Originally published in BSA Society Matters magazine.
What an incredible and worrying few months it has been for everyone. Who would have thought that in the New Year a mystery virus creating headlines in China would shut down the entire UK property market a few months later?
Responding to a crisis: payment deferrals
Understandably, as it became clear that many businesses would be closed down for a temporary but undetermined period, people were becoming increasingly concerned about their incomes and paying their bills. BSA members responded incredibly quickly and proactively to support borrowers by announcing that borrowers would be able to take a payment holiday of up to three months if their income was affected because of the virus.
This was pivotal in providing confidence, reassurance and support to an unprecedented number of borrowers facing financial difficulties within an incredibly short period of time. At the last count over 1.8 million payment deferrals had been granted. For many, their initial payment holiday will shortly come to an end and lenders will be contacting customers to explain their options going forward.
What’s next? The transition phase
On 2 June, FCA published updated guidance for firms that outlined the regulator’s expectations in the treatment of customers, this is now in force and will remain so until the end of October. Transitioning these customers back to resuming monthly payments or offering further bespoke support is the next challenge awaiting members, certainly no mean feat.
BSA research tells us that thankfully the majority of customers should be able to resume payments at the end of their initial payment deferral. It is worth noting that a large proportion of customers took the deferral as a precautionary measure. It is clearly in their best interests to resume payments as soon as possible to ensure that they do not suffer ongoing or longer term payment difficulties.
We welcome the regulator’s emphasis on customers’ resuming payment where they can by placing partial payments on an equal footing to payment deferrals, this will encourage customers to pay what they can afford to. Keeping customers in their homes during a public health crisis is something our members fully support, so we agree with the extension of the possession’s moratorium.
A couple areas still need further clarification, one being the credit reference reporting process, although we are hopeful that this will be resolved shortly.
While more than 1.8 million payment holidays have been granted, it is important to remember that this policy was implemented to act as a bridge for those borrowers financially affected by the crisis. It was also introduced prior to Government announced support packages for borrowers and businesses.
The outlook for many borrowers is better than many feared, data from Koodoo shows that around 75% of borrowers expect to have their income fully restored by the end of the initial three month period. In addition, more than 25% of customers took the payment holiday as a precaution against future loss of income.
Furthermore, a YouGov survey commissioned by the BSA shows that 67% of borrowers are very or fairly confident that they will be able to meet their mortgage payments at the end of the three month payment holiday.
Therefore the outcome for the majority of customers will likely be capitalisation of the deferred payments over the remaining term.
Socially distanced valuations?
Another factor causing difficulties in the market has been the lack of physical valuations available. As the BSA became aware of the lockdown measures being applied in a number of our European neighbours, we began discussing with the surveying community and the Royal Institution of Chartered Surveyors (RICS) about how remote valuations could work within the Red Book guidelines.
We’re grateful to our colleagues from BSA Associate panel management firms Connells, Gateway and Countrywide for working quickly and carefully with societies to implement a range of desktop solutions and Automated Valuation Models (AVMs) - including for a number of building societies that had not previously used the technology.
Following on from this, societies understandably started to prune back product ranges and reduce LTVs to more comfortable levels, given the lack of physical inspections. The sheer number of criteria changes in a short space of time is likely unprecedented. I’m happy to see that the latest changes coming through are to reintroduce products to the market now that we’re allowed out of the house again, in England at least, with Scotland, Wales and Northern Ireland taking more phased approaches.
The road to recovery
If I could map out a clear road to recovery in the housing market I would, but it is an almost impossible task at this point in time. There are some encouraging early signs - estate agents reporting a flurry of enquiries, lenders telling us very few cases have dropped out of the pipeline and brokers reporting a pickup in interest.
Undoubtedly we are in a state of suspense with Government income support lasting until October, but the hope is we get that ‘V’ shaped recovery after all.
What all of this means for house prices remains uncertain. The RICS is maintaining its view that there is ‘material uncertainty’ in the market, but is meeting twice a week to discuss the evolving picture.
Lenders are slowly moving back up the LTV curve, with a number going to 80-85% LTV, though higher LTV products may take longer to come back due to concerns about house prices. There is a question whether Government will revive a Guarantee scheme in some form to get those 90-95% LTV products back on the market.
In terms of support for customers, we believe that Government should reduce the waiting period for Support for Mortgage Interest back down to 13 weeks. As it is now in the form of a loan, the impact on the public balance sheet should be minimal and this could provide a lifeline for homeowners if the economy does have a weak period. Similarly, if they could revamp a form of mortgage rescue scheme we think this would be good to have ready to go ahead of time, rather than waiting for signs of distress.
At the BSA we will continue to monitor the situation and welcome feedback from members as the effects of lockdown unwind over the next weeks and months.