In November UK Finance reported there were 88,300 mortgages in arrears representing more than 2.5% of the mortgage balance (our key arrears measure). This is the lowest figure since at least 1994 when we began to collect this metric. We also reported 1,900 mortgaged properties taken into possession in the quarter, a number broadly unchanged for the last six quarters. 2016 overall saw 7,700 possessions, the lowest number for almost a quarter of a century.

These are obviously very positive stories and evidence of a mortgage market that, overall, is in a sustainable place.

However, even in these benign market conditions, a small minority of borrowers have encountered difficulties that caused them to fall behind on their mortgage. Whilst our long-running published industry arrears and possessions figures are based on aggregate-level reports from our members, this article draws on our loan-level data to take a closer look at where the problems lie.

The loan level mortgage data within our Regulated Mortgage Survey (RMS) covers some 8.1 million regulated (homeowner) mortgages outstanding. This is around 88% of the 9.2 million homeowner mortgages outstanding overall, with the vast majority of those not included being those written prior to mortgage regulation in 2004.

Within the RMS we can identify 70,000 mortgages that were 2.5% or more of balance in arrears in June 2017. This equates to an arrears rate of 0.87%, very close to the overall homeowner arrears rate we reported in our industry figures for Q2 (0.91%).

RMS data also shows some 1,950 mortgaged homeowner properties taken into possession within the first half of this year. This represents 85% of the total 2,300 (excluding those on BTL mortgaged properties) we reported in our market figures, and an almost identical possession rate of 0.025% (around one in every 4,000 mortgaged properties) for the half year.

So, despite some differences in coverage and composition, this gives us confidence that we use RMS data to draw out powerful and comprehensive insights on mortgage borrowers in payment difficulties.

Arrears clouds have eased across the country

Figure 1 below maps out mortgage arrears cases, measured here as the proportion of mortgages in each UK postal district (first half of postcode) that are in arrears. The darker colours indicate a stronger incidence of arrears in that area. Note, however, we?re not suggesting any deeper significance to the colour scheme, beyond allowing a visual comparison of areas that have greater or lesser concentrations of payment problems.

The first thing that jumps out is how the arrears position has improved all across the UK. Two years ago, at least one in every hundred mortgages was in arrears in virtually every area in the country. And in many areas, this was two or three (or more) in every hundred. Since then, however, the colouring of the map has lightened dramatically, such that at the end of June this year there are only a minority of areas where even one in every hundred are in arrears.

Figure 1: proportion of mortgages in arrears¹

1.1: June 2015

1.2 June 2017

Source: UK Finance Regulated Mortgage Survey/Bing

1. Arrears cases are defined as those where the arrears represent over 2.5% of the outstanding balance

Housing markets are local, and so are payment problems

A second striking observation is that, both two years ago and now, the areas with higher arrears rates are concentrated very heavily outside the south of England.

Looking specifically at Northern Ireland we can see, writ large, both this regional variation and the significant improvement over the past two years. In June 2015, over three in every hundred mortgage borrowers were in arrears in virtually every Ulster postcode. Two years later the colour palette there, although still significantly darker than elsewhere in the UK, has lightened dramatically, with now only a minority of postcodes with these highest arrears concentrations.

The regional variation and improvements are also clear in Wales and Scotland and the northern regions of England, albeit on a lower scale. But, wherever you look on the map, the message is essentially the same: payment problems have decreased significantly, with virtually all localities seeing an improvement.

What drives arrears?

Most studies of UK mortgage arrears are based on publicly-available, national-level data. But, as these maps show, payment problems have a strong regional bias. Looking at other factors at a similar level of regional detail offers deeper insight and avoids the risks inherent in UK analyses from seeking a one-size fits all explanation for a collection of very different local economies.

Our aim in this article isn't a detailed statistical analysis, rather to draw out from our data some of the drivers that contribute to this regional pattern - and hopefully dispel one or two misconceptions on what impacts most on ability to pay.

