The UK mortgage market: an overview
With storm clouds over the economy and the financial sector in turmoil it is not surprising that mortgage lenders are trying to understand how bad it will get, how long will it last and how it will affect the mortgage market.
Experian is committed to supporting clients to help them understand the future trading landscape and provide the tools, data and insight to make the right business decisions at this challenging time.
Colleagues from across the mortgage industry in the UK gathered in January at Experian’s second UK Mortgage Round Table, aimed to offer an insight into the current issues and trends in the market and to use each other's expertise to discuss strategies to address these issues and develop the business.
This article highlights some of the issues and debates from the meeting.
Where next for the mortgage market?
The UK market is now officially in recession, recent years have seen 62 consecutive quarters of growth which then reversed from Q3 of 2008. * (read “The UK Recession has arrived” in this issue’s Global Outlook session). There are many factors affecting these changes, interest rates, interbank lending levels, currency values but it is clear that fiscal pressures are building and will have a significant impact on the mortgage market.
The Council of Mortgage Lenders has reported that UK mortgage lending fell by 30% in 2008 to the lowest level since 2002. The two most widespread house price surveys (Nationwide and Halifax) have reported that house prices fell by 16% in 2008. A further 15% fall is predicted in 2009 with some analysts not expecting a recovery until 2011.
This means at least two more tough years for mortgage lenders. But, there are brighter points we can take from this. For the mortgage market, the fundamentals should underpin the market in the medium term. Falling supply as new house building slows and increasing demand with a growing population and smaller household sizes means that mortgage lending will always be required. People will always need somewhere to live.
Is identification of early stress useful for mortgage lending?
In mortgage lending it is more difficult to show the impact of pre-delinquency actions as, unlike unsecured lenders, you cannot easily reduce the exposure to a customer. However, regulatory and media pressures mean that this area will continue to increase in prominence and mortgage lenders will be required to show what they are doing to support their customers.
Experian believes in the future that this activity will become more prevalent and risk teams will be able to demonstrate the value of preventative action in reducing collections and repossession costs as well as building customer loyalty and regulatory compliance.
To seize or not to seize?
The decision to foreclose and repossess on a mortgage is a difficult one; however, as more repossessions occur the auction recovery values will start to drop. The decision to “seize or not to seize” as well as the timing becomes crucial. Added to this is government and media pressure to avoid repossession and lenders are faced with an even more difficult trade-off.
When a mortgage account becomes severely delinquent, lenders are effectively faced with two basic options:
Attempt rehabilitation by working with the customer to bring the account back into order
OR
Initiate action to seize the asset and realise its maximum value to repay the outstanding debt bearing in mind we need to “treat the customer fairly”
The influences on the repossession decision are a combination of both risk and financial elements.
Fundamentally it comes down to two choices: manage the position or repossess the asset.
For short term issues and temporary “life changes” the aim is to rehabilitate the customer through temporary arrangements or restructuring debts. For more severe issues lenders need to examine repossession or voluntary forced sale by the mortgage holder. The best approach is always to engage with the customer and get them to propose a solution to the problem, which is realistic and they buy into.
Although the aim of collections is to rehabilitate a customer there are longer term financial overheads that need to be considered especially if a severely delinquent account is retained (restructured or not) in hope of resolution. However, repossession also brings several negative aspects including costs, potential losses and adverse public relations.
There is no simple answer to the challenge with many factors needing consideration in each case. If repossessing, it is better to act sooner, at least at present but if you do elect to wait and seek to rehabilitate the customer you need to do so in the knowledge that it is likely to be a long haul and that to lose nerve and start repossessing assets mid-stream offers possibly the worst outcome.
Should macro-economic factors be incorporated into scorecards?
The impact of the current, rapidly changing, economic climate has provided an incentive for a number of organisations to look at how to make scorecards more forward looking by factoring in the macro-economy into credit scoring models.
If successful, this will enable scorecards to become more effective because they will include predictions about the future state of the economy. There are a number of technical challenges in doing this but economic necessity will no doubt be the mother of statistical invention. An alternative approach is to build a scorecard and then test it through stress-testing in a range of hypothetical economic situations.
Jon Hudson
Head of UK Financial Services
Decision Analytics
Experian
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