Lender forbearance – where banks shift homeowners onto interest-only deals, extend their mortgage term, or even permit payment holidays – now accounts for 63pc of all troubled home loans, according to the Financial Services Authority (FSA).
Although forbearance can help households, the FSA is concerned banks are using it to flatter their numbers by reducing bad debt provisions.
In a guidance note on "forbearance and impairment provisions", it said: "We believe that there is scope for considerable improvement in firms' interpretation of the disclosure requirements." A spokesman added that "there are concerns" about banks' use of forbearance.
The regulator fears that "where [forbearance] is provided without due care or understanding of the impacts, it has potentially adverse implications for the customer". In one instance, the FSA said, "more than 95pc of customers requesting a conversion to permanent interest-only terms were found to be in financial stress".
"As a result, firms who have implemented sound checks ... may see their volume of permanent conversions drop significantly."
As many as 300,000 borrowers have switched roughly £60bn of mortgage debt from repayment to interest-only since the financial crisis struck in late 2007, FSA data shows. As forbearance does "not show up in arrears , "[it] may, at least to some extent, be disguising the scale of problems," the watchdog said.
According to research by Fathom Consulting, write-off rates on lending to UK households – currently a fraction of one percent – are no higher than in 2001 despite the recession and a 20pc fall in house prices. In the US, write-off rates have increased fivefold to 9pc since its housing bubble burst in 2007.
"Banks should be making much larger provisions because the current status is artificial," Danny Gabay, a Fathom director, said. "We have lower foreclosure rates than during the boom. It's just not plausible." UK banks are currently holding about £1.6bn in provisions against the country's total £1.2 trillion mortgage book. (AtW's comment: so that's just 0.1% provisioned for losses...)
In its guidance note, which was published unnoticed last month, the FSA even instructed auditors to take a tougher line on the banks. "We are looking to accounting and auditing firms to become more aware of forbearance practices in the firms they audit and the requirement for consideration of its effect in the recognition and disclosure of accounting impairment," the watchdog said.
Households are under huge financial stress despite average mortgage rates of 3.5pc being below the 5pc minimum in the years before the crisis. According to Darren Winder, economist at Oriel Securities, if mortgage rates return to those levels, the share of disposable income taken by mortgage payments will jump from 18pc to 21pc.
"Typically, levels that high are followed by a recession," he said, citing 2008 and 1990.
Earlier this year, analysts at the credit rating agency Moody's said the scale of forbearance was a "credit negative" for the country's banking system as its experience showed that on average roughly half the mortgages in forbearance default again.
Source: Banks accused of using mortgage debt leniency to flatter numbers - Telegraph
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Changes terms of loan to more favourable is a good thing so long as the main motivation is not to avoid showing true state of the loan book.
Although forbearance can help households, the FSA is concerned banks are using it to flatter their numbers by reducing bad debt provisions.
In a guidance note on "forbearance and impairment provisions", it said: "We believe that there is scope for considerable improvement in firms' interpretation of the disclosure requirements." A spokesman added that "there are concerns" about banks' use of forbearance.
The regulator fears that "where [forbearance] is provided without due care or understanding of the impacts, it has potentially adverse implications for the customer". In one instance, the FSA said, "more than 95pc of customers requesting a conversion to permanent interest-only terms were found to be in financial stress".
"As a result, firms who have implemented sound checks ... may see their volume of permanent conversions drop significantly."
As many as 300,000 borrowers have switched roughly £60bn of mortgage debt from repayment to interest-only since the financial crisis struck in late 2007, FSA data shows. As forbearance does "not show up in arrears , "[it] may, at least to some extent, be disguising the scale of problems," the watchdog said.
According to research by Fathom Consulting, write-off rates on lending to UK households – currently a fraction of one percent – are no higher than in 2001 despite the recession and a 20pc fall in house prices. In the US, write-off rates have increased fivefold to 9pc since its housing bubble burst in 2007.
"Banks should be making much larger provisions because the current status is artificial," Danny Gabay, a Fathom director, said. "We have lower foreclosure rates than during the boom. It's just not plausible." UK banks are currently holding about £1.6bn in provisions against the country's total £1.2 trillion mortgage book. (AtW's comment: so that's just 0.1% provisioned for losses...)
In its guidance note, which was published unnoticed last month, the FSA even instructed auditors to take a tougher line on the banks. "We are looking to accounting and auditing firms to become more aware of forbearance practices in the firms they audit and the requirement for consideration of its effect in the recognition and disclosure of accounting impairment," the watchdog said.
Households are under huge financial stress despite average mortgage rates of 3.5pc being below the 5pc minimum in the years before the crisis. According to Darren Winder, economist at Oriel Securities, if mortgage rates return to those levels, the share of disposable income taken by mortgage payments will jump from 18pc to 21pc.
"Typically, levels that high are followed by a recession," he said, citing 2008 and 1990.
Earlier this year, analysts at the credit rating agency Moody's said the scale of forbearance was a "credit negative" for the country's banking system as its experience showed that on average roughly half the mortgages in forbearance default again.
Source: Banks accused of using mortgage debt leniency to flatter numbers - Telegraph
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Changes terms of loan to more favourable is a good thing so long as the main motivation is not to avoid showing true state of the loan book.
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