Conclusions and recommendations
Mortgage arrears and repossession levels
1. Being
in arrears and facing the threat of repossession are distressing
experiences. The evidence we have reviewed shows that both mortgage
arrears and repossession levels are on an upward trend, which
is expected to continue in the next few years. As recent global
events have shown, the fortunes of economies are intimately bound
up with that of their housing markets. (Paragraph 14)
2. Much uncertainty
remains as to whether any recovery in the housing market would
mitigate or exacerbate the scale of repossession. We recommend
that the FSA monitors the forbearance policies of mortgage lenders
to ensure that repossession is only a tool of last resort. (Paragraph
19)
The regulatory framework
3. We
believe that the issue of the regulation of second charge mortgages
should be reviewed by the Government. This Report focuses mainly
on the principles and rules relating to first mortgages regulated
by the FSA and it would be a cause for concern if second mortgages
(likely to be taken out by those with greater needs) were less
well regulated (Paragraph 22)
4. The evidence we
have received suggests that mainstream lenders are, broadly speaking,
complying with the FSA's mortgage conduct of business rules. Indeed,
we have heard positive examples of some mainstream lenders taking
pro-active steps to support consumers in mortgage difficulties.
That said, we are extremely concerned by evidence of a lack of
flexibility and forbearance in the sub-prime, specialist and second
charge sectors to homeowners in arrears. (Paragraph 32)
5. We share the serious
concern expressed by many of our witnesses that some lenders are
charging high and excessive mortgage arrears fees to customers
who fall into mortgage difficulties. Whilst we have not received
conclusive evidence that the mortgage arrears charges levied by
lenders are excessive and go beyond recouping additional administrative
costs, we fear that some lenders are using arrears charges as
an alternative profit stream. Indeed, the wide variation in the
level of mortgage arrears charges levied by different firms adds
weight to such a view. (Paragraph 39)
6. Such practices
are intolerable, placing additional strain on homeowners already
struggling to keep up with their mortgage payments. We note that
the FSA has already referred four mortgage firms to enforcement
action and understand that part of the case against some of these
firms is based on excessive mortgage arrears charges. We suspect
these cases represent the tip of the iceberg and call upon the
FSA to take a much more robust stance towards tackling and eliminating
unfair arrears charges. As a first step we believe lenders must
be required to provide an itemised breakdown of the additional
costs their arrears charges are supposed to cover. This would
help shed valuable light on whether such charges are reasonable
and justifiable as industry representatives claimed was the case
amongst mainstream lenders. Alongside this, we believe that the
FSA and OFT respectively should review all mortgage arrears charges
made by mortgage providers and secured lenders to determine whether
they are reasonable. (Paragraph 40)
7. We share the concerns
expressed by groups such as Shelter, Which? and Citizens Advice
that the FSA's principles-based approach in the area of mortgage
arrears has given far too much flexibility to lenders to interpret
the rules as they wish. The consequence has been a wide divergence
in practice amongst firms with consumers treated in an inconsistent
manner and little way of establishing whether they are being treated
fairly. We agree with the Financial Services Consumer Panel that
there is an urgent need for more rules or a more explicit statement
of the requirements on firms in guidance to help put some 'grit
into the system'. We note the arguments put forward by the industry
that the FSA's high-level principles in this area are complemented
by more practical industry guidance, but believe the need for
industry guidance in this area actually illustrates the deficiencies
of the FSA's current approach. Industry guidelines are not a substitute
for more robust rulesthey are voluntary not binding, there
is often little monitoring or supervision and there are no sanctions
for non-compliance. (Paragraph 47)
8. We note that the
FSA has begun moving from a principles to an outcomes-based approach
and trust the FSA's Mortgage Market Review, which includes a re-examination
of the mortgage conduct of business rules, will lead to a shift
in this direction with a better balance between high-level principles
and rules that are binding upon firms. The FSA's Mortgage Market
Review must also give serious consideration as to whether the
mortgage conduct of business rules need revising. The rules were
drawn up in the early part of this decade in a very different
economic environment and there is concern, expressed by the Financial
Services Consumer Panel amongst others, that revisions need to
be made to ensure the rules are appropriate for the very different
economic circumstance prevailing today. (Paragraph 48)
9. The FSA stated
in its submission said that "in late 2007, we became increasingly
concerned by evidence, both from our own mortgage effectiveness
review and from external reports by charities such as Citizens
Advice and Shelter, that some mortgage lenders were failing to
treat their customers fairly when they fell into mortgage arrears'.
