Mortgage arrears: follow up - Treasury Contents

Examination of Witnesses (Question Numbers 1-19)


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 monthly payment.

  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 line is?

  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 that?

  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 homes—they could pay their mortgages and something off the arrears—but 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 want.

  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 that?

  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 model.

  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 found—this is the same survey Peter mentioned before, so borrowers at court—is the judges failed to apply sanctions in many cases. In fact, I think they only offered sanctions in around six cases.

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