Rise in home repossession orders continues

Home repossession orders rose again in the third quarter, raising concerns about the impact of higher interest rates and the fallout from the global credit squeeze.

New figures from the Ministry of Justice show the number of mortgage possession claims issued in the county courts in England and Wales rose by 1 per cent to 34,717 between July and September 2007 compared with the same period in 2006.

Court hearings do not always translate into actual repossessions as many borrowers agree a last minute payment arrangement with the bank.

However, the number of homes repossessed this year has already jumped to 14,000 in the first half of 2007, against 10,800 in the first half of 2006, according to the Council of Mortgage Lenders. The council has forecast that 30,000 properties will be taken into repossession in 2007 and it expects this to rise to 45,000 in 2008.

The figures suggest that mortgage debt is fast becoming more of a problem for consumers than credit card and personal loan debts.

In the past two years, banks have written off millions in bad debts due to overindebted consumers being unable to pay back credit card bills and unsecured loans. Mortgage arrears have remained relatively low, however, partly because low unemployment has enabled consumers to service their mortgage debts.

The credit squeeze that started in August has virtually closed the mortgage securitisation market, hitting those banks that rely on wholesale funding for mortgages. As a result, lenders have been forced to rein back on mortgage lending or have increased their rates, resulting in much higher monthly payments and added financial strain for borrowers.

This is acute in the subprime mortgage market where lenders rely on wholesale funding and where rates are therefore rising.

Figures also released yesterday showed the number of people becoming insolvent fell by 5 per cent in the third quarter compared with the same period 2006, according to the Insolvency Service.

But experts said the fall might mask deeper problems because banks were putting consumers on informal debt management plans rather than letting them become insolvent - leaving the banks to write off the outstanding debts. Pat Boydon, partner in the business recovery services practice at PwC, said he expected insolvencies and repossessions to rise next year as house price inflation slowed and as consumers struggled to withdraw equity from their homes to repay credit cards and other debts.

"I would expect to see possession orders and insolvencies go up next year. In areas like second charge mortgages, many lenders have pulled back from the market so people can't get themselves out of difficulty as easily," he said.

Louise Brittain, partner at Baker Tilly, said: "It is probable that this fall in numbers [of insolvencies] is a false dawn. We expect that at the beginning of next year, there will be a sharp increase in formal insolvencies, in the wake of Christmas spending."

The latest Insolvency Service figures showed that there were 15,833 bankruptcies - up 2.2 per cent from the same period of 2006 - and a large drop in individual voluntary arrangements which fell to 10,239 in the third quarter, 14.3 per cent down on the same period in 2006.

However several experts have pointed out that this drop in IVAs could mask the true number of people facing financial difficulty.

The Association of Business Recovery Professionals says many debtors are being forced by banks and creditors into informal debt management plans, which are not legally binding and can last indefinitely.