Greater Repossession Risk In 2008
Do changes to the Banking Code really mean more protection for troubled mortgage borrowers?
Nowadays there's no question numerous borrowers are vulnerable to the threat of home repossession. In fact, the Royal Institution of Chartered Surveyors (RICS) predicts almost 45,000 repossessions will take place in 2008. That means 123 homes reclaimed from stricken borrowers every single day.
Although the forecast isn't as bleak as the repossession rate of the early 1990s, it still makes pretty disturbing reading given that the numbers losing their home looks set to increase by 50% on 2007.
So why are repossessions expected to rise? Well, a period of careless lending is likely to take its toll this year. The credit crunch has made it more expensive for lenders to borrow money. In turn, that has made all types of credit, including mortgages, both harder to come by and more costly for individual borrowers, particularly those with a sketchy credit history ('sub-prime borrowers').
This isn't good when there are around 1.4 million borrowers due to lose the safe haven provided by their fixed-rate mortgage when their deals come to an end this year. Borrowers who are heavily indebted could find even higher mortgage payments may stretch their finances too far, if they aren't able to re-mortgage to (or renegotiate) an affordable home loan. So it's a concern that average mortgage rates already appear to have crept up.
The Banking Code
You might ask, if reckless lending is at least partially responsible for the expected rise in repossessions then shouldn't the lenders help rectify the situation? Indeed, lenders which have signed up to the Banking Code will be expected to monitor borrowers more closely when new rules are introduced in March.
Before we look at the changes, let me briefly explain what the Banking Code is. It's a voluntary code which the banking industry claims sets standards for good banking practice for UK banks and building societies. The code came under review last November. The industry found what it considers to be two key deficiencies:
- More help is required for borrowers who may be heading towards financial difficulty
- Strengthened credit assessment practices are needed to enhance responsible lending
Under current rules, it's the responsibility of the individual borrower to approach the lender if they feel they're likely to fall into arrears. When the code is revised in March, lenders will be obliged to get in contact with the borrower first if there is evidence of financial difficulty, including late mortgage payments or greater use of overdraft facilities.
Both the British Bankers' Association (BBA) and the Buildings Society Association (BSA), which sponsor of the code, hope the new rulings will stem the growing number of repossessions by putting more pressure on lenders to pre-empt the risk of default.
Scrutinising borrowers' ability to handle their mortgage debt may provide an indication of problems sooner rather than later. But, while these new steps certainly won't cause any harm, the tangible benefits are difficult to see. The changes to the Banking Code don't seem sufficiently far-reaching when the real issue is irresponsible lending.
The credit crunch on banks has now caused them to adopt tighter lending criteria, particularly in relation to sub-prime mortgage debt. But it's indefensible that responsible lending wasn't deemed to be basic good banking practice by all lenders in the first place.