Britain’s Repossession Moratorium Benefits The Banks Not The Owners

U.K finance chief Jeremy Hunt just cut a deal with some British banks to hold off from repossessing homes where owners haven’t kept up-to-date with their mortgage payments.

That moratorium, which will last 12 months, sounds great on the face of things. The stated idea is that it will allow financially stressed borrowers to get their finances in order. And therein lies a problem and an obfuscation both at the same time.

The Help Likely Won’t Help

First, it’s hard to see how anyone deeply indebted due to rising inflation and soaring mortgage costs can do much to fix their situation. If they are lucky, the Bank of England may drop interest rates to more reasonable levels, which seems unlikely.

The issue with getting behind of mortgage payments is simple. When homeowners get behind, they get hit with late fees and interest charges on past-due amounts. When there are 12 months of past-due payments, you have a lot of late fees and lots of extra interest to pay. It’s hard to figure how such a terrible financial situation gets turned around easily while the Bank of England is waging war on inflation and raises interest rates with banal regularity. In other words, these efforts by Jeremy Hunt and the banks he persuaded to offer a moratorium likely won’t help as many people as the government thinks it will.

The OREOs Problem

Separately, the moratorium obfuscates that the primary beneficiaries are the banks, at least until the 12-month period of no repossessions ends. Banks don’t want to repossess real estate. They are in the business of lending money and receiving interest payments.

Taking ownership of a building or an apartment leaves the bank in a far worse situation than not taking ownership. When the bank forecloses, it has to list the value of the property it now owns in its financial statements. That usually occurs under the heading Other Real Estate Owned or OREOs.

Investors don’t like seeing large dollar amounts of OREOs on the financial statements. In fact, they tend to shy away from banks that do hold many OREO category properties.

This also leaves the bank with a problem. It now has to go through the process of selling the houses and apartments. And as anyone who’d sold a home, its a burdensome task. For the banks, it will be even more burdensome because they will likely own far more properties in relatively short order.