Examination of Witnesses (Question Numbers
23 MARCH 2010
Q1 Chair: Welcome to this one-off session
that we are having on the mortgage arrears follow-up from last
summer. Can you introduce yourselves for the shorthand writer,
starting with Mr Lindley?
Mr Lindley: I am
Dominic Lindley, Principal Policy Adviser at Which?
Ms Hughes: Nicola Hughes, Policy
Officer at Shelter.
Mr Tutton: Peter Tutton, Policy
Officer at Citizens Advice Bureau.
Q2 Chair: We have got until 10.30,
so we are going to have precise questions and the same for the
answers: precise. Nicola, when Shelter appeared before us last
year, your colleague, Kay Boycott, raised the spectre of a second
wave of repossessions. However, the CML has been revisiting its
estimates for arrears and repossessions and that is now downwards.
Why has not this second wave materialised as was predicted?
Ms Hughes: First of all, I would
say that repossessions have continued to rise. Although we saw
a modest drop in the last quarter of 2009, they were 15% up on
the previous year; so we absolutely cannot be complacent. The
CML predict that there will be 53,000 repossessions this year,
which means that, on average, one household is losing their home
due to mortgage repossession every 10 minutes. We still think
that that is far too high. As to the reasons why the figures have
not been higher, I do think there has been a lot of good work
there. First of all, I think most people would accept that the
major reason has been the historically low interest rate levels.
For example, in the 1990s interest rates were between 10-15%.
With the base rate being so low now, that has really kept a lot
more mortgages affordable. The other reason, of course, is that
unemployment has not been quite as high as predicted. However,
what we have seen is more people losing hours at work and taking
pay cuts, which I think is quite an important point because the
mortgage safety net is really designed around unemployment rather
than other loss of income.
Q3 Chair: Dominic Lindley, what factors
do you believe are key in explaining the better than expected
outturns, building on what Nicola has said? The CML again, and
others, have been talking about a combination of low interest
rates, lender forbearance and Government measures.
Mr Lindley: I think house prices
as well have increased by around 10% from when they bottomed out
at the beginning of last year; so that will help more consumers
either remortgage on some of the lower rates, which are only available
for those with substantial equity in their houses, or to sell
their houses, instead of facing repossession. There is an arithmetical
impact here, because lower interest rates means that it takes
longer for a consumer, when they do stop paying their mortgage,
to hit the arrears reporting thresholds put in place by the FSA,
but at the same time there has been a degree of lender forbearance.
While the take-up of some of the Government schemes has not been
as high as people expected, the very fact that they are there
has encouraged lenders to take more action. We think lenders still
need to do more for consumers who do contact them early. Quite
a few people that we have been getting through on our money helpline
have found that when they approached the lender, before they got
into trouble, before they missed the payment, they were told,
"Actually what you need to do is cancel your direct debit
and then we will reassess your income after that." That is
the wrong advice. The lender should be seeing what they can do
to move people to an interest-only mortgage straightaway, rather
than only activating their processes when they have missed one
Q4 Chair: Dominic, when you were
here the last time we were talking about the naming and shaming
element to the FSA's approach to firms when it decides to refer
them to enforcement. First of all, do you feel there is a need
for a change in the law on that? Bearing that in mind, the FSA
has defended its stance, stating that "any public statement
issued by us at the point of an enforcement referral could be
premature if the firm has not had the opportunity to put its case
to the FSA", and they conclude, "The fact that a matter
has been referred to enforcement is not of itself a proper basis
for saying that someone is guilty of misconduct." Do you
have sympathy with this view, or are the FSA just procrastinating?
Mr Lindley: I think they are just
procrastinating. Their enforcement processes have been proceeding
at a very slow pace. We have had one fined, but there are still
six firms which have been referred to enforcement, which means
the FSA must have some suspicion about them because they are a
risk-based regulator and they only refer firms to enforcement
when there is a suspicion they are breaking the rules. I think
the FSA has got a choice to make about whether it wants to continue
with this "quiet word in your ear" approach to regulation
or whether it wants to get tough and achieve a credible deterrent.
We contrast the FSA's approach with the approach of other regulators
like Ofcom. Ofcom yesterday announced they were launching an investigation
into a supplier of pre-paid international calling cards. They
did not say this firm is guilty. They said that they are going
to examine whether they have broken consumer protection law. If
Ofcom can do it, why cannot the FSA do it?
Chair: Okay; we will ask them when they
come before us.
Q5 John Thurso: Dominic, how concerned
are you that a rise in interest rates would lead to a substantial
increase in households that are in arrears and/or suffering from
the possibility of repossession?
