The Bank of England will today reveal how the credit crunch and squeeze on family budgets is pushing more people into arrears on their mortgages.
According to its latest Credit Conditions Survey, the default rate on secured loans to households – predominantly residential mortgages – increased "unexpectedly" in the first three months so this year, and "was expected to increase further over the next three months".
The banks face further losses from bad debts as the economy slows and the ability of families to service their debts declines. Bank write-offs on credit card debts grew in the first quarter, and are expected to rise further.
Almost four years since the credit crunch began and after countless government exhortations and initiatives, including Project Merlin, bank lending to small business remains "tight", says the Bank of England.
As the Bank's Monetary Policy Committee prepares to meet next week to decide its next move on interest rates, the Bank has clearly received warnings from banks and building societies that a hike in the cost of borrowing would badly affect their businesses.
The Bank reports: "Lenders had expected the default rate on secured loans to households to stabilise in the first quarter of 2011, after having fallen during 2010. But lenders reported that the default rate had increased in the first quarter, and was expected to increase again in the coming quarter.
"Lenders expressed concerns over the potential impact of increases in Bank Rate on default rates."
The Council of Mortgage Lenders said that the survey was in line with their expectations at the end of last year when they warned of a "modest increase in arrears and possessions... reflecting the continuing pressure on household finances, the persistence of cases of long-term arrears and the Government's decision to cut help for borrowers by cutting payments of support for mortgage interest."
Since then, the Chancellor has reinstated some help for those in arrears, and launched a modest scheme designed to help first-time buyers. But the generally uncertain outlook, especially for those in the public sector, continuing shortage of finance, stricter FSA rules and the very prospect of a declining market are likely to be strong depressing factors.
The arrears rates may also reflect a renewed tendency to "forbearance", where banks and building societies watch arrears increase without triggering a repossession, for fear of crystalising a loss. A recent court case in Scotland, Wilson vs RBS, has also slowed the rate of repossessions north of the border, and increased arrears.
The Bank's survey did show some relaxation on lending ratios for buyers; but most economists agree that the fundamentals remain loaded against a return to normality. Indeed, the problem may now be much more one of a lack of demand for credit. The Survey reported household demand for mortgages had continued to fall sharply in 2011, and was expected to fall again.
A Bank of England policymaker has suggested that the level of home ownership will be permanently damaged by the credit crunch, because the mortgage finance market has run out of "suckers". David Miles, an external member of the Bank's Monetary Policy Committee, said banks had boosted lending in the boom by making existing borrowers fund cheap "teaser" rates for new customers – "but eventually you run out of road – in terms of cross-subsidisation from the back book, you run out of suckers".
Shorter term, the Nationwide announced that house prices increased by 0.5 per cent in March, with a quarterly rate of increase of 0.6 per cent – partly due to a shortage of stock as the market is so slow. It commented: "This is unlikely to mark the beginning of a strong upturn in prices."Reuse content