The maps below show unemployment rates (Figure 2), and the incidence of mortgages in low or negative equity (Figure 3). Like the arrears maps, the darker colours indicate a higher incidence.

Figure 2 Claimant count unemployment rate¹ August 2017

Figure 3 % of mortgages in low or /negative equity² June 2017

Source: UK Finance Regulated Mortgage Survey/ONS/Bing

1. Total claimant count rate, all adults by Local Authority, August 2017.
2. Mortgages with current LTV 90% of greater, June 2017

Broadly speaking, we can see a relatively similar regional profile for unemployment as we do for arrears. This is intuitive - loss of income necessarily affects ability to pay and, although the Local Authority unemployment rates shown aren't necessarily replicated uniformly across each postcode district within it, we would expect that they do track closely for the most part.

Perhaps less intuitively, we can see what looks like much stronger correlation between arrears and the incidence of low or negative equity. This relationship has been noted by industry analysts in the past, but the lack of detailed regional data has usually restricted analysis to either the national or broadest regional level. Again, although the colours in the maps below have no significance other than to differentiate between lower or higher levels of the indicator in question, there is no mistaking the fact that the areas with the highest arrears incidence are also those with the highest incidence of low or negative equity.

One rationale for negative equity being associated with arrears is that negative equity is a symptom of a housing market downturn. Such downturns don't happen in a vacuum, but are themselves a product of other negative economic factors, including wider socioeconomic conditions. And so, to an extent, negative equity is a bellwether for a wider set of conditions that trigger payment issues.

In some cases, there may also be a behavioural factor at play. If a borrower owes more on their house than it is worth, then, where they face financial difficulties such that they are struggling to meet all of their credit commitments, the debt to equity consideration might weigh more heavily in their thinking if they feel they have ?no skin in the game.?

However, this is a dangerous misconception, and one which led to a high incidence of ?walkaways? (voluntary possessions) in the downturn of the early 90s. Lenders have a legal right to pursue unpaid debt, even after possession, if there remains any shortfall.

In the post-financial crisis housing market downturn, greatly enhanced messaging from lenders and the trade associations representing them has helped to open up the lines of communication with borrowers in difficulties. This dialogue, matched by low interest rates and a high degree of lender forbearance for homeowners, has helped keep many people in their homes through the period.

And what about income stretch?

Another factor which might be expected to influence arrears is affordability. Broadly speaking, if affordability looks more stretched, then it wouldn't seem unreasonable to think that there is a higher likelihood that the borrower will experience payment difficulties at some later point. But in fact, when we look at affordability as measured by the loan to income ratio (Figure 4) we see just the opposite.

Figure 4 % of mortgages lent at over 4 times income June 2017

Source: UK Finance Regulated Mortgage Survey /Bing

Across most of the country less than a fifth of mortgages are taken out at over 4 times the borrowers? income. However, in the South East and, to a lesser extent, the South West, most geographies have over 20% and in many cases, over 30% of loans taken out at these higher income multiples. But, as we?ve seen in the arrears maps, these geographies have the lowestincidences of arrears.

However, income multiples are only one measure of affordability and can be a relatively crude indicator of a borrower's ability to pay. Since 2014, following the FCA's Mortgage Market Review, lenders are required to assess mortgage applications using a detailed income-expenditure test, which provides a more individualised assessment of affordability by looking at that household's balance sheet.

For mortgages written since 2015 our data also allows us to look at affordability on this basis. Figure 5 below maps out the ?wiggle room? that borrowers have (at the point they took out their mortgage). In other words, how much income do they have left after deducting the mortgage payment, other credit commitments and basic household expenditure from their take-home pay.

This looks closer to the geographical profile of arrears but, even so, the picture does not look clear-cut. Whilst many of the regions with the highest arrears do have a high incidence of these more stretched borrowers, there are plenty of other areas of the country, including much of the South East and South West, that also have these levels of affordability stretch but very low arrears.

