Servicers need to be proactive during rising unemployment, argues Andrew Doyle, finance director of Crown Mortgage Management
Following the furore that has surrounded the relationship in the UK between interest rates and inflation in the last few months, it is easy to overlook other equally important economic indicators. Mortgage servicers must always strive to develop an understanding of borrowers’ circumstances, even if the borrowers themselves aren’t yet sure what they are or will be. While interest rates and prices obviously have a vital impact on borrowers’ finances, projections on unemployment are key to understanding what the future holds for the mortgage market, because regardless of the price of repayments, those without incomes suffer the worst risk of default.
So, what is the future for UK jobs? Well, frankly, the picture isn’t healthy.
The Chartered Institute of Purchasing and Supply (CIPS) has released a study suggesting that unemployment is set to rise through the first half of 2011. CIPS surveyed employers from across the UK and found that more intend to cut jobs than create them in the next quarter. The study shows that while there is some optimism from the private sector in manufacturing and services, the public sector is already pulling in it horns.
According to the CIPS, two thirds of public sector employers intend to cut jobs in the next quarter. This would be sobering news at any point, but the worry is that public sector cuts are being made pre-emptively at the beginning of 2011, rather than later in the year as predicted by the coalition. Faster cuts from the public sector give the private sector less time to take up the slack and raise the spectre of an unemployment spike in the middle of this year.
Another concern for servicers is that the indicators suggest younger people will be the hardest hit. The ONS has recently published statistics showing that youth unemployment has reached 18% – higher even than the 17.8% which was recorded back in 1993. Ed Miliband has been moved to start talking of a ‘lost generation’ and servicers must take note. Younger mortgage borrowers tend to be the ones with the smallest deposits and highest LTVs. With house prices continuing to decline, those young borrowers are facing the dual prospects of default and negative equity.
For lenders, the best solution is to be proactive. At Crown, we have taken steps to ensure that we are able to look carefully at the cases of individual borrowers and try to see where problems might develop well before they actually do. This gives us the chance to make our concerns known at an early stage, offer flexible solutions to the problem and thus minimise the upheaval if borrowers do suffer financial setbacks. Treating customers fairly requires servicers to actively look to the future and seek out potential problems, rather than just reacting as they arise.
But this isn’t just a problem for mortgage lenders and servicers, because youth unemployment could have a long-term impact on the wider economy too. If Ed Miliband is right that today’s youth truly are a ‘lost generation’ this will drive down demand for property in the years to come and force lenders to continue with tight lending criteria for an uncomfortably long time.
In a climate where lenders can’t be confident about borrowers’ finances, the onus must always be on servicers to be proactive. The current outlook for unemployment is, unfortunately, bleak, but the good news is that there are things servicers can do to minimise the damage. We must approach uncertain economic conditions with our eyes open, because doing so will make the pain as bearable as it can possibly be.