Scottish Government

MORTGAGE ARREARS AND REPOSSESSIONS IN SCOTLAND

Chapter Five Questionnaire survey of lenders

Objectives

5.1 The objective of this component of the research was to survey all lenders operating in Scotland. Specific topics to be investigated included:

• the number of borrowers in default
• the extent of arrears of those in default
• the extent of losses on repossessed properties
• whether lenders use repossession actions more readily than they otherwise would as a tactic to encourage borrowers to pay.

Methodology

5.2. Lenders' policies and practices were investigated using postal questionnaires and follow-up face-to-face interviews. The postal survey was conducted between April and June 2001, although late responses trickled in until January 2002. The face-to-face interviews were conducted between November 2001 and January 2002.

5.3. A postal survey was conducted of all lenders in Scotland who had more than 50 standard securities registered in properties (both commercial and residential) in Scotland in 2000.

5.4. Some lenders responded to say they had no loans on residential properties in Scotland, but 33 lenders completed the questionnaires, representing a 73% market share. This is a reasonably high response, given the complexity of the information sought. Market share was estimated from the number of standard securities noted in the Register of Sasines.

establishing a comprehensive list of lenders in Scotland

5.5. The CML is the trade association for mortgage lenders in the UK. CML members are banks, building societies and other mortgage lenders who together undertake around 98% of mortgage lending in the UK. It was not difficult to identify the main mortgage lenders and to categorise them by their market share for the UK. An up-to-date inventory of all lenders who are CML members, with their contact details, is on the CML website ( http://www.cml.org.uk/). At the time of the research, the CML had 143 members in the UK as a whole and 58 Associate Members ¹¹. Not all CML members had mortgage customers in Scotland.

5.6. Identifying non-CML lenders was more difficult. CML were aware of only one Scottish based lender who was not a member and that was the Century Building Society, the second smallest in the UK. However, all lenders have to advertise, so a trawl was made on the internet, the yellow pages and other directories. In addition, the review of court registers identified non-CML lenders. A description of the process and a list of lenders can be found in Annex 4.

5.7. The process yielded a list of lenders in Great Britain that was likely to be close to comprehensive. The next stage was to identify which lenders had a Scottish portfolio and this was done using the Register of Sasines. This includes a record of lenders for residential private property sales in Scotland.

5.8. A search was conducted by staff at the Registers of Scotland of the register of sales for the year 2000. The list provided to the project was in an aggregate form, i.e. Halifax lent to 20% of buyers and the Bank of Scotland lent to 10%. The list required some cleaning: obvious commercial lenders and local authorities were removed, and entries such as Governor and Company of Bank of Scotland and Bank of Scotland were amalgamated. The final list of 297 lenders showed the estimated market share of each lender in Scotland for the year 2000. The largest ten are shown in Table 5.1.

Table 5.1 Main lenders identified from Register of Sasines

Notes

1. The percentage is calculated as a percentage of all Recorded Securities in that year. It should be seen as only an estimate of market share.

2. This corresponds with CML estimates of the largest lenders in Scotland.

3. Securities recorded in the Register of Sasines include all charges on a property. Therefore, this table does not refer to market share of primary mortgage lenders, but market share of all loans.

4. Bank of Scotland and Halifax Plc have now merged into HBoS.

5.9. This differs from the main lenders in the UK. The top six UK lenders ¹² are Halifax plc (including Birmingham Midshires and IF), Abbey National, Lloyds TSB, Woolwich plc (including Barclays) Nationwide BS and Royal Bank of Scotland (including NatWest, Direct Line, Virgin One). Clydesdale Bank and Bank of Scotland appear in the Scottish top lenders but are not included in the UK top six.

5.10. Many lenders identified from the Register of Sasines lent on only a small number of properties in 2000. Seventy-eight lent on only one property and 42 lent on two. Only lenders who lent on more than 50 properties were included in the postal survey.

