Lenders get tough on debt-ridden Britain

Published 03rd Aug 2007

Banks are cracking down on the UK’s army of debtors as rising borrowing costs put an increasing strain on finances, latest figures showed today.

Home repossessions and county court judgements are rising, while personal insolvencies drop - indicating that banks are becoming increasingly intolerant of debt plans structured under Individual Voluntary Arrangements (IVAs), and impatient with those falling behind on mortgages and other borrowings.

The Council of Mortgage Lenders (CML) reported that the number of home repossessions across the UK surged to its highest level for eight years in the first half of the 2007. Banks and building societies took back 14,000 homes in the six months to June 30 - up nearly 30 per cent on the same period a year ago.

The CML blamed a sharp rise in sub-prime lending - typically home loans to consumers with poorer credit ratings.
Michael Coogan, CML director general, said: “The greater risks inherent in sub-prime lending are resulting in significantly higher levels of repossession in that part of the market compared to mainstream experience.”

Northern Rock, Britain’s third-biggest lender, recently reported a doubling in the number of repossession cases to 1,536 for the first half of the year. Abbey has reported a 10.5 per cent jump, Bradford & Bingley 31 per cent and Alliance & Leicester a 78 per cent surge.

Meanwhile, creditors are also getting tough on unsecured debts, with official figures showing a sharp fall in the number of people being allowed to reduce their borrowing by entering into an Individual Voluntary Arrangement (IVA).
The Insolvency Service reported a 15 per cent reduction in the number of IVAs issued in the second quarter of 2007 to just 10,698.

An IVA allows a debtor to stave off bankruptcy by coming to an agreement with his creditors to pay off a percentage of his debts over a given period - but many lenders now believe the terms are too attractive to the borrower.

Mike Gerrard, head of personal insolvency at Grant Thornton, the accountant, said: "There are some quite big creditors who haven't been happy with IVAs for a while, and some are now taking a tougher stance."

In a separate development, the Registry Trust reported that the number of county court judgments (CCJs) issued to consumers in England and Wales increased by 5 per cent in the first half of 2007 to more than 420,000.

Malcolm Hurlston, the chairman of Registry Trust, said most judgments are directly credit related and the rest are issued by utility companies or Revenue & Customs (HMRC). He said: "With high street banks continuing to see high bad-debt provisions, the use of the court system to recover debts looks likely to remain of key value.

"This continued increase gives a warning to consumers: if they do not pay their judgment debts within a month the details will be visible on a public register for up to six years. As a result they will find credit unobtainable or more expensive."

The news that creditors are getting tougher over debts comes at a bad time for beleaguered consumers. The Bank of England has increased the cost of borrowing by 1.25 percentage points to 5.75 per cent in less than 12 months. Many economists also expect the Bank to increase rates again before the end of the year. Each quarter point increase in interest rates adds around £25 to repayments on the average £100,000 home loan.

Howard Archer, chief UK economist at Global Insight, said “The pressure on many households is set to increase significantly. The cumulative increase in interest rates enacted so far by the Bank of England is yet to fully feed through to impact on borrowers. On top of this, a substantial number of homeowners will see their mortgage bills rise markedly during the second half of the year as the cheap fixed rates that they took out two years ago expire.”

He added: “Clearly, the higher that interest rates rise, the greater the danger that a growing number of people will be pushed over the edge and there is a clear need for many households to improve their personal balance sheets.”
Andrew Ellson

Source: ' Times Online '

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