property auctions to increase as tens of thousands face repossession

Half a million homeowners will fall into serious mortgage arrears this year because of the economic crisis, predicts the Council for Mortgage Lenders. There are now expectations that tens of thousands of families will be evicted by banks and building societies this year.

2008 – A bad year

There are disagreements about how many people had their homes repossessed in 2008. The CML believes that its prediction of 45,000 home repossessions was not exceeded. However, the Ministry of Justice reported many more court applications for repossession.

In the third quarter of last year, there were 38,500 claims for repossession made and 29,500 orders made. Yet according to the CML only 11,300 homes were actually repossessed. According to the CML this merely demonstrates that many mortgage lenders obtained the legal authority to repossess, without actually doing so.

The CML admits its figures underestimate the total number of home repossessions by about 10% to 20%, because they do not take into account repossessions by other lenders that took second charges on properties.

Worse in 2009

Despite what the CML regards as a more flexible and responsible approach being taken now by mortgage lenders, it is predicting a big increase in repossessions this year, to around 75,000.

There is clearly a serious and growing problem for many borrowers in meeting repayments. Borrowers with three months or more arrears rose from less than 121,000 in early 2007 to 210,000 at the end of last year – and the figure will rise exponentially later this year if the CML's projections of 500,000 serious arrears cases by the end of 2009 are correct.

Many observers believe that the CML is being over-optimistic in suggesting that repossessions will not rise at a similar rate. Nick Hopkinson, director of Property Portfolio Rescue – which offers to buy out distressed property investors – says: "I believe the CML's prediction of 75,000 possessions in 2009 is still too conservative." He thinks that many homeowners will initially hang on to their homes, but admit defeat as the negative equity and mortgage debt increase.

Sale and rent back

Both the CML and the Government recognise that in the current market place, many more homeowners unable to service home loans will turn to sale and rent back companies. The CML is urging the Government to make these more widely available, providing the schemes are properly run and regulated.

The Government has now accepted a report from the Office of Fair Trading that the sector needs to be strongly controlled. From next year, operators will be regulated by the Financial Services Authority. But that still leaves a long time for distressed homeowners to be exploited by rogue operators – with widespread bad practice reported by the OFT.

Auctioned off

The economic climate has also led to a big increase in the number of homes going on the market at auction. Some brokers promoting property auctions claim that properties will sell at 10% to 40% below the prices that an estate agency would market a home.

Gary Murphy, partner at Allsop – which describes itself as the UK's leading property auctioneers – says there has been a big increase in the number of properties going to auction. In 2007, his firm offered 2,321 property lots and sold 1,974, yielding £438m. But last year this had jumped to 3,612 lots, of which 3,085 were sold for £394m.

Some 80% of those homes sold by Allsop at auction last year were the result of repossessions. The proportion had fallen by about half by the end of the year, as mortgage lenders reduced repossession action under government pressure. But Murphy expects the figures to rise again.

"It [repossession] is unlikely to go away and they [repossessed homes] are unlikely to be sold in other ways," says Murphy. With the continuing lack of mortgage finance he predicts that the retail property market will remain quiet this year. "Auctions tend to attract people that have cash to spend or with a minimum requirement for finance," he points out.

While those attending auctions are hoping to buy cheaply, Murphy argues that buyers are purchasing more efficiently rather than at below market value. Auctions, he suggests, are merely a more effective means of determining what the current market price actually is.

By Paul Gosling
13 February 2009