5.11. It can be seen that no single lender, not even the Halifax, could exercise polices that would be likely to impact significantly on the market as a whole.

5.12. Addresses and telephone numbers of non-CML members were obtained from the Financial Services Authority (FSA) website ( http://www.fsa.gov.uk/), directory enquires and yellow pages on the web. Questionnaires were addressed to the 'Head of Lending', as advised by CML.

5.13. A complete list of all 89 lenders in Scotland was compiled from these sources. The list is included in Annex 4.

Questionnaire Design

5.14. The questionnaire is included in Annex 5. Comments from the Scottish Executive and CML were incorporated following issue of draft versions. Pilot versions of the questionnaire were sent by the CML to a small number of lenders.

5.15. The following topic areas were covered in the questionnaire:

• number/value of mortgage balances
• repossessions/arrears figures
• disposal of property/shortfall
• characteristics of lender
• policy on lending
• percentage of court decrees granted/implemented
• percentage of repossessions which bypassed the court.
• Response Rate

5.16. The initial responses were slow, as the information requested involved a quite a lot of work on the part of the lenders. Telephone reminders were undertaken after 3 and 6 weeks. Before the first telephone reminders, only seven responses had been received.

5.17. Seven lenders refused to respond, saying either that it would be too much work to fill in the questionnaire or that they were unable to supply a separate breakdown for Scotland. Five others said they only lent on commercial properties in Scotland and one felt the survey was inapplicable to them as they only dealt in equity release/withdrawal. Two lenders responded on behalf of another lender in the survey (Halifax and Leeds Permanent gave one response, as did Standard Life Assurance Company and Standard Life Bank). Lenders which were out-of-scope (i.e. did not lend on residential property in Scotland) were removed. The valid total of 'in-scope' lenders was 81.

5.18. Responses were obtained from the 33 lenders listed in Table 5.2. The final response rate was 41% of 'in-scope' lenders. A rough estimate is that the lenders responding represented 73% of the market ¹³. All the largest lenders responded except Woolwich Plc and Nationwide, who together account for 9% of the market.

5.19. Fourteen of the responses were from building societies, 10 were from banks, 2 from insurance/assurance firms, 2 were centralised lenders ¹⁴ and 5 were from finance companies.

Table 5.2 Estimated Scottish market share of lenders responding to questionnaire

Note

1. The estimate of market share is based on activity in one year, 2000, recorded in the Register of Sasines. It relates to the overall number of standard securities (loans) and not to the overall value.

2. It should be noted that activity data from one year only may be biased.

3. This table has been ordered according to market share.

Results

5.20. The survey results showed great variety amongst the lenders, both in size and in the characteristics of their lending.

5.21. The survey questions asked about the number and size of the loans secured on Scottish properties. (Loans were referred to as mortgages). However, since some lenders dealt in secured loans, the figures returned may refer to both mortgages and secured loans. Since lenders were not specifically asked to supply information only on first charges, second or third charges on properties may also be included in the figures. The inclusion of secured loans would tend to decrease the average loan size identified in the survey.

5.22. The smallest lender in the survey had a total balance of 100,000 outstanding in 2000, while another lender had 6,553 million. Over all the lenders, the total outstanding balance in 2000 was 27,711 million. It should be borne in mind that only those lenders with more than 50 standard securities took part in the survey. A summary of responses is shown in Table 5.3.

Table 5.3 Value of outstanding balances 1999 and 2000

Note

1. One lender gave 2000 figures only.

2. Loans refer to both secondary secured lending and mortgages.

3. The figures in this table represent the spread of answers given to the question asking the 'Total value of residential mortgage balances outstanding in Scotland on December 31 ^st 1999 and Dec 31 ^st 2000.

4. #This refers to 72.4% of the market as two lenders did not supply information on total value of balance outstanding - 2000.

5. *This refers to 64.6% of the market as seven lenders did not supply information on Total value of balance outstanding - 1999.

