We find ourselves in the first recession since 2009 which, at a 20.9% reduction in growth, is the worst in Europe and North America. However, since lockdown, restrictions have been eased, the outlook is improving, but clearly the economy remains volatile.
Surprisingly we seem to be in a property mini-boom, which appears to be part fuelled by both relocation and the stamp duty freeze. A concern is that if the 31st March 2021 is a finite date for the end of the stamp duty freeze, will this become another “dual-MIRAS” scenario of the late 1980s and house moves will suddenly stop as of the 1st April when people once again have to pay stamp duty. If we follow the MIRAS process through, we could then potentially hit a period of property depreciation, but most economists are predicting an increase in valuations next year of around 1%.
Historic recessions across the globe indicate that those that are able to, start to try and save money; this often means a reduction in debt and also strangely, an increase in investment activity as stocks are low. However, the enforced payment holiday programme across lending sectors sets a new precedent and we wait to see what the long-term effect of this government-driven policy will be. Chances are the lending community will be expected to continue with some fairly robust forbearance policies. What will be critical is that adherence will be audited and therefore lenders will need to keep a record of the forbearance provided together with the reasons why. This is an area PSL has invested in and developed during the pandemic which is creating a lot of interest.
With unemployment currently plateauing at 3.9% we wait to see the true effect on loan payment affordability. Undoubtedly certain sectors have started to recover fairly positively as proactive, well-managed relaxation of social distancing measures have commenced. But with some forecasters predicting a UK unemployment peak at 5%, whichever way we look at it, collections’ departments will be under a lot of pressure for some time to come. Those that have previously tested arrears and special servicing activities will be in good shape, as will those that have systems providing automated activities to ensure the “cradle to grave” collections process is as efficient as it can be. Those with self-service capabilities will clearly reduce inbound calls and this is also an area that PSL has invested in to develop a solution available to the whole market.
The Government is apparently 100% behind supporting borrowers for the long term, and that support is being passed on to lenders under a diktat to continue forbearance through their own policies. If you look outside of the UK however, there are some interesting policies in place.
If you take Ireland as an example, where we have Phoebus deployed, there are strict rules and appeals processes laid down around customer communications to borrowers in financial difficulties and those in arrears. At one point a maximum of three contact attempts per month were permitted, excluding normal primary servicing activities such as statement issuance. If a change of address became apparent, then normal chasing could re-commence.
Another policy that is not common in the UK but is in Ireland is the concept of “warehousing”. Following negotiation, and with a view to keep borrowers in their homes, this is where part of the loan is moved to a separate non-interest bearing “sub account”. Whilst still included within the overall loan balance and redemption figure, there is an expectation by the lender that this amount may get written off in the long term and is provisioned for accordingly.
In summary, the future holds many unknowns and strangely, we need to prepare as best we can for various unquantifiable eventualities. We have been through turbulent times before, and although we are riding out a particularly unexpected and severe downturn, we will come out of this stronger.
Our current experiences will assist in formulating future policy at both originations and servicing stages of lending which will reflect any lessons learnt, and this will mean both lending businesses and borrowers alike can be fully prepared for the upturn when it fully returns.