Memorandum from Citizens Advice (CRED 52)
1 Introduction
1.1. The CAB service provides free, independent, confidential and impartial advice to everyone on their rights and responsibilities. It values diversity, promotes equality and challenges discrimination. The service aims both to provide the advice people need for the problems they face, and to improve the policies and practices that affect people's lives.
1.2. The CAB network is the largest independent
network of free advice centres in Europe, providing advice from over 3,200
outlets throughout
1.3. In 2007/08 bureaux in
2. Background to CAB experience of mortgage and secured loan arrears problems
Enquiry statistics
2.1. Enquiries to the CAB service about mortgage and secured loan arrears problems have been rising since 2005. As the following table shows, these have increased by around a quarter over the last three years.
2.2. However the number of enquiries about mortgage and secured loan possessions seems to have accelerated through the last half of 2007/08 and 2008/09 so far. For instance, the first four months of 2008/09 have produced around 27,300 enquiries, compared to roughly 18,200 enquiries in the first four months of 2007/08 - an increase of around 45 per cent. Projecting the current level of enquiries forwards would produce over 80,000 mortgage and secured loans arrears problems this year.
2.3. However a client or household can be recorded with more than one enquiry about a mortgage or secured loan problem and so the number of households with arrears problems will be somewhat less than this. Even so based on current levels, the CAB service is likely to see something like 56,000 households with mortgage arrears problems this year.
Reasons for mortgage arrears problems
2.4. A recent snapshot survey, which is yet to be published, of around 400 households seeking advice from the CAB service about mortgage arrears during the last week of June 2008 found that borrowers faced financial difficulties for a variety of reasons. The table below shows that there was no single clear reason given by CAB clients for their mortgage arrears problems.
2.5. Unemployment was a significant, but not a dominant cause of the problems. However, around 40 per cent of the borrowers in this survey who were in receipt of or claiming a means tested benefit which provided income support for mortgage interest (ISMI) payments, were in arrears due to job loss or business failure.
2.6. This suggests that, not surprisingly, a downturn in the economy leading to a sharp rise in unemployment and business failure would increase the levels of mortgage arrears inquiries we are seeing. In which case ISMI benefits for the unemployed are likely to become more important in supporting homeowners. We welcome the recent changes to ISMI, which we discuss later in the submission.
2.7. It is also notable that rising mortgage costs were given as a main reason in very few cases. Given that many of these CAB clients will have mortgages with sub prime lenders that charge high reversionary rates and may also find re-mortgaging difficult, we might have expected this to be a more significant reason. However homeowners may be squeezed by a combination of rising mortgage costs, increases in the basic cost of living and a slowing economy. This would reduce resilience against income shocks, such as a drop in wages, a period of ill health or even a relationship breakdown that would be felt by lower income borrowers in particular. The reasons given by CAB clients seem to show this.
2.8. In summary, we believe that the immediate effect of the credit crunch has been to significantly increase growth in enquiries to the CAB service about mortgage difficulties, that we started to see in 2005. We believe that this growth was in large part a story of borrowers on the margins of the mortgage market (lower income households and sub prime borrowers in particular) who were getting into difficulties. We have no evidence as yet to suggest that the credit crunch is now starting to pull a much wider range of borrowers into difficulties in a way similar to the recession of the early 1990's. However any significant increase in unemployment could change this.
3. The problems facing CAB clients and some recommended solutions
3.1. In December 2007 we published an evidence report, Set up to fail, which highlighted the problems CAB clients were facing and analysing some of the causes, including irresponsible lending, arrears management practices and the court process, sale and rent back and the inadequacy of existing safety nets.
Problems with lending practices and the advice of brokers
3.2. CAB evidence highlighted cases where borrowers were entering into mortgage or secured loan agreements which appeared to be unaffordable from the outset, or unsustainable, or which made the borrower very vulnerable to debt problems. We recommended that FSA responsible lending rules should be tightened up, particularly in respect of self certification type loans and mortgages taken out by people exercising the right to buy their local authority home. We also recommended that the Office of Fair trading needed to develop a better selling regime for secured loans. We urged both regulators to toughen up monitoring of lending practices to ensure that lenders complied with the rules.
3.3. To an extent the need to deal with irresponsible lending practices has become less urgent since the credit crunch, as mortgage and equity withdrawal lending has declined. However the issue is still very much alive and we would hope to see improvements in place for when the market picks up. In this regard we welcomed the results of the FSA's responsible lending project and hope that these translate into better practices in the market. We also welcome the OFT's own irresponsible lending project and hope that the resulting guidance will give a clear message to second charge lenders about the steps they will need to take to ensure that they only sell credit that is affordable and suitable for the borrower's needs.
