David Prosser: Calm before the storm on mortgage arrears


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The Independent Online

Outlook It is hugely welcome that home repossessions are falling rather than rising, despite the crunch on household incomes we have seen during the first half of this year.

And for now, the downwards trend ought to continue. When Lord Young, appointed last year as a Government enterprise adviser, said that, despite the recession, people "had never had it so good" his insensitivity cost him his job – but at least on the measure of the cost of mortgages, he was right. The unprecedented low level of interest rates have meant fewer people have got behind on mortgages than in previous downturns.

Other factors have helped too. In particular, mortgage lenders have come under significant pressure to show forbearance – to avoid repossessing defaulting borrowers' homes in all but the most extreme of circumstances. That has undoubtedly flattered the figures.

We should not be complacent, however. For one thing, the policy of forbearance stores up trouble for the future. Lenders are postponing taking action against struggling borrowers, not forgiving them their debts – indeed, in many cases, the amount owed will bespiralling because of interest charges and penalty fees.

Moreover, interest rates will not stay at this level forever. As the Bank of England's Inflation Report made clear again this week, there is now no prospect of a rise in the cost of borrowing before 2012, but rates will begin to creep as soon as the Monetary Policy Committee judges the economy can cope.

Richard Banks, the chief executive of UK Asset Resolution, the body that controls the mortgage lenders nationalised during the credit crisis, has this summer warned of the potential for a "tsunami" of repossessions once low rates and forbearance begin to unwind – on the latter, by the way, he says many lenders have been too lenient for their own good, and for the good of customers.

In the past, repossessions have always spiked up during recessions and receded as the economy has recovered. This time around, that profile is set to be reversed.