Mr Lindley: We are concerned,
because households are now much more sensitive to interest rate
rises. More people have moved off the short-term deals and have
gone on to variable rates or standard variable rates, where they
have little protection if a firm wants to increase that. We have
already seen people like Skipton Building Society increasing their
standard variable rate by 1.5% with two months' notice, which
is going to create a substantial increase in payments for some
consumers. The spreads between the base rate and the mortgage
rate the consumer is paying have increased dramatically as the
firms have taken advantage of the lack of competition to increase
their profit margins. You even have Halifax, on their website,
saying that if you want to be able to take advantage of lower
interest rates if they go down, a tracker mortgage could be what
you need. That is clearly misleading and irresponsible, because
interest rates are only going one way, and that is up. The firms
need to be assessing affordability and clearly communicating to
consumers that interest rates could rise substantially.
Q6 John Thurso: Have you got any
information, or have you done any work, as to at what point the
rises in interest rates will bite in this area? Clearly, if there
was a quarter point and that was it for two years, it might not
have a vast impact, but, if they rose, do you know where the break
Mr Lindley: If we are talking
at an aggregate level, because of the increasing margins that
the industry has been able to subject consumers to, if interest
rates get back to 3%, then the proportion of consumers' income,
taking away interest payments, will be back where it was at the
start of the credit crunch. If interest rates get back to 5%,
then the proportion of income accounted for by interest payments
will be right up at the peak of the early 1990s when, as Nicola
said, we had all that trouble with people not being able to afford
their mortgages. Even small increases in interest rates will cause
difficulty for some consumers. We do think further work needs
to be done to disaggregate these numbers and work out exactly
at a lower level how many consumers are at risk if interest rates
go up by one or two percentage points.
Q7 John Thurso: Nicola, in your submission
you note that lack of mortgage availability could also have an
impact on arrears and repossessions. Could you flesh that out?
Why is that?
Ms Hughes: I suppose negative
equity is a bigger problem for people who are looking to move
or are already in arrears because it might affect the arrears
management and the exit from home ownership. If people are not
in arrears and they just want to stay in that house and wait for
property prices to increase again, then you do not have such a
problem. I suppose there is a concern where people are looking
to move house, perhaps because they have got more children or
something, that they could end up being stuck in an overcrowded
house, not being able to move, which is a problem.
Q8 Ms Keeble: The last time you came,
Dominic, I think it was you who highlighted some of the practices
around mortgage arrears charges. I wondered if you had seen improvements
since then and also would like your comments on the FSA's proposals
and the effectiveness of them.
Mr Lindley: We welcome the FSA's
proposal that if a consumer has made an arrangement to pay off
the arrears with a mortgage lender, then the mortgage lender will
not be able to keep levying the monthly arrears charges. I think
there still will be a problem for some consumers who have got
variable incomes and who will not be able to agree a fixed amount
upfront but would be able to agree a small fixed amount and then
a variable amount depending on when they can pay a bit more. I
think it is also very disappointing that right in the depths of
the recession there are some lenders who have been increasing
their mortgage arrears charges. Abbey increased their monthly
charge from £35 to £40 a month and Capstone Mortgages,
which administers the old Lehman Brothers' book, under the brands
Preferred Mortgages and Southern Pacific Mortgages, has increased
its monthly arrears management fee from £60 to £85.
Q9 Ms Keeble: So that has gone in
the wrong direction, despite all the focus on it?
Mr Lindley: Yes, despite all the
focus on it and despite the FSA saying they are conducting a review
of the reasonableness of these arrears charges. We have not heard
anything from them yet as to what they have actually assessed,
and we have not heard anything from the companies or the trade
associations as to what are the reasonable costs that these charges
are supposed to cover, but it is for the lenders to justify these
fees, and they have failed to do that.
Q10 Ms Keeble: The Mortgage Market
Review proposes more interventionist measures. Would you welcome
Mr Lindley: Yes, I think we would
welcome more interventionist measures because lenders have shown
that they are not going to voluntarily cut these fees, so we do
need the FSA to assess whether they are reasonable, to take action
to make sure they are cut and, also, to make sure that people
who have paid excessive fees are automatically refunded. The FSA
has done that in the case of GMAC, which had to refund around
£7.7 million to consumers, but this action needs to be taken
now. It is no good for consumers, six months after their house
has been repossessed, to get a cheque in the post for a couple
of hundred pounds because they were overcharged for the solicitors'
costs. This needs to happen now while people are still struggling,
not in a year or two years' time.
Q11 Ms Keeble: Nicola and Peter,
looking at lender forbearance, you did a joint study which found
that around a third of advisers believed that lenders had not
properly complied with the mortgage pre-action protocol. Would
you like to make some comments on that?