Problems with arrears management practices and the court process
3.4. CAB evidence highlighted cases where some lenders did not seem to be doing enough to help borrowers deal with arrears, and seemed instead to be using the courts as a first resort rather than as a last resort. We were also concerned that the court process for mortgage possession did not include sufficient safeguards to prevent lenders from going to court where this was not necessary. As a result we recommended that the FSA and OFT should clarify their respective rules and guidance on arrears management, and work harder to ensure that lenders complied with them. We also recommended that the court process should include a pre-action protocol for mortgage arrears that would set out the steps that lenders should take before coming to court. This would empower the court to adjourn cases or disallow costs where lenders have not taken these steps.
The specific problems of people who entered into unregulated sale and rent back agreements
3.5. CAB evidence also highlighted cases of
people who had entered into sale and rent back agreements in an attempt to
avoid losing their home (generally as a result of mortgage arrears).
Safety nets were failing to support borrowers
3.6. Uptake of mortgage payment protection policies continued to decline and CAB evidence highlighted how the rules limiting the timing and amount of payments from the benefit system towards mortgage interest meant that help was often too little and too late. As a result we recommended that the Government should consider reforming aspects of the ISMI scheme as a matter of urgency, including reducing the waiting period before payment, increasing the maximum size of loan on which interest could be paid and abolishing the standard interest rate.
3.7. Finally we argued that the increasing level of people seeking advice about mortgage arrears was a problem that could only be addressed through co-ordinated action across government.
4. Citizens Advice's views on the housing package
4.1. Citizens Advice gives a very warm welcome the initiatives that the Government has taken so far to support homeowners in financial difficulties. Here we would highlight the following points.
4.2. We have seen cross departmental co-operation to address the growth of mortgage repossessions and borrowers in financial difficulty. Citizens Advice has been impressed with the urgency and breadth of the Government's response so far.
4.3. Last week the Government, the Civil Justice Council and the judiciary jointly announced the launch of a pre-action protocol for mortgage arrears. This has been introduced in a very timely manner and should help ensure that lenders help borrowers to find solutions to mortgage arrears problems.
4.4. We also welcome the guidance issued by the Council of Mortgage Lenders that clarifies the FSA rules on good arrears management practices for CML members. The guidance is comprehensive, well written and sends a clear message to lenders as to how they are expected to help borrowers in difficulties. Citizens Advice congratulates the CML for this thoughtful and progressive response. We would urge the Finance and Leasing Association, which represents many second charge lenders, to adopt similar guidance for their members.
4.5. The housing package reforms of ISMI to help with mortgage interest payments are also very welcome. Based on the evidence of our small snap shot survey, we estimate that of the 55,000 households projected to seek advice from the CAB service about mortgage arrears this year, around 9,500 would benefit from the changes to the ISMI waiting period and around 2,750 would benefit from the increase in the capital limit (these two groups will overlap in some cases, so the numbers cannot be added together).
4.6. Again based on the small snapshot survey, we estimate that around 59 per cent of the households currently seeking advice about mortgage arrears would be likely to be classed as being in priority need under homelessness legislation. Therefore we believe that the mortgage rescue scheme announced in the housing package is a very sensible and cost effective way to support homeowners to whom local authorities might otherwise owe a housing duty. Citizens Advice are currently working closely with the DCLG team on implementing the mortgage rescue package.
4.7. So in general terms, Citizens Advice strongly supports the package of measures aimed at supporting homeowners in financial difficulties. However, we believe that some of these measures need to go further.
4.8. The DWP announced that the ISMI reforms would come into effect in April 2009. However we understand that these will only apply to people who claim after the introduction date and not to existing claimants. This means that someone who has been waiting 20 weeks for help before April 2009 would have to wait another 19 weeks while a new claimant would only have to wait 13 weeks. This seems unfair. Introducing the reforms in this way could also put people in the bizarre position of delaying their claim and suffering hardship in order to benefit from the ISMI changes. We would also point out that the period between now and April 2009 could prove to be the most acute period of mortgage arrears problems, when the help from government is most needed.
4.9. We note the statement by the Secretary of State for Work and Pensions in Parliament on 20 October 2008 that the changes to ISMI might be brought forward to January if there were cross-party support. Citizens Advice would urge Parliamentarians of all parties to support the introduction of the ISMI reforms as soon as possible and to have them introduced in such a way that they apply to all pending applications, as well as new applications.
