Lender forbearance is a tricky subject, explains Bob Young, managing director of Capital Home Loans
I’m a great believer in constant communication with customers through a variety of means whether that’s phone calls, emails or increasingly face to face visits. The latter means of communication has been a mainstay of the way CHL deals with customers, particularly those who have slipped into arrears or may be on the verge of payment difficulty of whatever kind. It’s fair to say that our focus for the past couple of years has been all about collections, ensuring that our borrowers have all the support they need to pay and to effectively keep them as the owners of their properties.
How you go about this however is a moot point and certainly not an exact science. Different lenders have different methods and this is becoming far more apparent. Indeed, there has been a lot of talk recently about arrears levels and the forbearance policies of lenders, particularly the big banks. It seems to me that we have turned a corner in terms of the focus on what lenders should do and how they should treat those borrowers who may be missing payments.
Back post-Credit Crunch there seemed to be a willingness to accept that lenders should show the upmost flexibility when it came to dealing with, what is an ugly phrase, ‘delinquent borrowers’. Even though we clearly saw large rises in arrears and possessions post-Crunch and during the recession, if lenders had operated in their traditional manner rather than adopting such forbearance policies then the levels of possessions in particular would have been far greater than the numbers we have seen. Indeed, look at any of the figures released by the CML with regard to arrears and possessions in any sector and the comment will be continually made that forbearance has ensured that such numbers have been less than might have been initially anticipated.
Of course it also makes perfect sense for lenders to practice these policies given that possession is ultimately a course of action taken as a last resort. No quality lender in their right mind will want to possess especially if they can keep the borrower on their books paying the mortgage. Now, clearly there are a variety of options available to lenders in how they maintain this, for example, moving loans from repayment to interest-only, providing payment holidays, accepting a lesser amount than the full mortgage payment for a set period of time, etc. The point is that this type of action is not to be set for an indeterminate amount of time these are short-term measures that should be reviewed regularly.
Post-Credit Crunch the government and the regulator appeared to sing from the same hymn sheet on this type of policy clearly it makes sense to keep arrears and possessions as low as possible during harsh economic times. Now, however, we seem to have something of a change in emphasis with both the FSA and the IMF recently expressing some concern that lenders (actually the big banks in particular) are continuing to use forbearance policies to mask the true extent of the numbers of problem borrowers they have on their books. The suggestion is that, because the banks are not transparently reporting the numbers of borrowers who have been dealt with via a forbearance policy, we are not getting a proper picture of the true level of bad debts currently within our major financial institutions. Of course this is of most concern when we have state-owned banks – the question is being raised around how susceptible these banks are to another financial crisis if the reality is far different to the public pronouncements?
As a lender which uses forbearance policies ourselves I can understand the FSA’s concern. In dealing with any borrower who is having difficulty paying their mortgage we have to weigh up all the facts when we look at how they are dealt with. Of course, we want to ensure that they can keep hold of their property and continue to pay the mortgage, however there is a discernible difference in buy-to-let lending in that we can use a Receiver of Rent to take things forward. This is not the case in the residential market so the issue of forbearance is brought into even sharper focus – yes lenders will want to keep borrowers in their homes however at what point does a lender become culpable in heaping more detriment on the customer by continuing this policy long after the situation has become critical. In any number of cases the right course of action may well be to say, ‘Everything that can be done has been done and to continue as we are would effectively only be storing up greater trouble for the borrower later down the line’.
Of course coming to, and making this, decision is not easy and the borrower may not thank the lender at the time, however later on (with the benefit of hindsight) they may well do. It’s absolutely important for our banks to get this balance right and clearly the FSA wonders whether these tough decisions are being made frequently enough by some or if they are using forbearance as a long-term measure, when this is clearly not what it is designed for.
Turning off the life support in this way is never easy, however we are now sufficiently down the line from those dark days to be able to make those decisions based on individual cases without worrying about the bigger ‘how bad can this period be?’ question. At the time it was probably right for lenders to be ultra-flexible and, based on a case by case basis, flexibility is still important, however clearly the regulator has decided that, for some banks at least, it is time they used forbearance in a far more sensible and suitable manner.
