Mortgage arrears
Very little is mentioned of mortgage arrears by journalists. Official sources are similarly coy about disclosure. A search of the ONS website reveals figures for repossessions and mortgage arrears....ending in 2002, just 9 years out of date.
The CML publish quarterly figures though. After a quick look we can conclude that these figures are worthless. The reason they are worthless is that the definition of 'in arrears' is to have arrears worth 2.5% of the mortgage. This, in lending terms, represents a mortgage that is already well past the point of no return. To understand what this level of arrears means consider that (with say a 2.5% interest-only mortgage) a houseowner could be 11 months in arrears and still not be counted in this figure, only after 12 months without paying would they appear. With a 5% interest-only mortgage the houseowner could be up to 6 months in arrears and not appear in this figure, and (as the figure is calculated quarterly) anyone who clocks up their 11th or 6th month just after the data is collected will be 9 or 14 months in arrears by the time they appear in the published number.
The figure for arrears should include those mortgages of 3 months in arrears at least, and then perhaps in reasonable bands such as 3-6 months, 6-12 months and so on. Lenders take notice of a loan as soon as one payment is missed, and accounting provisions would normally be made in bad or doubtful debts after 3 months. If all mortgages over 3 months in arrears were counted in this figure we would have a reasonable measure of stress being experienced by borrowers and lenders. It is obvious that this figure would be much much higher than the published one. It is also obvious that the CML has access to this data, but chooses not to publish it.
According to the CML the absurdly high arrears group which they publish was 169,600 at the end of 2010, down from around 194,900 a year earlier, and around 220,000 at the end of 2008.
This improvement in loans (which as I say are already critically-bad by the time they are recorded by the CML) over the last two years cannot be the result of homeowners settling their mortgage arrears. My experience in banking suggests that homeowners who are more than 3 months in arrears are unlikely ever to come good for the lender.
So if these mortgages are disappearing from 'arrears' where are they going? They are almost certainly not being repaid, perhaps a tiny number will be, so are they being repossessed? The number of repossessions is consistent with the fall in the number of these loans, but that would imply (approximately) that no more new arrears were being created in the period Dec 2008 to Dec 2010. Incomes available to service mortgage payments began falling and continues to fall quickly because unemployment is rising and incomes are squeezed in the private sector by falling hours, full-time work becoming part-time work, shorter working weeks, pay freezes, pay cuts, and prices are rising for food, fuel, & home energy. This implies that there should be an increase in the number of mortgages of this type and not a decrease, with new arrears appearing in this category faster than they leave it by repossession.
There is an interesting possiblity that mortgages are put into a box, a category, called something like 'in repossession proceedings' but which do not get repossessed. They leave the 'in arrears' category. They are non-performing for hundreds of days. They will never repay. They do not get repossessed because the government is against repossession and also controls the majority of the mortgage market, and perhaps because the mortgage is underwater and would crystalise a loss for the bank (and sometimes the taxpayer) which they cannot afford. Zombie loans?
In any event, it seems likely that there are a large number of mortgages which are under severe stress and will not be repaid, which are recorded privately but are not published. The net effect of all this is to massively understate arrears in the UK mortgage market. A true picture could be obtained by finding the number of mortgages of 3 months or more arrears.
The CML publish quarterly figures though. After a quick look we can conclude that these figures are worthless. The reason they are worthless is that the definition of 'in arrears' is to have arrears worth 2.5% of the mortgage. This, in lending terms, represents a mortgage that is already well past the point of no return. To understand what this level of arrears means consider that (with say a 2.5% interest-only mortgage) a houseowner could be 11 months in arrears and still not be counted in this figure, only after 12 months without paying would they appear. With a 5% interest-only mortgage the houseowner could be up to 6 months in arrears and not appear in this figure, and (as the figure is calculated quarterly) anyone who clocks up their 11th or 6th month just after the data is collected will be 9 or 14 months in arrears by the time they appear in the published number.
The figure for arrears should include those mortgages of 3 months in arrears at least, and then perhaps in reasonable bands such as 3-6 months, 6-12 months and so on. Lenders take notice of a loan as soon as one payment is missed, and accounting provisions would normally be made in bad or doubtful debts after 3 months. If all mortgages over 3 months in arrears were counted in this figure we would have a reasonable measure of stress being experienced by borrowers and lenders. It is obvious that this figure would be much much higher than the published one. It is also obvious that the CML has access to this data, but chooses not to publish it.
According to the CML the absurdly high arrears group which they publish was 169,600 at the end of 2010, down from around 194,900 a year earlier, and around 220,000 at the end of 2008.
This improvement in loans (which as I say are already critically-bad by the time they are recorded by the CML) over the last two years cannot be the result of homeowners settling their mortgage arrears. My experience in banking suggests that homeowners who are more than 3 months in arrears are unlikely ever to come good for the lender.
So if these mortgages are disappearing from 'arrears' where are they going? They are almost certainly not being repaid, perhaps a tiny number will be, so are they being repossessed? The number of repossessions is consistent with the fall in the number of these loans, but that would imply (approximately) that no more new arrears were being created in the period Dec 2008 to Dec 2010. Incomes available to service mortgage payments began falling and continues to fall quickly because unemployment is rising and incomes are squeezed in the private sector by falling hours, full-time work becoming part-time work, shorter working weeks, pay freezes, pay cuts, and prices are rising for food, fuel, & home energy. This implies that there should be an increase in the number of mortgages of this type and not a decrease, with new arrears appearing in this category faster than they leave it by repossession.
There is an interesting possiblity that mortgages are put into a box, a category, called something like 'in repossession proceedings' but which do not get repossessed. They leave the 'in arrears' category. They are non-performing for hundreds of days. They will never repay. They do not get repossessed because the government is against repossession and also controls the majority of the mortgage market, and perhaps because the mortgage is underwater and would crystalise a loss for the bank (and sometimes the taxpayer) which they cannot afford. Zombie loans?
In any event, it seems likely that there are a large number of mortgages which are under severe stress and will not be repaid, which are recorded privately but are not published. The net effect of all this is to massively understate arrears in the UK mortgage market. A true picture could be obtained by finding the number of mortgages of 3 months or more arrears.
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