HML. Homeloan Management Ltd

There is no doubt that the regulator will take a more pragmatic approach to lending in the future so rather than waiting for the MMR, lenders should get on with changing their policies now and use targeted analysis to pinpoint areas where risk management resources will be most needed.

 

Lending has and always will be about managing risk but the events of the past few years have raised fundamental questions about how lending institutions should go about it.

 

When the Financial Services Authority recently announced its Mortgage Market Review proposals would not be published until the autumn, its chairman Adair Turner explained the issues relating to risk that the regulator is trying to come to terms with.

 

He asked the question that if the sector knew in advance that lending to a customer group with specific characteristics had a 15 per cent chance of resulting in arrears and repossessions, should it still lend to them and put the non-defaulting 85 per cent at a disadvantage.

 

“We will protect the 15 per cent from repossession, but at the expense of restricting the 85 per cent of that group to make a stretching but affordable commitment,” Turner told the audience at the FSA’s annual public meeting in June. “The analysis required to enable an informed debate on this issue needs to be of the highest quality and clearly presented.

 

“This means we will not be publishing our proposal before early autumn but I trust that when it is forthcoming, it will generate the engagement that this important question deserves.”

 

When Michael Coogan, director-general of the Council of Mortgage Lenders, stepped down from his post in July he made reference to Turner’s question.

 

He also asked whether the market needs to change its attitude and instead of focussing on helping the aspirations of the many, should instead protect the minority from the potential of detriment.

 

“To date, we have always emphasised the former approach but with the experience of the last few years, it is a valid question whether risk aversion rather than risk management should be the watchword for regulators in the future,” says Coogan.

 

Most in the mortgage industry have welcomed the MMR delay and are encouraged that the FSA is willing to listen and engage in a debate. And while we may have to wait a few months for the details, the general approach the FSA is likely to take is already clear.

 

When it published its business plan earlier this year, it became evident that the regulator was going to adopt a more pragmatic approach.

 

“We recognise the need not to take a ’one size fits all’ approach and the need to balance the advantages of simplicity against those of flexibility,” its business plan says.

 

“For example, we acknowledge that our initial proposal to have a fixed 25-year term for assessing affordability, while easy to administer, may not be appropriate, given the range of different individual circumstances.”

 

The FSA is therefore going to be far less formulaic and will put greater emphasis on ensuring that lenders are managing risk prudently and appropriately, given the circumstances their borrowers find themselves in.

 

 

The answer lies in understanding the specific risks facing different groups of borrowers and then demonstrating to the regulator that a particular course of action has been followed as a result of that understanding.

 

Take arrears and repossession management, for example. In the immediate aftermath of the credit crunch, lenders were asked to exercise forbearance wherever possible. But the regulator has now confirmed that in some instances forbearance may have helped to make a bad situation worse.

 

Applying blanket rules is not the answer. Individual circumstances have to be taken into consideration and the more intelligence lenders can gather about factors that have a bearing on arrears and possessions, the better.

 

Earlier this year, HML published the UK’s first repossessions forecast with data provided on a regional basis and in July it extended the forecast to include an analysis of the type of properties most likely to be repossessed.

 

Forecasts are based on an analysis of 320,000 live mortgage accounts and the initial forecast of 33,257 repossessions for the year has proven accurate, based on the half-yearly figures.

 

The CML has not amended its forecast of 40,000 repossessions, even though its latest data shows that if the current trend continues there will be 33,760 repossessions this year.

 

HML’s approach has been to produce data that shows regional variations for lenders to use when adapting their arrears and repossession policies. For example, it has identified that repossessions in Northern Ireland are going to be nearly three times as high this year as the national average. On the other hand, repossessions in the South-West are going to be almost half the national average.

 

When the types of properties most likely to be repossessed were analysed, it became clear that borrowers living in terraced properties are those at greatest risk.

 

But if you think this may be stating the obvious, an analysis of repossessions in London shows that borrowers in flats are the most vulnerable group and detached properties in the capital are equally as likely to be repossessed as terraced properties.

 

By producing such intelligence lenders can more accurately target their limited arrears management resources and ensure help is given to those groups who need it most.

 

There is a danger that the lending industry will just sit back and wait for the MMR pronouncement in the autumn, but it needs to adapt its risk management systems now. There is no need to wait and much to be gained from acting now.