Mortgage arrears: follow up - Treasury Contents

Examination of Witnesses (Question Numbers 20-39)


23 MARCH 2010

  Q20  Nick Ainger: By "sanctions" what do you mean?

  Ms Hughes: It should be something like costs; not allowing the lender to add costs to the borrower, but the protocol doesn't really allow this.

  Q21  Nick Ainger: Did the judge kick out the repossession application?

  Ms Hughes: In some cases, the hearing was adjourned.

  Q22  Nick Ainger: On the grounds that the protocol had not been followed?

  Ms Hughes: What they would have done is either adjourned the case to allow more time for negotiation if the protocol had not been followed or, perhaps, give a suspended possession order, but in many cases no real action was taken and we could not see a very clear correlation between not following the protocol and the outcomes for borrowers. I think there are two things there. First of all, it is about needing to get a more consistent practice across judges in the county courts, and the Ministry of Justice have been working on that. As Peter mentioned, the check-list should help with that consistency of practice. The other issue, though, is really that the protocol itself does not have real teeth; the sanctions in it are pretty weak. If you look at the language, for example, it is "should" not "must". If we look at Scotland, they have just introduced pre-action requirements; so it is much stronger there that the lenders have to do these things.

  Q23  Nick Ainger: If the Mortgage Conduct of Business Rules actually do become regulation, would that address that issue?

  Ms Hughes: I think that would certainly help. I think we have seen that the principles-based approach that the FSA has taken to date has not been particularly effective. The proposal which we very strongly support is to move those rules from guidance, as they currently are, into binding rules. We would like to see that happen as soon as possible and for the FSA not to get derailed by the election, or anything else, because it is really important that those changes happen soon to protect borrowers in the immediate term.

  Q24  John Mann: There were 1,458 second charge possessions in 2009. Can I ask you, Nicola Hughes, does that suggest restraint and repossession only as a final result?

  Ms Hughes: I think there is not a clear consensus that second charge lenders are any more or any less forbearing than the first charge lenders, so we do see a mixed picture there, but some of our own evidence has actually suggested that second charge lenders are not always entirely sympathetic. For example, in a survey we did of callers to the National Debt Line, 57% of those that were in arrears with their first charge mortgage were satisfied with the way the lender had treated them, but only 34% of those in arrears with their secured loan, their second charge loan, were happy. There are still some inconsistencies in practice, I think.

  Q25  John Mann: Peter, would you agree or disagree?

  Mr Tutton: Yes, I would agree with that. Clearly, if someone has got second or subsequent charges, it increases their payment burden and if they get into difficulties it makes it harder to get out. There are a couple of points. One is on the kind of lending practices in the past of some second charge lenders. We have seen cases where people pay 70% of their income in housing costs plus arrears as a management practice. There is a question that if people come before the courts do the courts have enough power to allow people to pay maybe less than their contractual mortgage payment, less than their contractual second charge payment, for a while, until they get back on their feet. It is also about giving the courts the power to give people breathing space, which we do not think is really strong enough at the moment.

  Q26  John Mann: Finally, for each of you. In a sentence, how would you summarise the position of home owners who might be in difficulties now as opposed to the early 1990s?

  Mr Tutton: I was a money adviser in the early 1990s and there does seem to be a different pattern now that the people tend to be subprime borrowers, so we have lower income households, people really clinging on. One of things we found in our survey of people with suspended possession orders, about 30% of them, what they had left after paying their mortgage and their secured loans was less than the poverty line for everything else. Going back to the point on interest rate rises, a small interest rate rise, 0.5% would put their borrowing costs up maybe £60 a month, but that could be the difference between them staying in their home or not. I think what is the difference between now and possibly the 1990s is that we have got many more vulnerable households, lower income households, households also with a lot of other debt. 48% of people in our survey had unsecured debt and they were much more likely to face full possession. That was not the case in the 1990s. You did not have this huge amount of unsecured debt dragging people down as well. A lot of what we are seeing in the housing problems in this recession is actually about problems that were building up in credit markets about people who are very vulnerable to debt if anything went wrong. That is different from the 1990s.

  Ms Hughes: First of all, I would say that the economic environment is very different to the 1990s because we are in a low interest rate environment now. I think that is very important. Professor Janet Ford looked at these issues in a research report called Uncharted Territory and concluded that lenders were offering a wider range of forbearance tools now as opposed to the 1990s, so I do think the situation has improved.

  Mr Lindley: I think the difference now is that because interest rates have been cut so dramatically, it allowed lenders to widen their margins on mortgages. The vulnerability, as my two colleagues have said, is that when interest rates start going up more people are going to be squeezed, but, also, there was a lot more subprime lending and I think the recession has really exposed some of the practices in the subprime market. People were given mortgages which were unaffordable but, also, there were more people who had over 100% mortgages so that when house prices fall you are kind of stuck with your existing lender and are more vulnerable to rises in the standard variable rate. As we are seeing with Skipton, you have very little protection if your lender decides to increase their standard variable rate. The borrowers with Northern Rock, while they might be protected at the moment because it is owned by the Government, when it is sold on there will be little protection or little to stop the new private Northern Rock increasing standard variable rates, unless that is made a condition of any sale.