Yet it was not until June 2009 that the FSA announced that it
was finally taking enforcement action against four firms. Furthermore
such enforcement action against these firms could potentially
take up to a year to conclude. During this period of time, which
included the FSA's investigation, over 40,000 more homes were
repossessed. The seemingly leisurely approach of the FSA in terms
of completing its mortgage arrears review and enforcing possible
breaches in the rules in the area of mortgage arrears is a matter
of grave concern. We call upon the FSA to spell out clearly in
its mortgage market review how it will improve its performance
in terms of bringing miscreant firms to book. (Paragraph 52)
10. Currently the
FSA only publishes the names of firms it has found guilty of wrongdoing
once enforcement action against the firm has been concluded. The
industry has told us that it supports the continuance of this
approach, although others have argued that this places the interests
of lenders ahead of those of consumers. We have concerns that
the balance between disclosure to the public and the need to protect
firms before they have been found guilty of wrongdoing has tilted
too far towards the interests of the industry. (Paragraph 58)
11. Whilst we would
not go so far as to describe the FSA's stance on naming firms
guilty of wrongdoing as symptomatic of the cosy relationship between
the FSA and industry as others have done, we understand why such
a suspicion lingers. We were, for instance, surprised that the
FSA, in part, justified its decision to reject a freedom of information
request in this area on the grounds that publication would damage
its relationship with firms who might as a consequence be less
willing to provide the FSA with information. Such a softly softly
approach contradicts the pronouncements by Hector Sants, Chief
Executive of the FSA, who has publicly stated that he wanted firms
to be afraid of the regulator. We invite him to add substance
to this statement by informing claimants whether or not their
cases are being investigated. The impression given at the moment
is that it is the FSA that is scared of the firms it is charged
with regulating. One possible approach would be for the FSA to
publish information on the breadth of practice in the sector which
of itself would highlight outliers. (Paragraph 59)
12. The pre-action
protocol has been helpful but should be more specific including
the giving of examples of unreasonable actions by lenders (for
example excessive charging of arrears) which the court may take
into account. (Paragraph 63)
13. We are extremely
concerned by the evidence we have received of dubious and unscrupulous
practices in the private sale and rent back market. Such practices
have caused misery and suffering to many families and have brought
the sale and rent back industry into disrepute. (Paragraph 73)
14. We welcome the
decision to bring the sector under the regulation of the FSA.
However, we have concerns that the interim regulatory regime for
the sectorwhich will be in force until 30 June 2010may
not afford full protection to consumers and may even give some
a false sense of security. The FSA must therefore ensure that
there will be no slippage in the date for the full regime to come
into force and should consider whether this date could be moved
forward. We are also surprised that the interim regulations do
not contain a requirement for 'independent valuation', despite
the fact that the FSA's original proposals in this area contained
just such a provision. We seek clarification as to the grounds
upon which the FSA made this decision and whether it will include
'independent valuation' as a requirement under the comprehensive
regulatory regime which is to be introduced in 2010. (Paragraph
74)
15. There is also
a danger that whilst reputable sale and rent back firms will register
with the FSA, many others will continue to operate in the 'dark',
away from the prying eyes of regulatory scrutiny. The FSA should
therefore set out how it intends to register and monitor the activities
of those sale and rent back firms and landlords who may try to
slip under the radar. At the same time, the FSA must demonstrate
that its regulatory regime in this area has real 'bite' and that
it will move to enforcement action much more quickly than has
hitherto been the case with respect to breaches of its mortgage
conduct of business rules. (Paragraph 75)
Government support for households in mortgage
difficulties
16. We
welcome the measures which the Government has introduced to support
homeowners in mortgage difficulties. However, the need for the
introduction of a large number of new initiatives as well as the
amendment of schemes in place before the current crisis suggests
that adequate safety nets for homeowners in mortgage arrears and/or
at risk of repossession were not in place prior to the current
recession. We recommend that the Government re-examine its longer-term
strategy towards supporting homeowners in mortgage difficulties
to ensure that adequate mechanisms to support homeowners are in
place even once the current downturn has ended. A part of any
review of strategy should be an examination of the adequacy of
existing insurance models to protect mortgage holders against
adversity and the potential of alternatives. (Paragraph 80)
17. We welcome the
introduction of the Homeowners Support Scheme (HMS) which has
the potential to provide valuable assistance to homeowners in
mortgage difficulties. We recognise that it is too early to make
an assessment of how many homeowners have benefited from the scheme
and therefore whether HMS can be judged a success. That said,
increased disclosure of the details of equivalent schemes operated
by some lenders is important, not least so that consumers and
advisors have a clearer idea of the support they should be receiving
from lenders. Finally, firms representing 20% of the market place
are neither in HMS or offering equivalent support to their customers.
