Industry stats and outlook for arrears and possessions February/March 2014

1. Industry stats and outlook for arrears and possessions February/March 2014

2. Council of Mortgage Lenders Primary trade body for first charge residential mortgage lending industry Not a regulatory body – but does issue steers and good practice 115 member firms including banks, building societies and specialist lenders Membership holds approx 95% of UK first charge residential mortgaged assets

3. Themes Industry wide stats and outlook What might influence interest rate rises? Policymakers’ ponderings Industry focus

4. Arrears by % balance # of mortgages Source: CML

5. Possessions Source: CML

6. 2013 performance and2014/15 forecasts Source: CML

7. Interest rate rises? The evolution of the Bank of England’s ‘forward guidance’

8. Aug 2013: forward guidance announced “The [Monetary Policy Committee] intends, at a minimum, to maintain the currently exceptionally accommodative stance of monetary policy until economic slack has been substantially reduced, provided that this does not put at risk either price stability or financial stability. In practice, that means the MPC intends not to raise Bank Rate above its current level of 0.5% at least until the Labour Force Survey headline measure of unemployment has fallen to a threshold of 7%.” Mark Carney Governor of the Bank of England 7 August 2013

9. Nov 2013: revised estimates on unemployment hitting 7% “Despite the sustained recovery in activity [...] the MPC attaches only around a two-in-five chance to the LFS unemployment rate having reached the 7% threshold by the end of 2014. The corresponding figures for the end of 2015 and 2016 are around three-in-five and two-in-three respectively. These probabilities are higher than in August, reflecting the stronger outlook for near-term demand.” Bank of England Inflation Report November2013 BoE’s November 2013 estimate of probability BoE’s August 2013 estimate of probability Source: Bank of England Inflation Report, November 2013

10. Early 2014: unemployment hits 7.1%, forward guidance revised “The unemployment rate for September to November 2013 was 7.1% of the economically active population, down 0.5 percentage points from June to August 2013.” Office for National Statistics 22 January 2014 • “The first phase of guidance was about the conditions that would have to be met before we would even begin to think about raising Bank Rate. Now we are outlining: • what we intend to do: close the spare capacity gap over the next few years; • why we intend to do it: to keep inflation at target and avoid wasteful spare capacity, particularly in the labour market; and • how we intend to do it: first by waiting to raise Bank Rate until spare capacity has been absorbed further and then eventually through gradual and limited rate increases. • Bank Rate may need to stay at low levels for some time to come. The first phase of guidance gave businesses confidence that Bank Rate would not be raised at least until jobs, incomes and spending were growing at sustainable rates. As guidance evolves, that remains the case: the MPC will not take risks with the recovery. ” • Governor of the Bank of England • 12 February 2014

11. Interest rate rises aren’t the only cause of payment shocks…… life events, plus …

12. Wage growth v inflation Percentage change year-on-year Source: ONS

13. Policymakers’ ponderings • How resilient are households to a relatively sharp uplift in interest rates? • How are households managing debt in a low interest rate environment?

14. Balancing conduct and prudential regulators’ requirements • Conduct (FCA) = consumer protection (incl. adherence to MCOB rules) • Prudential (PRA) = financial stability (incl. forbearance sustainability and impairment provisions)

15. FCA arrears and forbearance thematic • Launched: Q2 2013. Results: Feb 2014 • Forward looking, ‘future proofing’ • 8 firms (10 brands) – small, large, mainstream, sub prime • Potential areas of focus: • Customer-oriented cultures and behaviours • Proactive, early engagement with customers • Vulnerable customer groups • Policies, systems and controls • End-to-end case reviews • Training and competency

16. Factors for lenders to consider in future proofing their approaches to arrears management

17. Considerations for lenders • Understanding potential impairment and susceptibility to interest rate rises • Forbearance tailored to customer circumstances (e.g. ability to pay and nature of payment difficulty) • Learning loops – understanding what drives good customer outcomes and feeding this back into policy/strategy design • Encouraging customer engagement with debt advice • Exploring alternatives to repossession – assisted voluntary sales (e.g. in the right circumstances and for the right borrowers) • Continuing to ensure that possession is sought only as a last resort

18. Conclusions • Headline numbers continue to fall … … but strategic questions persist over debt resilience, both pre- and late-arrears • FCA arrears and forbearance thematic = continuing regulatory focus on ensuring good customer outcomes • Lenders need to ensure that pre-arrears, collections and litigation policies are future proofed