Repossessions on rise as debt and fraud hit home

THE housing market lurched into a new crisis last week when it emerged that repossessions have soared. Some hit by homelessness are borrowers who bit off more credit than they could chew. Others may have been tricked into paying over the odds through fraudulent activity by developers.

The sad news for those drowning under a sea of debt is that last week's 0.25% cut in base rates, which should trim £16 off a typical £100,000 mortgage, may do little to help.

As the credit crunch deepens, banks are becoming more choosy about who they lend to. Those with big debts will find the cost of credit rising for them, and rather than seeing reductions in their home loan bills, many face more pain in the months to come.

More than 27,000 houses were repossessed by banks and building societies last year, the highest number since 1999 when institutions took back the keys to 30,000 homes.

However, the Council of Mortgage Lenders is anxious to point out that the number currently losing their homes remains a fraction of the 75,500 kicked out onto the streets at the height of the last property recession.

It did, though, warn that repossession numbers would rise again in 2008 as the economy slowed, the credit crunch deepened and more borrowers discover they were victims of fraudulent deals.

However, beneath these modest-looking figures lurk some worrying trends. Though the housing market may have slowed over the last few months, it is still moving normally in many areas.

Historically, repossessions only rise when the market has been stone-cold dead for longer than a year, and borrowers are forced to abandon all hope of solving their financial headache by selling their way out of trouble.

Indeed, house sales remained buoyant for much of 2007, only tailing off towards the very end. The December house move figures are not due out until later this week, but transactions are expected to be maintained at around 1.05 million for the year, only a fraction down on the 1.1 million in 2006.

Furthermore, according to the Halifax, house prices ended the year up 9.4% across the UK, largely due to strong growth in Scotland.

This compares with more modest property inflation of 8.3% in 2006 and 5.7% in 2005. Yet in the two previous years, repossessions only reached 22,400 in 2006 and 14,600 in 2005.

So why did repossessions climb in 2007? And how honest is it of mortgage experts to attempt to minimise the seriousness of the trend by contrasting this data with that of the depths of the last recession when prices fell for six years?

By the end of 1989, for example, 17 months after the abolition of favourable mortgage tax breaks which triggered a boom which almost immediately went spectacularly bust, we were still only seeing 15,800 repossessions. We endured two more years of sharply collapsing house prices before they reached 75,500.

Mortgage broker Ray Boulger at Charcol said: "Despite recent interest rate rises, most home buyers are not currently at any risk of losing their homes. I suspect that those getting into difficulty now fall into a few groups who have over-committed themselves.

"There is also evidence of fraudulent activity, particularly in the area of new developments."

Boulger believes that most buyers will be left untouched by repossession fears. He said: "It would take house prices to seriously dive before the bulk of the market has anything to worry about."

So who are those most at risk of repossession?

Up to their eyes in debt

Lenders only repossess borrowers whose debts are bigger than the value of their property. Given the sharp rise in prices over the past couple of years, this should not apply to many purchases.

However, some individuals may have over-committed in the first place by borrowing a 100% mortgage. They have then quickly fallen behind with repayments, pushing them into arrears.

Other borrowers may have begun with more modest loans, but then used their property to raise more cash to buy new cars, holidays or fund their lifestyle.

They will now struggle to fend off repossession. According to the CML, 129,000 borrowers are more than three months in arrears with payments.



Sub-prime borrowers

As many higher-risk lenders pull out of the market, borrowers with poor credit histories coming to the end of affordable deals will now find these impossible to replace. They may have no alternative but to languish on their current lender's standard variable rate, which is likely to prove a very painful experience.

Such householders face a terrifying few months, and more repossessions are sadly inevitable.



New flats and developments

Many such properties were blatantly overpriced, and their prices have tumbled as the market has softened, leaving borrowers to take fright and hand back the keys.

However, evidence is emerging that special incentives and offers muddied the waters even further.

The prices some of these flats were purportedly sold for were registered on the Land Registry at inflated values. For example, if a developer knocked £50,000 off the price of a unit selling at £200,000, the flat was still registered for £200,000, even though the purchaser only paid £150,000.

This gave other new buyers an entirely false picture of the true value of these properties. Meanwhile, lenders have reduced the amount they are prepared to lend on these properties, making selling your way out of trouble more problematic.

Sadly, crooks and cowboys always move in to make a killing at any boom.

Buy-to-let

Not only have buy-to-let investors been particularly vulnerable to fraudulent activities and tumbling new development prices, but rents are falling too in some areas.

There is mounting evidence that in some areas buy-to-let landlords are rushing for the door and handing back their keys to the bank.