By Richard Pike, Chief Sales and Marketing Officer at Phoebus Software Ltd
In my various external meetings and conversations undertaken in my role here at Phoebus Software, one thing that is apparent is divided opinion on whether the mortgage market is in for a rough ride when it comes to increasing arrears.
Those that service more historic back-books, many of which have borrowers on some “interesting” products and rates, have been preparing for an increase in arrears activities for some time.
Lenders with more prime books and a lot of equity built into the overall portfolio have that as protection against losses. But more recent lending at higher loan-to-values could cause an issue when many borrowers are used to a very low interest rate. If they are on variable rates that are on the increase and they have less disposable income due to the rise in the cost of living, borrowers may start to feel the pinch and struggle.
Many analysts and economic commentators seem to think that a 4% to 5% base rate environment is quite possible. Combined with double figure inflation, this is going to be both daunting and challenging for newer borrowers.
The Bank of England has stated that 40% of borrowers will be affected by higher rates over the next 12 months through being on SVR linked products. In addition, many borrowers are coming off fixed rates in the next year.
Gross domestic product (GDP) fell 0.1% in March and 0.2% in April but unexpectedly grew by 0.5% in May. This suggests the economy can cope with higher interest rates, which some analysts think means the next Bank of England base rate may rise by 0.5%. at the next meeting on 4 August.
But it’s not just the UK we should be looking at – the global economy is just as important as this will have a knock-on effect on the UK economy and stock markets.
In June, the World Bank warned that global growth is being “hammered” by the war in Ukraine and lockdowns in China. It drew similarities to the 1970’s when rate increases were imposed to control escalating inflation across many countries, which triggered the 1982 global recession.
Clearly no-one wants to see this scenario, but should we be preparing at least for a downturn?
One of the outcomes of the cost-of-living crisis, which many will argue has been caused by external factors, will be the government undoubtedly enforcing on lenders regulatory requirements to deal with borrowers in financial hardship. This will also be underpinned by the Consumer Duty Directive, which based on the drafts already seen, will have a large focus on vulnerable customers, arrears and forbearance.
In summary, all of the above leads to potentially rocky times ahead, and we are seeing an upsurge in the recruitment of collectors in the market. However, lenders with experienced, modern, in-house servicing platforms should be looking at utilising areas such as in-built workflow to automate as many collections processes as possible. This will keep the number of collectors down and allow cases to be dealt with by exception.
The second half of this year will set the scene for 2023. Time is running out to consider whether servicing platforms are fit for purpose and whether they should be upgraded or replaced.