5.23. To further illustrate the variety of lenders, the average size of loan for each lender varied from circa 6,600 to circa 85,000 in 1999 and circa 8,700 to circa 80,500 in 2000. The figures were derived by dividing the total value of each residential mortgage balance by the number of mortgages outstanding. Overall, dividing the total balances by the total number of loans, the average was 39,000 in 1999 and around 41,000 in 2000.

5.24. The average number of loans outstanding for all lenders was 24,500 in 1999 and this had risen to 25,000 in 2000, reflecting the growth in the market at that time. The total number of loans outstanding in 1999 was 636,918 ¹⁵ (grossed up to 984,418 for 100% market size) and in 2000 it had risen to 751,923 ¹⁶ (grossed up to 1,037,135 for 100%market size). This confirms the growth in loans reported by the CML. To validate this, according to the Scottish Executive Statistical Bulletin (Housing Series) of December 2001, the stock of dwellings in Scotland was 2.305m in 1999 and 2.325m in 2000. Of these, 62.3% (1.436m) were owner occupied in 1999 and 63.1% (1.467m) were owner occupied in 2000 ¹⁷. According to the Scottish Household Survey, 61% of all homeowners (not all households) still have an outstanding mortgage and 39% have paid off their mortgages ¹⁸.

Table 5.4 Number of loans in Scotland

Notes

1. The validation figure is based on an estimate of 30% of the Scottish owner-occupiers owning-outright and Scottish Executive figures on owner-occupier stock (1.4 million in 1998), up-rated by long term growth rate of owner-occupier stock. Estimates based on Scottish Executive tenure figures, owner-occupier rate (63.1%) applied and total stock 2,325,000 in 2000 gives an estimate of 1,467,075 owner-occupier properties, with a reduction of around 30% owned outright.

2. * The research survey figure is lower than the validation figure by 2.3%. It was grossed up from returns representing approximately 64.7% of the market and it is likely that this has resulted in a minor discrepancy.

5.25. Considering that the estimates shown in the table are derived from different sources, they are reasonably consistent. However, it might have been expected that the research figure would have been the higher of the two. In the CML survey lenders were asked to observe the following note:

' All the loans secured on one principal security should, where possible be counted as one loan, ignoring the fact that different accounts may have been established for MIRAS and non MIRAS, initial and further advances or for fees and deferred interest'.

5.26. In contrast, the research figure may take in more than one loan on the same property.

5.27. A potential source of error lies in the grossing up. In the absence of other control data, the research findings were grossed up based on market share, using data extracted from the Register of Sasines. The Register of Sasines records standard securities on properties. There will certainly be double counting when there is more than one standard security on a property. Also, the figures are not consistent as the Register of Sasines reports securities recorded in one year (2000) while the survey records the total number of mortgages outstanding at one point in time in 2000. The grossed up figure should therefore be regarded as approximate. However, the verification data shown in Table 5.3 suggests that the method produced acceptable results.

5.28. Following the survey, a selection of lenders were asked whether, if a second or subsequent advance was made, a second security would be issued. This was to try to assess the effect of double counting in the Register of Sasines. All said that it would normally depend on the type of security held originally. If it was an 'all monies charge' securing not only the borrowing at the time but any future borrowing, then they would not need to take a new security, i.e. further advances could be made to borrowers which were inclusive within the first charge. However, if the future borrowing was not covered, or if was in a different name, then it was different product e.g. a secured personal loan then they would take out new security.

5.29. This did not enable the effects to be quantified but, when considered in conjunction with the data shown in Table 5.4, it suggests that the research and CML survey results are broadly comparable.

Arrears

5.30. Because of the diversity of both the number of loans and the dispersion of balances, the number of repossessions reported in the research survey also varied widely by lender. In 1999, this ranged from zero to 979 ¹⁹, (average 103) while in 2000 it ranged between zero and 722 ²⁰, with an average of 88.