It's important to note that since 2015 a number of relevant economic conditions - in particular interest rates and employment - have been extremely benign. This has meant that arrears on mortgages written in that time are disproportionately low, with the vast majority of cases written before that date. So, we cannot make strong inference until we have a longer period with which to compare arrears with this affordability metric.

Figure 5 % of mortgages with less than 10% wiggle room¹ June 2017

Source: UK Finance Regulated Mortgage Survey/Bing
Notes:
1 Wiggle room defined as the proportion of income left over after deducting mortgage payments, credit commitments and basic household expenditure from net income.
2 Data refer only to mortgages written since 2015.

Should a longer comparison period show a similar regional pattern, this would suggest two things. Firstly, assessing affordability by reference to a borrower's individual balance sheet appears to be a better indicator of the potential incidence of subsequent payment problems than simpler measures, like income multiples. Whilst many firms were already operating these sorts of income-expenditure models well before MMR came in, mandating this as standard industry practice ensures a level of coping ability, at least at the outset of the mortgage, which will have helped keep borrowers on track with their mortgages as their finances fluctuate.

However, our second takeaway is that, even using this far more granular, tailored approach to assessing affordability, it isn't possible to predict and prevent arrears in every case, Factors external to a borrower's situation at the time of application, including wider housing and economic conditions, look to be at least as important as triggers for mortgages arrears, if not more so.

In all of this we do recognise that there is a limit to how much you should reasonably infer from eyeballing a collection of heat maps, particularly as how these look is, to a degree, dependent on the colour scheme and bandings of the data in question.

So, while this is definitely not a deep statistical analysis, we have run these data through a very simple model, so as to put a degree of numerical rigour to what the maps themselves appear to tell us. A basic regression model indicates that, amongst the factors we?ve explored here, by far the strongest influences driving arrears are the local incidence of low or negative equity, followed closely by the local unemployment rate. By contrast the incidence of stretched affordability, measured by the wiggle room metric, has only a comparatively weak effect, and one which is not statistically significant. Again though, we would caveat this heavily, since most arrears cases were written in the period before these affordability data were available.

The possession map

Although possessions are at historically very low levels, there are some cases where the lender and the borrower have worked through and exhausted all other options, and possession is in fact now the best option for the borrower.

This final map below shows the incidence of mortgage possessions in the first half of this year. Unsurprisingly there is a similar picture to that for arrears. There was less than one possession for every 10,000 mortgages outstanding across the majority of the South and the Midlands. However, in the North of England and the other UK nations we see a higher incidence, with Ulster again experiencing universally the highest incidence of possessions - 6 or more per 10,000.

Possessions per 10,000 mortgages, H1 2017

Source: UK Finance Regulated Mortgage Survey /Bing

Local attention to local issues

What we have shown here is a clear picture that there is no such thing as a national housing market. Housing - and housing finance - are by nature local issues, linked with local economic conditions. This doesn't start and end with the ability to buy a house, but continues throughout the life of the mortgage.

The UK has just seen the first base rate rise in over a decade, with the Bank signalling more to come. Even though these are likely to be relatively modest there are already pinch points in borrower finances. We have had persistently anaemic wage growth and now higher inflation than we?ve seen for some years. And the Bank, in its most recent Financial Stability Report, highlighted the continuing rapid growth of consumer credit, as well as risks to mortgage borrowers of an interest rate or unemployment shock.

Against a backdrop of economic uncertainties around where the UK will land in its post-Brexit relationship with the EU, these pinch points for borrowers have the potential to become more common, and more acute.

Even in the current benign conditions, there are some localised hotspots for mortgage payment problems. Recognising and quantifying local issues now can make the lenders, policymakers and local government all better prepared for a less favourable environment. Here we?ve presented only a largely pictorial view, but a deeper understanding of the local conditions can only be a benefit in preparing for what may lie ahead.

First published in the January 2018 edition of the Mortgage Finance Gazette.