Repossessions in the secured loan market have fallen rapidly since 2008, but Q1 of this year saw them leap by 50%, followed by a 32% increase in Q2 – so are lenders starting to take a harder line against borrowers in arrears or is there another reason for the increase?
The headline figures of 50% and 32% might look startling but are somewhat less shocking when the actual number of repossessions are taken into account.
Figures from the Finance & Leasing Association show there were 226 secured loan repossessions in Q1, up from 151 in Q1 of 2012, while Q2 of 2013 saw 183 repossessions, compared to 139 in Q2 of 2013.
Fiona Hoyle, head of consumer finance at the FLA, says although repossessions grew in the first half of 2013, it was from a very low base and still represents only 0.06% of the total number of FLA secured loan mortgage contracts.
“In fact, 2012 saw repossessions at their lowest level since the financial crisis began,” she says.
“The number of repossessions in 2013 as a whole is expected to be at a similar level to that reported in 2010 and 2011.”
Back in May, the FLA estimated that there would be 750 secured loan repossessions in 2013.
This might be more than the 628 recorded in 2012, but is very few in comparison to the 1,612 the market saw in 2008.
Since October 2008 lenders have had to comply with the Pre-action Protocol for Repossession as set out by the Civil Justice Council. This protocol covers cases going to court for possession and aims to ensure that a lender and a borrower act fairly and reasonably with each other in resolving any matter concerning arrears, and to encourage more pre-action contact in an effort to seek agreement between the parties on alternatives to possession.
“Second charge lenders remain committed to helping customers in financial difficulty to avoid repossession action wherever possible,” Hoyle says.
“The regulatory requirement to only take possession as a last resort remains a cornerstone of how lenders manage collections activity,” she adds.
So is the latest increase in repossessions anything to worry about?
House price increase
John Grimbaldeston, director of products and marketing at mortgage servicing and third party administrator HML, believes the recent house price boom in the South of the country could have caused the increase in repossessions.
Figures from the Office for National Statistics show that in August the house price index stood at 185.8, surpassing its previous peak of 185.5 in January 2008.
In the 12 months to August 2013 UK house prices increased by 3.8%, up from a 3.3% increase in the 12 months to July 2013.
The ONS has attributed the annual house price increase in England to London house prices, which were up by 8.7%. Excluding London and the South East, UK house prices increased by 2.1% in the 12 months to August 2013.
“Historically some of the secured loan portfolios will have been sat on marginally negative/positive equity,” he says.
“But as house price inflation has tipped up over the last 18 months, especially in London and the South East, there will have been cases where secured loan lenders now have sufficient equity in the property for repossession,” Grimbaldeston says.
When it comes to repossessions, the first-charge lender will always get first dibs on any equity in the property, making it illogical for a secured loan lender to repossess if there is not going to not be enough equity in the property and there is going to be any kind of shortfall debt.
“At HML we have £1.6bn worth of shortfall debt that is sat on our portfolio, so even before anybody looks to second charge the first-charge shortfall would need to be recovered,” Grimbaldeston says.
Simon Stern, director of Prestige Finance, however does not think the recent increase is down to lenders in the current market and has nothing to do with the recent house price increase.
“A lender cannot suddenly change its forbearance policy because house prices have increased – I can’t speak for other lenders but in our case 100% not,” he says.
Stern says the increase is more likely down to lenders who are not currently lending.
“The FLA’s data represents around 85% of the industry but some of those loan companies are no longer lending. The current lenders in the market meet regularly and I am not aware of any of them reporting a significant increase in repossession and we are certainly not,” he says.
Despite the increase in repossessions, the Financial Ombudsman Service says it has not seen an increase in the number of complaints relating to secured loan repossessions – which is a good sign for the industry.
The ombudsman received 925 complaints about secured lending in the last financial year (2012/2013). This is the first year it has recorded secured loan complaints as a separate product due to the increase in complaints and so far, in the first three months of this financial year (April – June 2013) it has seen 228 new cases about secured lending.
However a spokeswoman for the FOS, says: “Our teams have not seen any real increase in the number of repossessions happening when a secured loan repayment is not met.”
She says the increase in complaints is due to issues around affordability and contractual issues.
The repossession forecast in the first charge mortgage market might look optimistic, with repossessions in the first six months of 2013 falling to their lowest level since the latter half of 2007- standing at 15,700, according to the Council of Mortgage Lenders.
But the future for secured loan repossessions is less clear. There does not seem to be any evidence of an increased urge among secured loan lenders to go to repossession and the lack of extra complaints to the FOS appears to back this up.
With current lenders still following the pre-action protocol, it will be interesting to see what happens to the FLA figures over the coming twelve months with the picture hopefully becoming clearer as to why this is.
With interest rates at a record low of 0.25% and UK unemployment showing signs of falling, it is questionable as to whether people getting into financial difficulty is the reason behind a rise in repossessions.
Although the increase in repossessions the market has seen this year is from a very low base, the 50% increase in Q1 is not something to be ignored and if the trend seen in 2012 is duplicated in 2013 it means repossessions are likely to rise further in Q3 and Q4.