Whilst there are practical difficulties around securitisation
covenants for some in offering such supportsomething we
discuss in greater detail belowthe Government must make
it a priority to increase participation. Raising participation
is especially important as evidence suggests that it is largely
sub-prime or specialist lenders who are not participating in such
schemes and these are precisely the firms whose customers are
most likely to be in mortgage difficulties. Whilst we hope that
persuasion will be sufficient to convince more lenders to sign
up, the Government should not rule out compulsion if this approach
fails. (Paragraph 85)
18. We are concerned
by evidence we have received that certain securitisation agreements
and covenants may restrict the ability of lenders to offer forbearance
and greater flexibility to homeowners in mortgage difficulties
and may restrict their ability to participate in HMS. To this
end, we call upon the FSA to move quickly to ensure that securitisation
agreements already in place do not act as an obstacle to treating
consumers in mortgage difficulties fairly. Equally, we would welcome
details of how the FSA intends to ensure that future securitisation
covenants do not contain such provisions and the timetable to
which it is acting. (Paragraph 89)
19. The Mortgage Rescue
Scheme has directly benefited just six households, despite being
designed to assist upwards of 6,000 households. We call upon the
Treasury and the Department of Communities and Local Government
to explain why their projections for participation in the scheme
appear to be so out of step with the picture on the ground and
request analysis as to whether this reflects flaws in forecasting,
poor design of the scheme or lack of consumer demand. We note
the comments made by John Healey, Minister for Housing, that MRS
has acted as a catalyst for people in mortgage difficulties receiving
advice and assistance from lenders and money advisors. This is,
of course, to be welcomed, although we do question whether it
is the most cost-effective way to raise people's awareness of
the need to, in the first instance, work together with their lender
to resolve mortgage payment difficulties. (Paragraph 93)
20. We recommend that
the Government should review the Support for Mortgage Interest
(SMI) scheme as part of the Pre-Budget Report this autumn, and
consider the costs of linking the scheme to either: a contribution-based
Jobseekers Allowance or to the tax credits system. As part of
that review the Government should examine: the payment of actual
interest rates instead of the SMI standard interest rate, the
issues surrounding second charge mortgages and what steps would
be needed to lift the two year cap on SMI payments. (Paragraph
99)
Mortgage finance
21. First
time buyers face barriers to getting on the property ladder, such
as high deposit requirements and restrictive lending criteria.
While we are not advocating a return to past levels of lending,
it appears that more needs to be done to help credit-worthy first
time buyers access credit. It is likely that restricting some
first time buyers has negative effects on an already depressed
housing market. (Paragraph 113)
22. It is vital that
consumers understand that their mortgage payments will vary over
time, especially during a period when interest rates are far more
likely to go up than to fall. This is the responsibility of lenders
and this is a matter that should be enforced by the FSA. (Paragraph
114)
23. We are concerned
that decreased competition in the mortgage market could lead to
unfair practices towards consumers. The FSA need to be vigilant
in their supervision of lenders to prevent anti-competitive practices.
(Paragraph 115)
24. Arrears rates
in the sub-prime sector are higher than those in the rest of the
mortgage market. We note that the current sub-prime arrears rate
of 10% is likely to rise given that arrears are predicted to increase.
However we acknowledge that there are borrowers who use sub-prime
lenders who are able to sustain their mortgage payments. We agree
with the FSA that the important issue is for all lenders to consider
the affordability of a mortgage for each potential customer. The
FSA should ensure that all lenders perform adequate affordability
tests, approved by the regulator, and improve their understanding
of borrowers' ability to repay. (Paragraph 119)
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