Shadow of the 1990s as economic woes hint at repossession surge

Published on Thursday 29 July 2010 15:34

SCOTLAND could be heading for a new repossessions crisis as public-sector cuts and rising unemployment threaten to tip thousands of struggling borrowers over the edge.

And with experts predicting lenders will soon run out of patience with those in arrears, only low interest rates are preventing an early nineties surge in the number of people losing their homes, it has been claimed.

Shelter Scotland, the Consumer Credit Counselling Service (CCCS) and Citizens Advice Scotland (CAS) are all increasingly concerned at the prospect of a new surge in repossessions as a possible double-dip recession looms. Keith Dryburgh, social policy officer at CAS, said its bureaux across Scotland helped nearly 3,500 people with mortgage arrears problems in 2009-10.

"With unemployment still rising and significant public- sector cuts in the pipeline, we are greatly concerned that the continuing economic turmoil will cause more and more clients to face the loss of their home," said Dryburgh.

He pointed out that, despite greater lender forbearance and historically low interest rates, last year was the worst for repossessions since 1996. "As interest rates inevitably rise and public-sector cuts kick in, it is a significant worry that we will see another rise in repossessions in Scotland," said Dryburgh.

The Council of Mortgage Lenders forecasts 53,000 repossessions this year, up from 47,700 last year and double the number just three years ago, but short of the 1991 peak of 75,500.

However, an Oxford University report released this month warns that repossessions could reach 175,000 within two years, given the worst-case scenario of sharp interest rate hikes and unemployment going as high as 11.4 per cent next year.

While the bleakest scenario may be over-pessimistic, some fear that other factors - including a fresh property market slump and growing pressure on household incomes as government spending cuts kick in - could combine to send repossessions back towards the peak of 1991. The situation is likely to be aggravated in October when Support for Mortgage Interest payments for those who have lost their jobs is halved from 6.08 to 3.09 per cent.

In all, the portents are ominous, believes Graeme Brown, director of Shelter Scotland. "A large number of people are only two pay packets away from losing their home.

"Now with public-sector jobs and UK government mortgage support schemes both due to be cut, we face the very real prospect of thousands of people struggling to pay their mortgages."

Tens of thousands of households in Scotland are having to use their credit cards to pay their mortgages or rent, according to Brown."For those homeowners, even a small increase in interest rates could tip them over the edge towards homelessness."

Brown cited lender forebearance as a major reason for the lower than expected level of repossessions over the past two years. Conversely, when lenders begin to crack down on those in long-term arrears, repossession will be unavoidable for many people.

Brown said: "Either the employment market needs to pick up so that homeowners can repay their arrears or lenders will have to find an alternative arrangement. For example, this could involve mortgage to shared equity schemes, or lenders could even become landlords themselves by entering the mortgage to rent market on a meaningful scale."

Delroy Corinaldi, director of external affairs at the CCCS, said it was counselling a growing population of people with suspended repossession orders on their homes which lenders have chosen not to enforce despite clients failing to meet court stipulated payments. But the relative leniency displayed by lenders was partly determined by the markets, he added. "In addition, some lenders are increasingly showing reluctance in allowing struggling debtors to switch to interest-only mortgages as a short-term solution, giving people the necessary breathing space to find other more sustainable options."

Government schemes have also contributed to keeping repossessions down, albeit to a limited degree. The Scottish Government said its homeowners support fund (HSF) has enabled nearly 600 families in Scotland to stay in their homes in the last two years. The HSF covers two schemes - mortgage to shared equity (MTSE) and mortgage to rent. The current mortgage to rent scheme, launched in March 2009, helps those facing repossession sell their home to a registered social landlord and become tenants. The MTSE scheme was introduced in March 2009 and enables struggling borrowers to retain ownership of their home and enter into a shared-equity agreement with the Scottish Government, having had their secured debt reduced to a manageable level.

Shelter Scotland believes the Home Owner and Debtor Protection (Scotland) Act 2010 will prove more effective. The act, coming into force in force in September, will require lenders to demonstrate that they have undertaken all reasonable alternatives to repossession before going to court. Brown - who wants the act extended to protect tenants in rent arrears - claimed the legislation would address the "cruel and inhumane dash to court" taken by secondary lenders when their customers fall into arrears,

"Unemployment is still rising across the country and Scotland simply can't deal with another wave of repossessions. This act protects both the homeowner and the taxpayer. By making the best practice of good lenders a requirement for all, this legislation can help shape a better lending regime in the future."

The act will also allow CAS advisers to act as lay representatives for clients in repossession proceedings and Dryburgh is optimistic that this will help prevent repossessions. But he warned: "It is imperative that the government minimises the impact of public-sector cuts to ensure that such cuts do not lead to an increased number of people facing the loss of their home."

HOW TO AVOID THE TRAP

1.Organise your budget

Review your financial situation and see if there's anything you can do to improve it. Can you cut back on spending without hardship? Can you get a better deal on your mortgage, energy bills or other essentials? Is there any way of increasing your income? Are you entitled to any benefits?

2 Face up to the problem

If you receive a letter from your mortgage lender, don't shove it to the back of a drawer. Get advice instead - visit your local CAB or money advice centre, or call Shelter Scotland's helpline on 0808 800 4444.

3. Talk to your lender

If something goes wrong and you can't meet your monthly mortgage payments in full, it is vital that you tell your lender immediately. If you don't want to phone, download a sample letter from the Shelter Scotland website.

4. Pay what you can

Even if you can't afford your entire monthly payments, show that you are willing to pay what you can. If your lender knows you are trying to pay off your loan it should allow you more time to sort out your money problems.

5. Find out what your options are

Repossession should be a last resort for your lender, and they have to consider ways to prevent it happening. For example, you could decide to sell your home yourself, or apply for a debt payment programme to give you more time to pay back your arrears. You could also see if you're eligible for the Scottish government's mortgage to rent or mortgage to shared equity schemes.