5.31. All lenders except two had 5% or under of their mortgages over three months in arrears. Eleven per cent had none of their mortgages over three months in arrears (see Table 5.5).

Table 5.5 Lenders with mortgages over three months in arrears

5.32. Both lenders with greater arrears levels than 5% were finance companies dealing with secured loans: one had 8% and the other had 20% of their mortgage book over 3 months in arrears. A check showed that their lending policy appeared to be standard.

5.33. Just over 40% of the loans over three months in arrears were 3-6 months in arrears, almost 22% had arrears of 6-12 months, and 12% of the loans were over one year in arrears ²¹.

Repossessions

5.34. Based on a sample of lenders representing 71.5% of the Scottish market, there were 2,995 repossessions in 1999 (4,189 grossed up to 100%) and for a sample representing 72.5% of the Scottish market, there were 2,727 in 2000 (3,761 grossed up to 100%). In 1999 and 2000 repossessions were 0.6% of total mortgages, as reported by the lenders surveyed. The number of repossessions indicated by the CML survey in 1999 was considerably less that this, at 3,102.

5.35. A possible source of incompatibility between the research and CML figures could arise if repossessions of properties with multiple securities held by more than one lender had been double counted in the research survey. Lenders were asked if the repossessions reported were only those where they had repossessed the property themselves. All said they would only report their own repossessions, i.e. if another lender repossessed a property on which the lender had the first charge, it would not be recorded as a repossession. However, if a second charge holder discovers when doing a valuation that there is insufficient equity to clear their outstanding debt, they may pass the case to the first charge holder to sell and incur the associated sale costs. If this happened, the first charge holder would record it as being a possession case, but this would not be a common eventuality.

5.36. Lenders specialising in secondary lending were also consulted. Again, they said that they would only record the repossessions they carry out themselves. It therefore seems unlikely that there has been significant double counting of repossessions within the research survey. The CML survey does not include secondary lenders, or ask about secured lending. It therefore seems that the explanation for the higher figure estimated in our survey is primarily a function of this, although double-counting of repossessions between the first and second charge holders could account for a small part of the difference.

Loan to value ratio

5.37. In order to explore whether the properties taken into repossession were heavily mortgaged, lenders were asked about loan to value ratios. The question asked lenders to give percentage (in ranges) of the properties taken into possession in 1999 which had various loan to value ratios when the mortgage was arranged. The question aimed to discover whether properties which were repossessed had a particularly high loan to value ratio when they were arranged. Of course, it should be pointed out that 100% LTV is not the maximum that can be borrowed. During the course of the interviews with borrowers, it become evident that borrowing up to 110% of the value of the home was possible.

5.38. This detailed information is summarised in Table 5.6. Figures in Table 5.6 are an average of the answers given by lenders in each category.

Table 5.6 Loan to value at the time the mortgage loan was arranged of repossessed properties

Note The original question was 'Of the properties taken into possession in 1999 (Jan - Dec) what percentage had the following loan to value ratios when the mortgage was arranged'. Each category i.e. 'Below 85%' is a different variable and an average has been taken of the answers given in each category.

5.39. Nearly half of the repossessions had an LTV ratio of 100% at the time the mortgage was arranged. Sixty-nine per cent of properties taken into possession had LTV over 95%. The fact that repossessed properties were likely to have high LTV was confirmed in the follow-up interviews with lenders.

5.40. Table 5.7 refers to properties taken into possession in 1999. It can be seen that most repossessed homes have low valuations. The distribution may reflect the relative numbers of loans at each property value level as well as the varying probabilities of repossession. It is probable that lower income groups would be in the lower value property category.

Table 5.7 Original valuations of properties repossessed in 1999

Note The following notes for guidance were provided to the lenders.

1). 'Please include properties bought under the right to buy scheme'.

2). 'We realise that price inflation and right to buy discounts have a big role to play in this - but nevertheless we are interested in the original valuations. For properties bought under the right to buy scheme we are interested in the market valuation and not the discounted valuation'.