Mr Tutton: Yes, that was a study
of people visiting court desks, so it was a kind of last ditch
advice before facing repossession action. The good news about
that was that something like nearly 80%, I think 78%, of the people
that were taken to court ended up staying in their homesthey
could pay their mortgages and something off the arrearsbut
what advisers were finding in a lot of those cases, about a third
of cases, they believe, was that the borrower said they had been
in contact with the lender but the lender had not offered a repayment
plan or had not offered any of the other options, like moving
to interest only, thinking about capitalisation, the sort of things
that should be happening under the pre-action protocol. That was
in July, and if we were to give lenders the benefit of the doubt,
the protocol was still coming in. One of the things we would have
recommended, if it had not happened, was a check-list for the
courts and lenders to make monitoring compliance easier. That
has since happened, which is good news, and so we will have to
see going forward how that helps. We are still seeing some cases
of advisers telling us that lenders are not necessarily doing
much to help people. I was looking yesterday at the case of someone
who was taken to court because their mortgage payment and when
their money came into their account were misaligned, and the lender
would not change it; so there are still all sorts of problems
with simple things that could keep people out of court that that
are not happening.
Q12 Ms Keeble: When we last discussed
this in the evidence there was particularly a discussion about
the subprime, the people in low income groups, not quite the main
street mortgage providers, as it were. Are they still causing
you particular concern?
Mr Tutton: I think the picture
is better than it was. We are still seeing, I guess, arrears problems
disproportionately amongst some subprime borrowers. As regards
the practice of subprime lending, some of them have got better.
We have certainly seen some subprime lenders offering more forbearance,
some of them offering very good forbearance and advisers telling
us they are getting much easier to deal with. That is still not
across the board. Some seem to be more difficult than others.
We are still seeing unhelpful practices, charges, as Dominic was
talking about: for instance, cases where people are getting income
support help but because their interest is capital repayment the
lender will not put them on and making charges.
Q13 Ms Keeble: Can you say who is
doing good practice and who is doing bad practice?
Mr Tutton: I would have to go
back and have a look. We can send you a note to be sure, if you
Q14 Ms Keeble: That would be helpful.
You mentioned the option of moving to interest-only mortgages,
but I see in the Mortgage Market Review that the respondents agreed
there was a case for constraining this particular product type.
I have not looked at it all because we have just got it this morning,
but, clearly, if people who are under financial pressure are being
recommended to move to interest-only mortgages for particular
reasons, presumably, that is storing up some problems for the
future if there is going to be pressure on interest-only mortgages.
Mr Tutton: Yes.
Q15 Ms Keeble: Nicola, do you want
to comment on that or any of the other issues?
Ms Hughes: Yes. I think that moving
to interest only is a very sensible short-term option for people
who are in temporary difficulties. Particularly if they are claiming
SMI, then moving on to interest only means that they will be getting
their full repayments met rather than just the interest part if
they were on a capital repayment mortgage. It is a very good option
for people looking to make a temporary move. It is also a prerequisite
for the Government scheme HMS (Homeowner Mortgage Support). I
do think that over the long-term, though, there is a risk and
what we would not want to see is people moving on to interest
only for a very long period without having identified how they
are going to pay off the capital sum at the end of that.
Q16 Ms Keeble: Do you agree with
Mr Tutton: Yes; absolutely. It
is about getting people through their short-term difficulties
in the best, least painful way, and that is what the pre-action
protocol should be all about.
Q17 Ms Keeble: One final question
about SMIs, since you mentioned that, Nicola. Do you still find
that some people are getting into problems because they cannot
get on to SMI, because they are on income-based JSA, not contribution-based?
Ms Hughes: I think income-based
JSA is eligible; it is contribution-based that is not.
Q18 Ms Keeble: Yes, sorry.
Ms Hughes: Yes, that is a problem.
I think what that illustrates is that SMI, while it works very
well for lots of people that are on it, is not really fit for
purpose as a long-term benefit. As I mentioned in my introduction,
it is not particularly helpful to people who are still working
but have lost hours or pay; it does not work for people where
one member of the household is in employment but the other one
is not; so I think what we need here is a long-term review of
this system. It is very important to keep SMI going over this
recession and the short-term changes to it have been very, very
welcome, but over the longer term we need to get to a more holistic
Q19 Nick Ainger: Nicola, in your
submission you say that you have done this analysis of over 450
repossession cases and in a third of those you found that the
pre-action protocol had been flouted in some way. In those cases
what did the judge do?
Ms Hughes: What we foundthis
is the same survey Peter mentioned before, so borrowers at courtis
the judges failed to apply sanctions in many cases. In fact, I
think they only offered sanctions in around six cases.