Pilot project aims to reduce risk of house repossessions

UK Asset Resolution (UKAR), the body that runs the £80bn of mortgages bailed out by the taxpayer, is identifying customers who could get into trouble in an attempt to persuade them to change their behaviour now.

UKAR’s chief executive Richard Banks said a number of customers are barely managing at the moment and they need to think about how they will cope in the future.

“Some people won’t cope when interest rates rise, but for others there are remedies,” he said.

“They need to think about what is their most important debt. It’s not the credit card, or renewing their Sky subscription, or going out for the latest mobile technology, it’s their mortgage.

“They have been protected by low interest rates, but the consensus is that rates will start to rise late next year. We are taking a much more pro-active stance,” he said.

He added that the UK is yet to see the impact of the public sector cuts which will come in over the next few months.

Around 90 per cent of UKAR’s customers are paying their payments on time, but Mr Banks is keen to help the 10 per cent that are struggling.

A good indicator of those who may have trouble in the future is a change to or cancellation of the mortgage direct debit in an attempt to juggle finances.

UKAR is also checking with credit agencies to see when customers are getting into trouble with other debts.

“At both Bradford & Bingley and Northern Rock Asset Management we are running a pilot and are phoning customers and asking them how things are going,” said Mr Banks.

“We are also asking them what their plans are for when interest rates go up. Repossession is the last option for us. We want customers to look at their finances and change their behaviour.”

In the pilot scheme around a third of customers have said they are glad UKAR called them as life is tough.

“These customers are significantly less likely – around five times less likely – to go into arrears than customers we haven’t spoken to,” said Mr Banks.

UKAR’s plan is to phone 2,000 customers a week to prepare them for the shock when rates start to rise. The general view is that rates will start to increase steadily over a two to three-year period by half a per cent each time. Rates could stabilise at four to five per cent, which could add hundreds of pounds to customers’ monthly mortgage payments.

Mr Banks said there is also a significant chance of a double-dip recession when rates start to increase.

He added that in some cases lenders have been too soft with customers who are in trouble.

“When a customer has long term problems and they are given more time it can actually increase their indebtedness. That’s not being fair to them,” he said.

UKAR continues to see a small increase in repossessions, but arrears have stabilised and over the past three months it has seen a small decline.

The number of customers more than six months in arrears at the end of May was 23,288. The equivalent number at the end of July was 22,372, a reduction of 916 accounts.

This reflects two activities. First, some customers are moving into repossession, which is why UKAR has seen a small increase in repossessions. Second some customers have managed to reduce their arrears position and have moved back into less than six months in arrears.

Following new research by influential ratings agency Standard & Poor’s that found homeowners in the North are 35 per cent more likely to fall into arrears than borrowers in the South, Mr Banks said UKAR has also seen a North-South split.

The Yorkshire Post has been highlighting the divide in economic fortunes in its Fair Deal campaign.

“There is a very distinctive ‘red belt’ in the North compared to London and the South East,” he said.

Last month UKAR warned that higher fuel bills, surging food prices and unemployment could lead to a rise in its bad debts.

B&B reported a surge in first-half underlying pre-tax profits to £152m from £83.6m a year earlier as bad debt writedowns fell. Its charge for bad debts dropped by £117.4m to £44.1m.

Prediction of worse to come

UK Asset Resolution’s state-backed loan books, nationalised at the height of the credit crunch, have benefited from the 0.5 per cent base rate.

“This is an artificial situation and it gives some people some relief that interest rates are lower,” said Richard Banks, the chief executive.

“However, with VAT, petrol and food price increases, disposable incomes are already being hit.

“People are having to modify their behaviour already.

“We are predicting that because of the general increase in the cost of living, over the next six months there are going to be more customers who become distressed and fall into arrears.”