The credit cycle is turning. Our own experience shows that the current strains in the system are becoming apparent in forbearance calls and while the volumes remain small the increase is significant.
Even more so when you remember that the first people to get in touch have invariably been here before so know what to do.
Many will not be calling at the moment who should be or who are very worried.
Certainly, even traditionally conservative lenders I speak to are seeing an uptick in the numbers of calls wishing to change payment mechanisms, dates which are early signs of trouble to come.
UK Finance recently reported the growing problem. In its most recent Household Finance Review for the second quarter of the year, it highlighted that despite the total number of customers in mortgage arrears falling for the fifth successive quarter, further and larger increases in arrears can be expected as the cost-of-living crisis grows.
Of course, Q2 figures, much like the regulator’s own reporting for the period, are a snapshot of a moment in the past – we are all focussed on what is coming and it would be a brave lender who looked at past successes as a guide to future performance at the moment.
Swap rates as they stand will mean many who will be coming off 2-year fixed rates of 1.5% secured 18 months ago will be in for a real shock. Inflation of the like we are seeing is here to stay.
A combination of factors both global and local are ensuring inflation is difficult to contain. From the cost of addressing climate change, (Hurricane Ian and wildfires in Dartford!) to our aging population, a particular feature of Western economies, being less inclined to save and more likely to spend, the drivers of post pandemic inflation are systemic.
UK Finance acknowledged that at an aggregate level, cost-of-living pressures have not yet affected households’ ability to pay for their monthly outgoings, but it highlighted two indicators showing signs of this trend reversing.
“Reportable mortgage arrears take some time to build up and so inflation early in the year, as well as the first interest rate rises, were not expected to feed through to arrears figures at that stage,” UK Finance said.
My own view is that if we maintain full employment, we might yet dodge some of these bullets, but this is no time for complacency – especially since many people working in Financial Services will never have experienced a downturn in the credit market in their careers.
We have already seen how parts of the mortgage process have suffered in this new volatile environment (product launches, withdrawals etc) in part because they have lain relatively untested over the past decade or so. Arrears will be no different. Can lenders deal with a significant increase well enough to ensure the right outcomes for all concerned?
Staffing up and skilling up in arrears management will provide challenges for every lender trying to help someone in an arrears. Delivering good customer outcomes has never been more important and this part of the customer journey should be no exception.
Mark Davies is managing director of BCMGlobal
