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Between Northern Rock and a hard place

13 Nov 2007

A few years ago the Simon Community ran a campaign that each of us was “three monthly pay cheques away from being homeless”. The claim is based on the fact that most mortgages have a condition that the lender can commence repossession proceedings if the account is more than two monthly payments in arrears. Surprisingly this cheery little detail doesn’t usually get a mention in the all singing all dancing adverts but nevertheless it is one of the facts of mortgage life.

Instead what banks and building societies do is flash up a virtually subliminal message on the screen stating that failure to make payments may result in repossession. This warning, which is usually in the smallest text permissible, is the financial equivalent of the old government health warning on a packet of cigarettes and about as useful.

In recent years there has been a substantial increase in the secured lending market and commentators have been concerned at the rising debt levels throughout society. The near collapse of Northern Rock has been the clearest indicator yet that the era of cheap money is at an end. Now with the last pensioner shuffling homeward having withdrawn their hard earned shekels out of Northern Rock lessons are supposedly being learned. The Bank of England is trying to make it clear that “risk has to be accurately assessed” and for the great unwashed what that means is that the cost of borrowing is going to go up. Banks and building societies are going to have to behave responsibly in the future and the rest of us will have to be more prudent and cautious and boring things like that.

The problems are all said to have started in America with a thing called the sub-prime market. The sub-prime mortgage market is a phrase used to describe lendings to that section of the population that would have difficulty getting a mortgage possibly due to bad credit rating or other features. Typically it is the section of the market most susceptible to predatory lending practices and in the US targets racial minorities, the poorly educated and persons on low incomes. We don’t use the phrase sub-prime to describe any section of the mortgage market here but that doesn’t mean that there isn’t the equivalent here. Neither do we use the term predatory lenders but that doesn’t mean that they are not out there as well.

Every week in the High Court the banks, building societies and secured lenders list their proceedings for repossession. If the borrower is in arrears an order for possession is almost invariably made and a stay of six months is very often the best that you can expect. The borrower may have an opportunity to enter into an arrangement to clear arrears but that usually takes place in the context of an order for repossession having being taken by the lender.

One of the few other options is to try to re-mortgage to another lender. In the context of repossession proceedings very often that means paying a punitive interest rate with a high risk of the procedure starting all over again.

The reality is that most proceedings end in an order for repossession and the law in this area can appear strict and inflexible. The fortunes of a borrower in trouble contrasts dramatically with those of the lender getting into difficulties.
Unlike with the Northern Rock there is no prospect of the Bank of England stepping in to guarantee your repayments or come up with a rescue package. I suppose it is just another example of the observation by F Scott Fitzgerald “the rich are different…. they have more money”.