2011 Q3 Conveyancing Periodical - Managing Bad Debts Better

October 2011

by Martyn Alderton

Download a printable version of this newsletter

Amid the general economic gloom, the fact that house repossessions have remained relatively low and are forecast to show a flat profile in the foreseeable future, should be good news.

The Council of Mortgage Lenders (CML) confirmed 9,000 repossessions in the first quarter of 2011, which is marginally less than the 9,100 we saw in the second quarter of this year.  In terms of annual performance, 2011 is down by 7% on the previous year.  The CML expectation is that we will finish this year at around 40,000 repossessions in total.  In 2009 we saw about 48,000 for the year, so the downward trend is encouraging.

There are no obvious indications that the situation is likely to change radically.  The Bank of England's Monetary Policy Committee recently voted unanimously to maintain interest rates at their current levels.  And, depending on which reports one reads, even the hawks in the markets think it unlikely that a rise will come much before late 2014 or early 2015.

Nonetheless, the level of indebtedness is greater than 2.5% of loans and the jobs market is fragile.  So lenders are continuing to think hard about how best they can manage their loans profile - and especially that proportion of it that might turn into bad debt.

Part of this reflection involves lenders asking themselves about their collection policies and how they might improve them. 

One of the guiding factors in lenders' thinking on this issue is their stringent adherence to the Financial Services Authority's principles of Treating Customers Fairly.  Lenders are trying hard to find ways to ensure that defaulting borrowers are not left in unmanageable situations.

They are also focused on managing the recovery of debt as efficiently as possible.  Lenders have always had to consider their fiduciary duties to their shareholders, but for several of them, that important group also now includes taxpayers, which brings with it an additional level of pressure.

These two considerations are merging together and the question many lenders are asking themselves is whether or not it is right to allow borrowers' debts to creep up if assets are losing value and repayments are falling.

The answer is invariably 'no', which is giving rise to the emergence of new approaches to the debt-recovery problem.  Increasingly lenders and borrowers are working together to resolve the issue of persistent loan repayment defaults before things become irretrievable.

One of the solutions gaining currency is the CML's Assisted Voluntary Sales (AVS) scheme. 

The principle behind the AVS scheme is that no-one takes possession of a property.  Instead, the lender, generally through the auspices of their appointed asset manager, works with the defaulting borrower to plan and effect a managed sale that will see the lender recover, if not all, then as much as possible of their original loan.  By the same token, the borrower has time to find somewhere new to live.

As an appointed asset manager, LSL Corporate Client Department (CCD) would typically become involved in the process once the lender and borrower had agreed to an AVS. At that point, we engage with other professional parties such as litigating solicitors and estate agents.  We undertake the requisite market research and prepare the property for sale.  There is also engagement with letting agents and/or housing associations to help the defaulting borrower find suitable alternative accommodation.

The merits of the AVS solution are obvious.  For the borrower the process can be managed more efficiently and feel much less brutal than some of the traditional alternatives.  For the lender, an occupied property is likely to be more appealing to a potential purchaser and so increase the chances of achieving a higher sale price, which clearly helps them to mitigate the down-side risk of the debt recovery process.

Currently, less than 10% of the stock that LSL CCD manages is on the AVS scheme. However, while the repossession profile looks flat, the AVS model is likely to become an increasingly popular and familiar way of managing forced sales on mortgaged residential properties.

AVS is just one example of the way in which the market is evolving.  But if necessity is the mother of invention, one can be sure that lenders will develop ever-more creative solutions to recover their debt and help their defaulting borrowers at the same time.

Martyn Alderton is Managing Director of Asset Management, LSL Corporate Client Development

What now

If you would like to contact us you can do so via telephone, email and fax: