Comment: Lenders need to prepare for the next downturn

Technology offers solutions to help those struggling to pay their mortgage – let’s introduce them quickly

In many ways, the mortgage market is in rude health: lending continues to rise, competition is strong and there is a good selection of products available to borrowers.

At the same time, that strength has led to a certain bullishness among lenders, which are almost exclusively focused on getting new business on to their books.

This is a worry, for two reasons. First of all, we are living in a time of great uncertainty, with Brexit and the trade war being waged between the US and China just two disruptions that could act as a drag on the global economy and potentially lead to recession in the UK.

Second, the consequences of a downturn could be greater than in the last financial crisis. With rates already at 0.75 per cent, the Bank of England has precious little firepower at its disposal to combat the next downturn. And there is a limit to the amount of fresh money the central bank can print to shore up the system. Also, household finances have been squeezed by a decade of slow wage growth, so are not in as good a state as when the financial crisis hit. A fresh downturn would be likely to result in a substantial amount of stress among the existing borrower pool.

The big question is: do mortgage lenders have the tools at their disposal to deal with a sharp spike in the number of borrowers in financial difficulty?

I fear the answer is no.

Worryingly, many mortgage lenders still use the same tools and techniques for collections and recoveries as they did a decade ago.

At the risk of stating the obvious, the world has moved on since then, particularly in terms of data and technology, and it is imperative that lenders keep up with it.

It has long been the case that the earlier those borrowers in financial difficulty engage with their lender(s), the better the outcome for all involved. Mortgages are usually the last thing on which people default – in general, people tend to default on other loans and credit cards before they stop paying their home loan. It is down to lenders to become better at spotting potential financial problems before they arise, utilising the data and technology to enable them to do a much better job of helping borrowers who may be struggling to keep up.

If a lender has systems in place to monitor the financial health of borrowers, including those who are up to date with their repayments, they can intervene and engage early with those who are struggling.

We are also beginning to see the emergence of a category of borrowers in arrears who want to get their finances back on track, but do not want to talk to anyone about their situation. They may be embarrassed about the position they are in, or they may just not like talking about their finances over the phone. Lenders in the US have started to allow borrowers the option of setting up their own repayment plans online without having to interact with a human being. Providing this option has meant that borrowers are more likely to take hold of their financial situation before matters get too serious. We are keeping an eye on how successful this approach is for our American peers, but I expect that this will be widely adopted among UK lenders.

This is just one new tool at lenders’ disposal. In order to provide the most appropriate support to borrowers during the next downturn, lenders need to overhaul their approach to make the most of the opportunities provided by new capabilities with data and technology.

And that needs to happen now, rather than waiting until the next crisis hits.

Ian Larkin is chief executive at Target Group

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