Mortgage arrears and access to mortgage finance - Treasury Contents

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 rules—they 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 sector—which will be in force until 30 June 2010—may 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 support—something we discuss in greater detail below—the 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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