David Bailey, BoE Executive Director for UK Deposit Takers Supervision and responsible for the supervision of the UK’s banks, building societies and credit unions, gave a speech at the recent Building Society Association annual conference. His two main themes are intertwined; managing the fast-evolving outlook for credit risk and supporting building society members in what is becoming a quickly changing and challenging economic climate. While his message that day may have been aimed at the mutual lending sector, his warnings should resonate with lenders of all descriptions. Managing ‘credit risk’ and ‘supporting existing borrowers’ are two key issues for lenders at the moment.
In the month since his speech, we have seen a further deterioration of the UK economic environment. While I am sure many mortgage professionals won’t need reminding:
- Inflation, which measures the pace of price rises, remains at 8.7% in May, the same as April
- Core inflation, which strips out energy, food, alcohol and tobacco, rose by 7.1%, its highest level since 1992 (31 years!)
- UK debt has reached a 60 year high
- UK debt is now higher than annual GDP for the first time since 1961
- Government borrowing costs (the yield on two-year gilts) have reached a 15-year high
- Some economics ‘experts’ are calling on the Bank of England to “create a recession” to bring inflation down!
As a result of the above, the Bank of England increased Bank Base Rate on 22 June by 0.50% to 5%, the 13th increase in 13th months. Yet another ratch on the affordability impact on new and existing borrowers.
Managing ‘credit risk’ and ‘supporting existing borrowers’ are two key issues for lenders at the moment
What is the Government response? Chancellor Jeremy Hunt, recently told the Commons he will meet with lenders and ask, “what help they can give to people struggling to pay more expensive mortgages and what flexibilities might be possible for families in arrears.” Déjà vu! I can remember the then Prime Minister John Major calling lenders into No 10 in 1992 and the then Chancellor (Alistair Darling) and the then Housing Minister (Caroline Flint) doing the same, but in No 11, in 2008. It seems that the default position of Government, of every flavour, across many decades, is to call in the lenders.
Sure, the 1992 John Major lender summit resulted in the Council of Mortgage Lenders producing a document called “Statement of Practice on Handling Arrears and Possessions” which provided robust guidelines to all lenders. However, does Government really think that lenders aren’t doing everything they can to help struggling borrowers? We live, today, in a more regulated world and regulators have given as much thought to existing borrowers as they have to ‘origination harm’ issues. In respect of struggling existing borrowers, lenders must already comply with:
- FCA ‘Treating Customers Fairly’ requirements
- FCA ‘Mortgages: Conduct of Business’ Sourcebook – “MCOB 13 Arrears, payment shortfalls and repossessions: regulated mortgage contracts and home purchase plans”
- FCA ‘Consumer Credit Sourcebook’ – “CONC 7 Arrears, default and recovery (including repossessions)”
- The Debt Respite Scheme (Breathing Space Moratorium and Mental Health Crisis Moratorium) (England and Wales) Regulations 2020
- The Ministry of Justice Pre-Action Protocol for Possession Claims based on Mortgage or Home Purchase Plan Arrears in Respect of Residential Property
- The Ministry of Justice ‘Part 55 – possession claims’ Civil Procedure Rules.
Adding to the above, the new FCA Consumer Duty requirements will apply an additional focus on the fair treatment of existing borrowers.
No lender would willingly repossess a property while there remains a realistic possibility of ‘preserving’ the borrower as a customer. Apart from the fact that lenders care about their customers, it is only by maintaining the existence of the loan account that a lender can cover its origination costs and make long-term profit from an account. Repossession terminates the lender’s opportunity to make a profit from that account.
As I wrote in a mortgage trade magazine in April 2008, “it is clear to me that of the many issues the Government and FSA [now FCA, of course] does have to issue warning shots about, established lenders treating customers in financial difficulty fairly is not one of them.” Déjà vu, again!