The Scottish Government

« Previous | Contents | Next »

Listen

MORTGAGE ARREARS AND REPOSSESSIONS IN SCOTLAND

EXECUTIVE SUMMARY

1. The project had three main objectives:

• to assess the numbers of repossessions ¹ in Scotland and the trend over recent years. This involved a review of the main sources of repossession data
• to investigate mortgage lenders' policies and practices
• to gain a better understanding of the experiences of those suffering arrears and repossession.

2. A principal reason for commissioning the research was the steep rise in numbers of repossessions between 1994 and 1999 shown by two indicators. One was the number of repossession orders granted in the courts, as shown in Civil Judicial Statistics (CJS) records. The other was the results of annual surveys of its members carried out by the Council of Mortgage Lenders (CML). The figures were different, CJS showing much higher numbers and a steeper trend. Although lower, the CML figures still implied cause for concern.

3. The research included the following elements:

• a literature review. This identified little based on Scottish research. However, the English and UK based research was relevant and valuable in setting the research agenda. Generally, the findings were consistent with this research in the areas that were common to both
• collation and analysis of sheriff court records of repossession orders from 1994 and 2000
• a postal questionnaire survey of lenders
• an interview survey of ten lenders
• in-depth interviews with 53 borrowers who had experienced serious arrears and, in many cases, repossession.

4. A relevant initiative in this area is the introduction of the Mortgage Rights (Scotland) Act 2001, which became law in December 2001. This allows borrowers to present their circumstances to the court and seek additional time to pay or to find alternative accommodation. Up to that time, and during the period to which the research refers, a repossession order would be granted following failure to pay.

5. Other considerations of relevance to policy in this area were:

• Mortgage Payment Protection Insurance (MPPI) is intended to provide a private sector safety net. However, MPPI can only cover some of the risks and at present only about 23% of house buyers have it.
• an expansion to the availability of Mortgage to Rent schemes is planned. These allow a housing association to buy the home of someone in arrears. The household then pays rent which, unlike mortgage repayments, can be assisted by income support
• the CML statement of practice for the handling of arrears and repossessions has existed since December 1991 and its use is required under the Mortgage Code. This is a statement of good practice for lenders and intermediaries. Amongst other things, considerate treatment of borrowers in arrears is stipulated.

Repossession data: sources, numbers and trends

6. Only a tiny proportion (between 0.2 and 0.3%) of those with mortgages in Scotland are affected by repossession. The table below shows repossession figures from the CJS and CML data. The steep rise between 1994 and 1999 is evident, especially for the CJS indicator.

Note
* A reliable CML figure is not yet available.

7. The study found that the CJS figures were not reliable indicators of either numbers or trends of repossessions. The principal reason for this was that they reflected the number of orders granted and many of these (c60%) did not lead to repossession. It also appeared that there were errors and inconsistencies in the data collation and that the very high rise between 1994 and 1999 may have been partly a result of under-recording in 1994. Even if that were not the case, this data would not serve as a reliable indicator of trends because the figures would vary as a function of the proportion of orders resulting in repossession. This could change at any time in response to lenders' practice. It is very likely that the introduction of the Mortgage Rights (Scotland) Act 2001 will impact significantly on the use of legal action by lenders and on the outcomes of cases so, without further research, the ongoing significance of the data would be difficult to assess even if it were more reliable and easier to interpret.

8. The findings relating to the CJS figures were drawn from the collation of court records and information provided by lenders on numbers of court orders applied for, granted and acted upon. The collation sampled records in a sample of courts: Glasgow, Edinburgh, Aberdeen and Falkirk. The resulting data were not repossessions (they were orders granted) but they reflected the trend shown in the CML survey figures quite closely.

9. CJS figures have risen because lenders have made more use of section 24 actions (which will be included in the CJS statistics) as distinct from calling up notices and default notices (which will not necessarily be included).

10. An objective of the research survey of lenders was to estimate the total number of repossessions in 1999 and 2000. The table below shows the estimates alongside the CML estimate for 1999. The CML figure for 2000 is not available yet.

11. Neither survey obtained results from 100% of lenders. The research survey grossed up the results using estimates of market share of those who responded.

