Member Article

Forbearance can be risky say Deloitte

Mortgage lenders are making greater use of forbearance to help homeowners in arrears on their mortgages, but this could pose serious risks for borrowers and lenders.

According to Deloitte, forbearance - where borrowers re-negotiate how mortgages will be paid - can pose a number of challenges.

Poor forbearance tools can put customers at a greater financial risk and treat borrowers unfairly, which capital returns may be lower and lending volumes could be reduced.

Regulatory risks can also be higher, as the FSA looks at the potential implications for the firms of forbearance as well as the conduct risks for consumers, while impairment accounting and disclosures can also become trickier.

Commenting on the change in attitudes, Michael Coogan, strategic adviser at Deloitte’s financial services practice, said:

“During the 1990s lenders were much quicker to repossess homes when people had fallen behind on their mortgages because of the level of interest rates, and the speed at which arrears rolled up.

“This time mortgage lenders have responded to the downturn by making much greater use of forbearance, where a lender and borrower renegotiate how a mortgage will be paid.”

The FSA estimates that up to 8% of mortgages are in forbearance. Its use can give borrowers time to solve their financial problems, while lenders have a better chance of helping borrowers repay their mortgages over the long term.

However, Mr Coogan is encouraging banks and building societies to exercise caution when doing do.

He added: “Lenders must ensure that they do not make borrowers’ situation worse in the long term, and that their collections, credit and finance teams can deal with the complex demands of forbearance strategies which should be tailored to borrowers’ individual circumstances.”

This was posted in Bdaily's Members' News section by Ruth Mitchell .