Outlook: Forbearance may be storing up trouble to come

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The Independent Online

Who would be a banker just now? It's not simply that you are public enemy No 1 – now you're not allowed to ask many of your customers to pay back what they have borrowed from you. Certainly not Greece, whose debts you are required to roll over (though you must not call it a default), and not your mortgage customers back home either, to whom you must continue to show "forbearance".

The latter issue is one that concerns the Bank of England's new Financial Policy Committee, which now has the job of watching out for threats to financial stability. Its first set of recommendations, published on Friday, included a call for banks to disclose more information about the forbearance they have granted struggling borrowers at the behest of this Government and its predecessor.

Yesterday, the Governor, Sir Mervyn King, developed the theme, telling MPs that he did not expect there to be a sudden spike in repossessions once the Bank's Monetary Policy Committee finally begins to raise interest rates, flatly contradicting the head of UK Asset Resolution, who is in charge of £80bn of mortgages and warned of a possibility of a flood of bad debt cases.

Sir Mervyn's argument is that a shift to rate rises is only likely once other more positive trends have been established, such as an improvement in the jobs market.

Still, even leaving that argument aside – though note that the Council of Mortgage Lenders is already predicting a rise in repossessions of more than 12 per cent next year – we should at least question who actually benefits from forbearance.

In the short-term at least, the answer seems obvious – the beneficiaries of the policy are those who might otherwise be losing their homes. Well, that's fine, but it is not as if struggling borrowers are having their debts written off. Rather, the size of their borrowing is rising by the day and a good number may not be able to avoid repossession in the end, especially if interest rates start to rise. In the meantime, they face the debilitating stress of living at their lender's mercy.

As for the lenders, they too are short-term beneficiaries of forbearance. For as long as they do not call in these borrowings, they can avoid writing them off as bad debt. It is, of course, a problem deferred rather than avoided.

In fact, the crisis in Greece and the case of the UK mortgage market's hidden nasties have much in common. Both problems have prompted policymakers to come up with a similar fudge in order to get past a difficult bump in the road, but in doing so there's a real risk they are turning the possibility of a much more severe crash to come into an inevitability.

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