British Repossessions Soar

Home repossession orders in Britain could reach a 17-year high as the credit crunch compels banks and building societies to act

by Sean O'Grady

The number of properties being repossessed has soared as the effects of the credit crunch push court orders from banks and building societies to record highs, figures will show this week.

The tally of 95,374 repossession orders during 2007 was the highest since the housing crash of the early 1990s—when they peaked at 142,905 in 1991. In the last three months of 2007, the number of home repossession orders climbed by 6.3 per cent to 25,008.

However, that figure did not fully reflect the housing downturn and the credit crisis, which became more acute in March. On Friday, the Ministry of Justice will reveal the repossession figures for the first three months of 2008. The shortage of mortgage finance, particularly for the 1.4 million homeowners needing to renegotiate fixed-rate deals this year, and the general economic slowdown will almost certainly push even higher the number of families losing their homes.

The Bank of England said last week: "Many high-risk borrowers may find they are unable to re-finance expiring fixed-rate mortgage deals and will instead move on to the standard variable rate. This will result in a jump in their average effective mortgage rate of about 2.5 percentage points." However, many borrowers will not be able to afford their new commitments.

While the number of actual repossessions remains low and well below the number of repossession orders, because financial institutions and householders usually find ways through debt problems, the two nonetheless generally follow the same trend. More than 22,700 properties were repossessed in 2007, some way off the high of 75,540 seen in 1991, but three times their nadir in 2005. A large number of repossession orders now could mean a jump in repossessions later this year and in 2009.

Buyers who took out mortgages worth 100 per cent or more of their property's value over the past 18 months are particularly vulnerable to repossession, which leads to bankruptcy as well as homelessness.

Ministers are concerned about the impact of repossessions on economic stability and on local authorities obliged to rehouse people. A fortnight ago the Chancellor, Alistair Darling, and the Housing minister, Caroline Flint, summoned the Council of Mortgage Lenders to a summit where the CML agreed that lenders would "continue to treat customers fairly and sympathetically", although banks have shown an increasing reluctance to engage in Individual Voluntary Arrangement proceedings, sometimes referred to as "bankruptcy-lite".

Lenders pledged to help property owners in distress by "pro-actively identifying at-risk borrowers facing repossession". They also discussed "the valuable contribution that shared-equity schemes can make".

The political impact is also clear. At the weekend, the Prime Minister, Gordon Brown, said there would be further initiatives soon—probably more advice on how to avoid repossession and the extension of schemes such as the "Open Market HomeBuy", which offers shared equity in property to low-paid public sector "key workers" such as nurses.

In a sharp reminder to Mr Brown that the credit crunch persists, Graham Beale, chief executive of the Nationwide, said: "I cannot see 100 per cent loan-to-value loans returning in the market in the medium term—let alone the short term."

The withdrawal of such mortgage products has drastically reduced the number of first-time buyers, who in any case often find house prices an impossible stretch. Six months of falling property values do not so far appear to have increased buyer interest. The Bank of England's Financial Stability Report said the number of new mortgages being agreed was about half what it was this time last year.

Professor Stephen Nickell, chairman of the National Housing and Planning Advice Unit, and an adviser to Mr Brown, warned: "What we are seeing now is a loan strike. It is almost as if we are back in the bad old days of mortgage rationing.

"No one will lend to first-time buyers. What unnerves me is the fact there are good borrowers out there and people are not lending them money."

Provided by The Independent—from London, for Independent minds worldwide