12. The research figure in 1999 is significantly higher than the CML figure. While it is not possible to determine exactly why this is so, a significant factor will be the survey coverage. The research survey covered secondary lenders and non-CML members and these were excluded from the CML survey. It is also likely that the research survey expansion process will have incorporated some approximation and that there may be a little double counting when more than one lender lent on a property.

13. Considering all the factors, it seems certain that the true figure lies between the survey estimates, and is probably closer to the research total. This implies a working estimate of about 3,800-4,000 cases in 1999. This is a judgement, albeit one formed within the constraints of the survey estimates.

14. With respect to trends, the research suggests that the 1994-1999 increase in the CML figure of 70% (from 1820 to 3102) may be a reasonably reliable estimate. However, it also appears that trends should be interpreted with great caution. The number of repossessions recorded in any year is a function of historical as well as current factors. Such factors include

• the number of mortgages extant at that time. The number of repossessions must be a function of this as well as social, economic and administrative factors
• the distribution of maturity of these mortgages, which is a function of rises and falls in the market over time. The likelihood of repossession is higher in the early years of a mortgage
• lending policies over the years prior to the indicator year
• social, administrative, economic and legislative changes over the years prior to the indicator year.

15. In the case of the 1994-1999 trend, factoring out the large increase in the mortgage market size in that period reduces the rise from 70% to 48%. Taking account of the increasing proportion of mortgages at a vulnerable age (about 1-8 years) is not possible because of lack of data, but some illustrative calculations suggested that the impact could be considerable, possibly reducing the underlying trend to about 25-30%.

16. This is a much reduced indication of the likelihood of repossession. However, it is also notable that the trends are volatile and do not seem susceptible to interpretation, given the information available.

Court Data Investigation

17. In addition to allowing a review of the CJS figures, the collation of court records yielded the following significant findings:

• nearly all repossession cases are granted in favour of the pursuer and are short, with sixty per cent being completed in less than two months from the time the case comes to court
• defended cases take longer, but few borrowers defend proceedings, appoint solicitors or appear in court
• eighty per cent of repossession decrees were granted on properties within seven years from when the standard security was registered on the property
• none of the defenders obtained legal aid in any of the cases we examined. Obtaining legal aid would be difficult because few borrowers would have any chance of defending their case successfully.

Questionnaire and interview surveys of lenders

18. The questionnaire survey covered lenders with an estimated 73% share of the Scottish market. The results reflected a great variety of lenders, in both size and lending characteristics. Its scope included the quantitative information on court orders and repossessions summarised above. The total number of loans estimated from the returns was 984,418, which validated quite well against the CML survey and Scottish Executive published figures.

19. The number of repossessions per lender reported for 1999 varied widely (from zero to 979). Losses were incurred by lenders on three-quarters of repossessed properties. Over half of repossessed properties incurred losses of more than 20% of the loan outstanding before repossession.

20. Nearly all lenders had less than 5% of their mortgages over three months in arrears. Of the mortgages over 3 months in arrears, 12% were over a year in arrears. Lenders' perceptions of the main factors leading to arrears and repossession included financial over-commitment and mismanagement, job loss and marital breakdown. A feature of repossession was poor quality, or reluctant, communication from the borrower.

21. Arrears and repossessions were usually handled centrally. This has led to standardisation of procedures, e.g. action being triggered by a pre-set number of months in arrears. All the lenders interviewed stressed that they dealt with each case on its merits before a decision to repossess was made. The final decisions to repossess could be made by only a small number of people in any lending organisation, and in most cases were reviewed by a head of department.

22. Lenders said that detailed checks were made before lending. Mostly these involved credit scoring. Some lenders made these checks themselves and others commissioned brokers to 'package' loans for them. However, it appeared the nature of the customer base, i.e. many first-time buyers and a higher proportion of high LTV seemed to have more bearing on the level of repossessions than the lender's arrears and repossession policies.

23. A high loan to value (LTV) ratio appeared to be a feature of mortgages at risk of repossession. Nearly half had LTV of 100% and 69% had LTV of over 95%. Low property value was also a feature: 40% had an original valuation of 30,000 or less. Seven per cent were originally purchased under the Right-to-Buy scheme. All these factors imply low-income borrowers.

