His words are seen as a reaction to the Bank of International Settlements’ (BIS) annual report, published on Sunday, which urges the UK to raise rates to bring down inflation.
Richard Banks, the Chief Executive of UK Asset Resolution (UKAR), said that the industry may have been too lenient with some of its customers, and that a policy of "tough love" would be fairer to people facing long-term difficulty in keeping up payments on loans taken out when house prices were at their peak and personal incomes were on the rise.
UKAR, set up to run the nationalised mortgages of Bradford & Bingley and parts of Northern Rock, is the country's fifth largest mortgage lender. But 23,000 of their 750,000 mortgage holders are more than six months behind with payments.
Mr Banks said that the number of people falling behind on payments could get "scary" if lenders did nothing to prepare for higher rates.
"You can see if you don't do something about it, you can see a tsunami," he said. "If you don't get into the hills you could get drowned by this. If you don't manage this properly it could get very messy."
Banks’ remarks follow a warning last week from the new regulator set up to spot financial risks in the system – the Financial Policy Committee (FPC) inside the Bank of England – that warned banks may be providing a "misleading picture of their financial health" if they were not making big enough provisions for borrowers in difficulty.
It also noted that the most "vulnerable" households were concentrated in a few banks. It did not scrutinise UKAR but noted that the two other bailed-out banks, Lloyds Banking Group and Royal Bank of Scotland, had the largest exposure to customers whose mortgages were bigger than the value of their homes.
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