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Lender caution is the right approach to handle pandemic risks – Hunt

by: Bob Hunt, chief executive of Paradigm Mortgage Services
  • 05/10/2020
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Lender caution is the right approach to handle pandemic risks – Hunt
Earlier this month, the Financial Conduct Authority (FCA) outlined how firms should approach those customers who continue to have payment difficulties.

 

In particular the FCA highlighted how lenders might go about restructuring mortgages by extending terms, moving them from repayment to interest-only, and the like.

It urged firms not to take a broad brush approach and instead focus on the individual needs of each borrower before coming up with a specific solution for them.

Needless to say, there is clearly a role for advisers here with those clients who might well have taken payment holidays and be wondering what to do next. 

At the same time, the Intermediary Mortgage Lenders Association (IMLA) presented an upbeat picture on the levels of arrears we might anticipate when borrowers come out of their payment holiday periods. 

The lender trade body said its members expect 0.5 per cent to five per cent of these borrowers to enter arrears while 1.5 per cent would be able to make interest-only payments if not their full repayment amount.  

Understandably, there was also an air of caution about what might happen next.

But it seems somewhat inevitable that – unless lenders want to move ahead with an increase in possessions –  forbearance will continue to be the name of the game in the months ahead. 

IMLA’s suggestion seems to be that, if lenders continue to exercise restraint in both the way they handle borrowers in difficulty and the lending policies they pursue, then we have the best chance of getting through this period with a minimum of long-term arrears and worse. 

That seems eminently sensible, and may well provide lenders with a degree of breathing space, particularly from those who feel that a lack of product or operational capacity is not allowing the market to make the most of the conditions we have – for example, people wanting to move or buy and a stamp duty holiday to take advantage of. 

 

Managing government support 

It would clearly be positive to have more high loan to value (LTV) products to choose from but we also cannot expect lenders to be gung-ho in the middle of a recession when a wide range of government support schemes are still ongoing, and we simply can’t know the full impact when they are brought to an end 

The furlough scheme will finish this month and replaced by the new job support scheme.

Then we’ll get a much fuller idea of unemployment levels, the income impact, and what might also happen to house prices which – while showing a strong foundation currently – could also begin to falter. 

Arrears and possession numbers may be low coming out of this payment holiday period but add in what could happen next to the economy, once that government support tap is turned down, and we’re into different territory.  

To that end, I’m not surprised that lenders don’t want to potentially add to those numbers by dint of the lending decisions they are currently making, hence the recent decisions to lower the risk they take via lower maximum LTVs and changes to affordability criteria.   

It’s possible to understand the individual issues this causes for borrower clients and to see the bigger picture in terms of why lenders might be operating in this manner, with limited product editions, small tranches of funding, and a focus on managing distribution. 

Unfortunately, during this period, I happen to believe it’s necessary.

It’s not possible to see what’s round the bend in the road ahead just yet, and until we do, driving safely has to be the right approach.  

 

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