3). This table does not add to 100 due to rounding.

5.41. Seven per cent of repossessions in 1999 ²² were originally purchased through the Right-to-Buy (RTB) scheme. To put this into context, broadly speaking, between 1980 and 1998 341,000 properties have been transferred from public ownership to owner-occupier. The average sales figure has been falling over recent years and in 1996 13,000 public-sector homes were bought by sitting tenants in Scotland ²³. There are around 100,000 property transactions in any year.

Table 5.8 Percentage of repossessions bought under RTB

Notes

1. The original question asked 'Of the properties taken into possession in 1999 (Jan - Dec) in Scotland, how many, as far as you are aware, were purchased through the Right to Buy system?'

2. Not all lenders supplied this information and this table is based on 15 valid responses.

3. This table does not add to 100 due to rounding.

5.42. Table 5.8 shows that 30.6% of lenders who supplied this information had no repossessions that were originally bought under Right-to-Buy. There were two companies where 50% of their repossessions were originally Right-to-Buy. These were a finance company and an Insurance/Assurance company. The weighted percentage of 0.5% shows that these account for a very small percentage of overall repossessions (only 4 cases). It should be borne in mind that this does not consider all ex-council properties, just those bought under RTB. Some council properties have been sold on and so have not been bought under RTB.

5.43. Only 0.4 per cent ²⁴ of the properties taken into possession in 1999 had secondary loans on the property. When this is weighted by market share, the percentage drops to 0.1%. The objective of investigating this was to establish whether debtors with second loans should be allowed to participate in the 'mortgage-to-rent' scheme, which is currently under consideration by the Scottish Executive. This question was asked to see to what extent excluding cases where default on a secondary secured loan had led to repossession would restrict the scheme. It should be borne in mind that only six secondary lenders participated in this research, although lenders offer secured loans too, and these are counted in the total loan figures.

5.44. The qualitative information obtained from the borrowers suggests that it is not always the original lender that moves for repossession. In four cases we interviewed it was the default on a secondary secured loan which lead to the property being repossessed. In five further cases, it was the lender the borrower had re-mortgaged ²⁵ with that moved for repossession, and not the original lender.

Losses on possessed properties

5.45. The disposal of properties was investigated, exploring how many had been successfully disposed of and the losses that were incurred. The timing of the disposal will obviously affect the accumulation of arrears but no information was collected on how long it took to dispose of properties. Of the properties taken into possession in 1999 (Jan - Dec) in Scotland, virtually all lenders had disposed of all or almost all (over 95%) properties through sale, auction or other means.

5.46. Of the repossessed properties where the proceeds of sale did not cover the original loan, i.e. where there was residual debt, the majority of lenders experienced more than 20% loss (as a percentage of the loan outstanding prior to repossession). When the percentage was weighted by market share of the respondents, then the proportion of those incurring larger losses increases, and the proportion of those incurring no loss decreases markedly (Table 5.9).

Table 5.9 Losses on repossessed properties

Notes

1. The table synthesises the information from three different variables. Each row in the table represents a different variable. A weighted average has been calculated for summarising the range of values given by lenders in each individual variable.

2. These figures include those losses covered by Mortgage Indemnity Guarantee (MIG) and court/solicitors fees.

5.47. To estimate the scale of the losses lenders incurred in any repossession, lenders were asked for the monetary value of losses on properties they repossessed. Table 5.10 shows that most losses were at the lower end of the range, although 17% were over 20,000.

Table 5.10 Monetary values of the losses

Note

These figures include those losses covered by Mortgage Indemnity Guarantee (MIG) and court/solicitors fees .

Reasons for repossession

5.48. Lenders were asked to give their best estimate of the principal reasons properties were taken into possession in 1999 (Jan - Dec). Table 5.11 shows many lenders did not have this information. For those that did, the most common reason given was 'Financial over-commitment or financial mismanagement'. Other reasons which were important were 'Became carer of children/older people', 'Marital, relationship or family breakdown' and 'Debtor lost employment'. Other reasons which were given for repossession included fraud and unauthorised tenants.

