Repossessing homes will become harder for U.K. banks seeking to recover properties when borrowers fail to keep up with payments on mortgages in the wake of the coronavirus pandemic, said analysts.
Recent guidance from the Financial Conduct Authority, or FCA, told banks to offer a range of "tailored repayment options" to mortgage borrowers affected by the coronavirus after the existing scheme offering a three-month payment holiday is withdrawn at the end of October. Customers will still be able to claim a three-month mortgage payment holiday, which in some cases could be their second or third deferral, up until the deadline.
So far 2 million mortgage holders have taken advantage of the payment holiday scheme, according to UK Finance, which represents banks. Among the U.K.'s largest banks, Lloyds Banking Group PLC had granted around 472,000 mortgage holidays as of June 30, while some 240,000 of NatWest Group PLC-provided mortgages were paused, according to data compiled by S&P Global Market Intelligence.
Though the FCA said banks and building societies will return to the tailored support they provided under its normal rules, the regulator also said lenders' approach needs "to reflect the uncertainty and challenges" that many customers will face in the coming months.
This could see lenders take a different approach to borrowers who are struggling more than they did in previous crises, said Numis Securities analyst James Hamilton.
"The banks will have to make decisions about how to deal with borrowers who lose their jobs, but also those who are 'underemployed' — customers who normally work on commission or bonuses, for instance, who have not been able to work as normal during the pandemic. Banks will have to decide whether to support borrowers who may have been in a good job for years but in a sector which has undergone profound change as a result of the pandemic, like cabin crew staff for airlines," he said.
New social contract
Banks are likely to take a more nuanced approach to borrowers who find themselves in financial difficulty than they might have done in the past, as the FCA's proviso on the need to reflect the uncertainty of the pandemic indicates, said Hamilton. In an era of low interest rates, banks are likely to offer some borrowers in trouble the chance to switch to an interest-only mortgage as an alternative to forbearance, for instance, he said.
However, lenders are likely to take a cautious attitude to repossession of properties where borrowers fail to pay.
"There were virtually no repossessions during the credit crisis, unlike in the recessions of the 1980s and 1990s," said Hamilton. "Lloyds, the biggest mortgage provider, was state-owned then and the government made it quite clear that mortgage-holders were also voters so overall there were relatively few repossessions. Banks will have to be very careful about repossessions and since courts have been closed there's likely to be a delay before legal action commences in earnest.”
John Cronin, analyst at Goodbody Stockbrokers, agrees with Hamilton, stating in a note to investors that the FCA's guidance could herald a new approach for banks.
"We think a new social contract is emerging — the pain taken by certain segments of society will not be tolerated by the political system and someone will have to pay. We think repossessions will be more difficult, banks will have to work harder than ever with customers to achieve reasonable forbearance measures," wrote Cronin.
Banks are likely to see a rise in mortgage forbearance when the regulator-approved mortgage holiday payment scheme ends next month.
"Undoubtedly, there will be more forbearance, when borrowers pause or reduce their payments, as the payment holiday scheme comes to an end. I don't know anyone who thinks any differently," said Hamilton.
S&P Global Ratings said it estimates that between 55% and 90% of U.K. borrowers have resumed paying their residential mortgages following payment holidays related to the economic impact of COVID-19.
The FCA noted that while the majority of customers who have had a payment holiday are expected to resume full repayment, "many will remain in financial difficulty." It also said that while the payment holiday scheme will finish at the end of October, it "will keep this under review depending upon how the wider situation develops."
The FCA warned banks that they should not take a "one size fits all" approach, and said the range of options that could be offered to struggling mortgage holders included extending the repayment term or restructuring the mortgage, while those borrowers most at risk should be referred toward debt advisory services.
Those mortgage holders taking payment holidays will see their requests reflected in their credit files, which could affect their creditworthiness. This is despite the government and the FCA initially telling consumers that a payment holiday would not affect their credit scores, which affects eligibility for future loans.
There has also been a change in approach to mortgage payment holidays by the Bank of England. When the scheme was first introduced, the BoE wrote to mortgage providers explaining that since coronavirus-related payment deferrals were being made widely available and were therefore not based on individual financial circumstances, they were not necessarily good indicators of significant increases in credit risk, credit impairments or defaults.
Marker of risk
However, following the FCA's latest announcement, the BoE said that the tailored forbearance arrangements for borrowers who are not able to resume payments in full immediately after their payment holiday ends is as good an indicator of a significant increase in credit risk as forbearance was prior to the pandemic.
The FCA's guidance comes as the U.K. mortgage market shows signs of recovery. The BoE said mortgage lending increased 6.74% month over month in July to £17.4 billion, though it was down 18.1% year over year. House prices were up 3.7% in August compared with a year previously, according to Nationwide Building Society's House Price Index.
"House price rises might be hitting the headlines now, but in the second or third quarter of next year, it's going to look very different," said Hamilton.