24. Lending policy varied: 50% lent three times one salary. Only 5% said the multiplier was lower, but others referred more generally to affordability. Joint multipliers were even more varied in size and structure. It appeared that joint mortgages brought a risk when one partner's income was insufficient to meet the repayments. Job loss, starting a family and marital breakdown could mean the loss of an income.

25. Lenders said they provided advice to borrowers in difficulties. However, this would often involve charging for the service. There was wide variation in charges for telephone calls, letters and counsellor visits. With some lenders, substantial charges could build up quickly. However, some lenders operated a maximum charge. Perhaps the charges could account for some of the poor communication from borrowers.

26. Lenders have pointed out that charging borrowers in difficulty for advice and administration services is a means of avoiding those costs being met indirectly by those who do not default. Whether this is cost effective is a judgement for lenders to make. Some borrowers may prefer to take out loans with lenders whose charging policy would limit the additional burden placed on them if they got into difficulties. The costs of a more accessible service to those in difficulties may be offset by savings from a reduced incidence of repossessions. The research does not provide evidence on these factors or on the balance of cost-effectiveness.

27. Although lenders wished to be flexible, their priority was to get the arrears paid off. Possible means of avoiding repossession were:

• payment holidays were mainly intended for maternity leave and would not suit many borrowers. The debt would only increase, as interest would be charged
• extension of mortgage terms would be allowed by some lenders but it would have long term implications and cost the borrower more
• withholding redemption costs if the borrower changed lender was not an option generally allowed by lenders. Anyway, few lenders would take on a mortgage in arrears
• capitalisation of arrears was a cosmetic device, because it took the arrears off the books but left the debt to be paid. It would cost more in the long term
• voluntary sale was not encouraged as a rule, though it could be considered for some customers.

28. The process of repossession did not always involve the courts. On average, it appeared that about 20% of repossessions were achieved without court action, which is needed for eviction rather than repossession. Many court orders obtained were not used and it appeared throughout the research that the threat of repossession was used as a stimulus for repayment, or at least for communication.

29. Following the sale of repossessed properties surplus situations could occur, but borrowers were not likely to get in touch with lenders in either a surplus or a shortfall situation. Lenders were prepared to tell borrowers about the sale price of their property, but in most cases had no contact details.

30. Most lenders felt uneasy about the impact of the Mortgage Rights (Scotland) Act 2001. Legal action was perceived as an effective means of tackling arrears. Possibly about 15% of applications to the court are never completed and, of the applications granted, only about 40% result in repossession. The implication is clear - without the potential for possession, or an alternative measure, lenders' problems with mortgage arrears would be greater. The possibility was raised that lenders would adopt more stringent lending criteria.

Survey of Borrowers

31. Contacting and obtaining interviews with borrowers in difficulties and borrowers who had been repossessed was difficult. Those who came forward were, to an extent, self-selecting and, furthermore, no lender perspective on the viewpoint of these borrowers was obtained. This was therefore not a representative survey and it cannot be used to derive either a reliable picture of all those who have experienced arrears or a balanced assessment of the relationships between lenders and borrowers. What it does provide, however, are illustrative examples of individuals', usually adverse, experiences. This met the needs of the research, to identify the characteristics of those in difficulties through examination of specific examples.

32. A finding that was consistent with other research, and which caused no surprise, was that the experience of arrears and, especially, repossession was extremely distressing for all the households involved.

33. The characteristics of the borrowers in the sample included the following:

• more than half were first time buyers and a quarter had bought under the Right-to-Buy scheme
• nearly two-thirds were second generation homeowners
• the average length of time between purchase and repossession was six years
• half had borrowed at 100% LTV or higher. The majority had an endowment mortgage
• most of the homes were of low value.

34. Only about two-thirds had taken any formal advice before taking on their mortgage. In retrospect, some thought it had been inadequate. Many of the borrowers said they had not understood the mortgage packages and had not appreciated the risks involved. Despite the high loan to value ratios, and possibly because of the lack of purchase advice, two thirds had not considered house purchase risky. Many took advice during their period of financial difficulty; usually from Citizens Advice Bureaux, local authority homelessness officers and money advice centres.

