servicing at Crown Mortgage Management
In its report this month on the Department for Communities and Local Government’s (DCLG) mortgage rescue scheme, the National Audit Office (NAO) has cited inadequate market research on the state of the mortgage market for the scheme’s failure to help even half of the planned number of homeowners.
The travails of the DCLG demonstrate the value of ensuring experienced people with a thorough outlook and a full understanding of the workings of the mortgage market are consulted before making assumptions about borrowers’ finances and how best to prevent a spike in possessions.
To an extent, the DCLG can be forgiven for underestimating the number of borrowers who required assistance. The Bank has held back from raising the ultra-low interest rate policy for two years and mortgage borrowers on tracker rates have been reaping the benefits. If you’ve managed to keep your job and avoid a pay cut, the fact that you’re spending less on your mortgage is great news. The problem for borrowers and the UK economy as a whole is there are still plenty of people at the limit their financial margins and this number looks set to increase.
In fact, low rates themselves are partly to blame. It’s too easy to simply say low rates mean a healthy financial environment for borrowers. Inflation expectations are now 4% and although the MPC has stated it is not concerned about high inflation becoming endemic, it’s hard to see how this is possible when expectations are at double the target level and CPI is even higher. Inflation is chipping away at UK households’ real-terms income and is now as great a threat to borrowers’ ability to pay mortgage rates as an increase in the base rate.
Borrowers are also concerned – quite rightly – about the impact of the UK’s austerity package. As we approach the second half of 2011, unemployment will rise as the public sector sheds its excess weight. Rates will have to rise too. Borrowers feeling relatively comfortable right now know they still have plenty of reasons to feel nervous.
The DCLG’s biggest mistake was to assume there was only a small number of mortgage borrowers currently feeling the pinch. The mortgage rescue scheme was designed to help 6,000 households (although it ultimately was only able to assist 2,600). In the first quarter of 2011, possessions jumped 15% to 9,100 – far more in just three months than the DCLG had ever intended to help with a scheme which began more than two years ago. To think demand for assistance would be so limited compared to the total number of possessions shows a failure to properly understand the financial positions of borrowers.
This could have so easily been avoided by expert consultation. With almost 40 years’ experience in the industry, specialist servicers like Crown know their business depends on understanding borrowers’ and lenders’ needs to optimise the outcomes of working together. Forward planning is needed to do exactly what the mortgage rescue scheme tried to achieve – spotting problems early and working with borrowers as individuals to find a solution that avoids possession. For servicers worth their salt, doing otherwise would mean shirking their TCF responsibilities and failure to protect their clients’ reputations in the marketplace. Reputational concerns must be at the forefront of how servicers operate.
It takes experience and expertise to properly understand the mortgage market. When you’re trying to understand how best to assist borrowers, you must combine a thorough understanding of the wider picture with the ability to closely assess borrowers’ circumstances. There is no other way to ensure you are being responsible, open and transparent in dealing with clients. For specialist mortgage servicers such as Crown, this is the basis of what we do.