Table 5.11 Principal reasons of the properties taken into possession in 1999

Notes

1. Table does not sum to 100 as averages are used, and one 'reason' has been excluded.

2. Lenders were asked to try to account for 100% of the reasons for repossession and include a percentage for where the reason is not known against 'Records do not specify reason'. This 'reason' has been excluded from the table, but accounted for approximately 18%.

3. Only one reason was allowed for each case.

Lending policy

5.49. Concern has been expressed about the affordability of mortgage repayments, especially the income multipliers used as lending criteria. All lenders were asked for their standard policy on multipliers for both single and joint mortgages.

5.50. Fifty per cent of respondents lent three times one salary for a single multiplier mortgage, 15% said they lent 3.25 times one salary and a further 15% said that their lending policy differed, depending on LTV (Table 5.12).

Table 5.12 Single multipliers

5.51. For joint multipliers, there was more variation in criteria. A third lent either 2.5 or 2.75 times joint salary. It is important to note that some lenders said they based their lending policy on 'affordability', although they gave no specifics. This is important because increasingly lenders are using affordability tests rather than salary multipliers. (Others used a multiplier of one income plus one or two times the other salary, while a further sample used a combination of the two).

Table 5.13 Joint multipliers

Note

The percentages in this table do not add to 100 due to rounding of decimal places.

Repossession court decrees

5.52. Lenders were asked for the percentage of the possession actions initiated that were granted in 1999 and 2000 in Scotland, and how many of those granted were implemented i.e. the possession actually took place. This information was requested to cross-check the court figures for cases initiated and granted, and the CML's figures for repossessions.

5.53. It needs to be reiterated at this point that there are different ways that possession can occur in Scotland. This question only referred to possessions that went though the courts not default notices, calling up notices, or abandonment. It aimed to discover the proportion of court decrees obtained that were actioned.

5.54. Results from this question show that the decree was granted in the majority of cases. However, few of these were actually implemented, with a fifth implementing under a quarter of actions granted, and two-thirds implementing between a quarter and a half. This lends weight to the hypothesis that lenders may commence court actions as a method of persuading borrowers to address their arrears difficulties. It also implies that some borrowers were able to respond to this pressure.

5.55. On average, lenders estimated that approximately 20% of repossessions were achieved without court proceedings, but the estimates vary widely. However, one large Scottish bank estimated that 70% of repossessions occurred without court proceedings, with a note to say that in these cases no eviction was necessary. It should be reiterated here that a lender does not necessarily need to go to court to get possession of a property: the court is needed only for powers of eviction.

Implications

5.56. The implications of the findings presented in this chapter will be brought together in the synthesis presented in Chapter 8. The principal points to be taken forward there are:

• most lenders had less than 5% of the mortgage book in arrears
• a sample of lenders representing approximately 73% of the Scottish market reported 2,995 repossessions in 1999 and 2,727 in 2000. When grossed up to 100% of the market, the estimated figures rise to 4,189 and 3,761. The figure for 1999 is about 30% more than the CML total. (2000 CML not yet available)
• repossessed properties were usually of low value, with 80% originally valued under 45,000
• just under half of repossessions related to 100% loan-to-value loans
• losses were incurred on three-quarters of repossessed properties. Over half of these losses were more than 20% of the loan outstanding. Just under a fifth were over 25,000
• most lenders do not collect reasons for repossession. Where a reason was known, financial over-commitment and mismanagement were given most frequently
• the multiplier used for a single salary was generally between 3 and 3.5. In some cases, a lower income multiplier was applied as LTV increased
• the majority of court orders applied for were granted by the court. However, far fewer were actually implemented, with 75% of lenders implementing less than half of the orders they obtained. A rough estimate is that about 40% of orders were implemented.