The Times is running regular briefings to coincide with TargetTwo Point Zero, the Bank of England contest for sixth-formers run in conjunction with this newspaper.

The competition challenges students to play the role of the Bank's Monetary Policy Committee (MPC) and recommend the best level for interest rates.

This week: Repossessions

What is a repossession?

This is when a mortgage lender takes possession of a house and sells it to recoup the money that it has lent the homeowner, secured on the property. Such a course of action is usually undertaken when homeowners fall behind with mortgage payments, known as falling into “arrears”, but a financial institution can also repossess a home if a borrower falls behind with repayments on any loan secured on the property — often called “second charge” loans.

Borrowers struggling to meet their monthly mortgage payments have several options — they can renegotiate with their lender to try to cut their monthly payments, for example, by switching to a cheaper, interest-only deal. Alternatively, they can sell the home themselves to repay their outstanding mortgage debt. This is often called a “forced sale”. If these avenues fail, repossession is usually the next step.

What's happening with repossessions at the moment?

Repossessions soared last year as increasing numbers of homeowners fell into difficulties with their mortgage payments.

The Ministry of Justice, which publishes data on this topic, reported that the number of repossession orders made by judges last year rose by nearly 20 per cent to 114,296. However, not all repossession orders result in an actual repossession, as lenders and borrowers can still come to an agreement after such a court order has been obtained.

Figures from the Council of Mortgage Lenders (CML), which compiles data on this from most of the country's mortgage lenders, show that about 40,000 properties were repossessed last year, up more than 50 per cent from 25,900 in 2007. The CML has forecast that repossessions could rise to 75,000 this year, matching the record highs of the early 1990s. The most recent figures from the Financial Services Authority (FSA), which include repossessions by some “second charge” lenders, shows a 92 per cent rise in repossessions between July and September last year against the same period in 2007.

Why are repossessions rising?

Recessions are usually accompanied by rising repossessions as increasing numbers of people lose their jobs, causing them to fall behind in paying their monthly bills, such as home loan payments. The credit crunch has exacerbated the problem, as borrowers heavily dependent on credit cards or personal loans to supplement their wages are finding that they cannot access additional funds, leaving them short of money every month. The sharp increase in interest rates in the middle of last year — as the Bank of England battled rising inflation — also forced some borrowers into difficulties as their repayments spiralled.

Does this have an effect on house prices?

To a certain extent, yes. Repossessed houses are usually sold at auction and can go for a knock-down price, which drags down house prices. But the more widespread phenomenon of “forced sales” is more damaging to overall house prices, as sellers desperate to get rid of their house are forced to slash their asking prices to attract buyers.

As house prices fall, consumers become less willing to spend and this puts downward pressure on inflation.

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