4.10. The ISMI reforms did not include any proposals to reform the standard interest rate paid under the ISMI scheme. Under current rules, help with mortgage interest payments is based on a standard interest rate that is set at 1.58 per cent above Bank of England base rates. We understand that this method is efficient from the point of view of administering payments, but it also means that borrowers may not get all the financial help they need to cover their mortgage payments in full. In particular we are concerned about borrowers of sub prime lenders where the discounted period on the mortgage has ended, and the interest charged has moved to a reversionary rate. These rates often track LIBOR rather than the Bank of England Rate and will often be considerably higher than 1.58% above base rate. In Set up to fail we set out figures showing how the shortfall between the standard interest rate and the rates charged on sub prime mortgages could be the equivalent of over 40 per cent of a couple's income based jobseekers allowance applicable amount.
4.11. The housing package announcement commits funds
to the mortgage rescue package that would be sufficient to prevent an estimated
6,000 possessions across
5. Beyond the housing package - is there a need for further support?
5.1. Citizens Advice believes that the housing package and the pre-action protocol provide significant additional help for borrowers in financial difficulties. However we believe there are some outstanding issues.
5.2. Firstly, the pre-action protocol gives the courts power to address poor arrears management practices, but it does not go beyond this to set any thresholds for reasonable forbearance for lenders. For instance, the protocol is silent as to whether lenders should refrain from moving for repossession while a borrower is in the newly reduced 13 week waiting period for ISMI. The FSA mortgage conduct of business (MCOB) rules establish that repossession should be a last resort, but they are silent on the question as to how much time a lender should give a borrower that has suffered a severe income shock to recover (perhaps by finding a new job after previously being made redundant) before moving to repossess.
5.3. The general practice of courts is to allow borrowers to stay in their homes if they can pay the current mortgage payments as they fall due, plus an amount to repay the arrears within the remaining term of the loan. However, it is not clear that the courts have sufficient flexibility to keep a borrower in their home where the borrower can meet some, but not all, of their monthly mortgage instalment. However the courts have different powers to deal with secured loans that are regulated by the Consumer Credit Act 1974. Here the court has the option to make a Time Order, a flexible order that can allow the borrower to pay reduced contractual payments, possibly over a longer period. Citizens Advice believes that a similar provision should be available for first charge mortgages.
5.4. Help with housing costs for low income households is currently uneven and organised in a way that arbitrarily excludes certain households. Help with mortgage payments from the ISMI scheme is only available to homeowners who are not in work. The housing benefit scheme helps low income tenants both in-work and out of work. But there is currently no help available for low income homeowners who are in work.
6. Rented accommodation
6.1. Unlike home owners, tenants who face sudden income drops as a result of loss or reduction in employment can claim help with managing their housing costs through the housing benefit scheme. However tenants are not immune from the impact of the credit crunch, as many buy to let landlords are amongst those no longer able to meet the costs of their mortgage and therefore facing repossession. This can put the tenant on a fast track to homelessness, even where they are fully up to date with their rental payment.
Landlord mortgage arrears
6.2. A specific problem which needs urgent attention is the position of tenants where their landlord gets into mortgage arrears and is repossessed by the lender. In these circumstances, the tenant, who may have an unblemished rent account, is often not entitled to even the limited protection which an assured short hold tenancy normally offers - i.e. two months' notice followed by a possession order through the accelerated possession route. Instead, the rights of the lender to repossess the property normally override those of the tenant, who, as 'occupier', is only entitled to receive notification of the possession proceedings and eviction date.
6.3. We believe that it is only reasonable that, in these circumstances, the lender should honour the terms of the tenancy and step into the shoes of the former landlord. This would mean that, if after repossessing the borrower, the lender wants vacant possession, legislation should require that the lender serve notice on the tenant and seek a possession order through the courts before the tenant is evicted.
6.4. Where there is a buy to let mortgage, there is a case for going further. The Rugg review suggests that lenders "should be encouraged to create tenancy protection strategies, to ensure ongoing management for repossessed properties purchased with buy to let mortgages."
Private Rented Sector standards
6.5. This is
also be a good time for a switch in focus onto increasing resources for
improving property standards in the
6.6. In order to incentivise landlords, a fiscal change to allow landlords to claim tax relief on improvements would also support such a strategy.
November 2008 |