35. Many borrowers interviewed were dependent on brokers' advice and recommendations, and did not shop around for products, lenders or, in some cases, properties. In retrospect, many borrowers were unhappy with the advice they had obtained from brokers.

36. Reasons for mortgage indebtedness commonly included: loss of employment, relationship breakdown, and financial over-commitment or mismanagement. Job loss was the commonest single problem.

37. Many of the borrowers had taken on additional loans following their mortgage. Sometimes this was for home repairs and improvements: at other times, it was to buy less essential items. However, debts were not taken on to pay the mortgage arrears. Many respondents felt that access to secondary credit was far too easy, and that more controls should be placed on levels of borrowing. Multiple indebtedness was a common feature of those whose homes were eventually repossessed.

38. A common characteristic of those who were repossessed was that they suffered from a range of interacting difficulties, e.g. job loss, health problems and relationship breakdown. Those who recovered were more likely to have a single problem that was resolved over time, such as temporary unemployment.

39. Another factor distinguishing those who recovered from their difficulties from those who did not was that support from family and friends was available. Often this help became available only when the lender had obtained a repossession order.

40. At the time of repossession, most borrowers were dissatisfied with their lender, saying they had been unsympathetic, inflexible and difficult. Some felt their debt problems were compounded by charges imposed by lenders looking to recover legal and administrative costs. It was suggested that better communication, more face-to-face contact and more debt counselling would have helped their situations. This is in direct contradiction to the perceptions of lenders who perceived that many borrowers were unwilling to respond despite their efforts to communicate. What emerges from this is a common view that early communication, advice and negotiation is necessary if the threat of repossession is to be averted.

41. Borrowers were generally positive about the Mortgage Rights (Scotland) Act 2001, although many said that it would have come too late for them, such was the irretrievable condition of their affairs by the time legal action was taken. Nevertheless, there certainly were instances where, for example, the opportunity to delay repossession action would have been useful. Also, the ability of courts to consider the defender's circumstances during a repossession action, while not seen as directly beneficial to the situation of most of those we spoke to, was seen as a useful means of making lenders consider their actions in a different way and potentially reduce the likelihood of court action being initiated.

Conclusions

42. The CML survey gives a reasonable estimate of trends: however numbers of repossessions may be a little low because it excludes secondary lending and non-CML members. An option is to validate the results with occasional surveys similar to that undertaken in this research. However, trend data is difficult to interpret and refers primarily to circumstances and policy in previous years. The Mortgage Rights (Scotland) Act 2001 is likely to have a marked effect on the use of legal action and the outcomes of cases and this will be reflected in the indicators.

43. It is difficult to envisage a policy that would dramatically reduce the likelihood of arrears that would not have the side effect of preventing all but the comfortably off from becoming homeowners. However, it seemed that some of those interviewed were very marginal cases. Nevertheless, the research identified some areas where action is being, or could be, considered. These are summarised below.

• ensuring the availability of legal aid or other independent support for defenders following the introduction of the Mortgage Rights (Scotland) Act 2001
• ensuring borrowers are aware of their rights under the act
• making the information and advice given to mortgage applicants, about the costs as well as the benefits of home ownership, more accessible and effective
• encouraging borrowers to take advice as soon as they get into difficulties, and to be more responsive to communications from their lenders
• increasing public awareness of the risks of credit, especially when debt is secured on one's home
• expansion of availability of the Mortgage to Rent scheme (as is planned)
• consideration of alternatives to or expansion of MPPI, which currently is generally considered not to be effective (a Government/CML/ABI initiative is exploring this)
• the charges made by some lenders for administration, advice and counselling are difficult for those in arrears to meet and may discourage communication
• more face-to-face communication between lender and borrower would be helpful
• lenders could adopt more cautious lending policies though, whatever their policies, the highest level of repossession is always likely to be found amongst those whose initial situation seems least secure. A related concern is the ease with which some borrowers could obtain secondary credit
• encouraging local authorities to adopt a more flexile attitude to homelessness applications from persons who have sold their homes to clear mortgage debt
• considering some form of short-term support for those whose problems might be temporary.

« Previous | Contents | Next »