  Q27  Mr Fallon: Peter Tutton, what is the current take-up of the Homeowners Mortgage Support Scheme?

  Mr Tutton: It is pretty low. When we did a survey on it, we found that we only had coming through CABs this year (and we are going to see getting on for 67-70,000 people) about two or three that had actually gone through to HMS. In December I think they announced about 15. So the take-up has been very low. The reasons why the take-up—

  Q28  Mr Fallon: I do not want to go into the reasons; I just want the figures. You think it is 15 cases.

  Mr Tutton: I think we saw about 15 cases. It was double figures before Christmas.

  Q29  Mr Fallon: Double figures?

  Mr Tutton: Double figures, yes.

  Q30  Mr Fallon: You are suggesting in your memorandum that the Government should instead move the scheme on to a loan modification basis. Does not that simply reward those who have borrowed too much?

  Mr Tutton: We are not suggesting necessarily that the Government moves the scheme onto a loan modification scheme.

  Q31  Mr Fallon: Hang on a minute. You say, "We believe the Government should consider how such a scheme might be set up on a loan modification basis."

  Mr Tutton: Yes, which would probably be done, we are saying, through the FSA rules, so when the Mortgage Market Review is looking at what lenders need to do with forbearance, it is bottoming out and whether lenders should be offering more loan modification schemes? One of the reasons why HMS has been unpopular with borrowers is because it defers interest, but you have got this big balloon of debt building up in the background and so it is a very big bet against nothing. If you get back into work you might be able to deal with it; if not you have got a bigger debt. Some of the better practices we are seeing with lenders at the moment is lenders saying, "Given where we are, we will share the cost of your problem but we will modify your loan, reduce your payments and a big interest bill will not build up." We think that is a good thing to happen. I do not think it is rewarding people who have taken on too much money. Most of the borrowers we are seeing are people who have lost their job, their partner has lost their job and they have lost hours. 63% of the people in our survey said the main reason why they were in arrears was connected to the economic downturn—relationship breakdown 20%, illness 19%—so we are talking about people who are struggling, usually through no fault of their own. It is true that in many cases we have seen people that have been able to borrow to the margins of vulnerability. In some cases we have seen outright irresponsible lending, often with very vulnerable borrowers who were not really in a position to understand where they were going to go. More frequently, and I guess why there is the number of arrears cases and a lot of subprime, we have seen the mortgage market extend to lower income, objectively riskier borrowers and when the water gets choppy they are going to get into difficulties and, the point is, what do you do to ensure that when it does get difficult they have got a better chance of surviving? One of the arguments we are making is if lenders are lending to people who are high risk, they should be prepared to meet some of those costs where it goes wrong. Hence something like a loan modification scheme, where you do not just defer the debt so borrowers are facing perhaps an unmanageable debt in a year's time but the lenders take on some of those costs as well.

  Q32  Mr Fallon: Tell me about the Mortgage Rescue Scheme, what is the take-up there?

  Mr Tutton: The Mortgage Rescue Scheme, I think we are into the hundreds now, 300 or so, and I think there is 1,000 going through the system.

  Q33  Mr Fallon: One scheme has helped 15 people.

  Mr Tutton: Yes.

  Q34  Mr Fallon: The other scheme has helped about 300 people?

  Mr Tutton: Yes.

  Q35  Mr Fallon: If it has only helped 300 people, why should it remain as a permanent safety net, as the building societies have argued?

  Mr Tutton: What we are seeing with the Mortgage Rescue Scheme is that it is a useful scheme for people who whatever has happened to them is a kind of cataclysmic failing. They are very unlikely to get back on track and be paying their mortgage, and so they are going to lose their homes. It is restricted to people who are in priority need, so vulnerable households that otherwise local authorities would owe a housing duty to. Effectively, what you are doing is trying to stabilise people who otherwise would perhaps have to be rehoused anyway; so you are cutting out the middle man of repossession and all the hardship. It is always going to be a low volume scheme, and there are concerns that it is expensive. It should be a last resort. Because, effectively, it does pay the lender's mortgage off so it should not be something that replaces forbearance and other support, but for those borrowers who are very vulnerable it is something as a last resort. It would always be low take-up, it is never going to be a huge scheme, but we are hearing from some of our advisers how it has managed to keep some very vulnerable households, people with disabilities, in their homes, stop them being made homeless; so it has had some good positive effects.

  Q36  Mr Fallon: But it has been running for well over a year now and it was supposed to help 6,000 people. You are telling us it has only really helped 300.

  Mr Tutton: I think there might be up to another 1,000 going through. The goat has to get through the python.

  Q37  Mr Fallon: Sure, but why has it not got to 6,000?

  Mr Tutton: I guess some of the reason would be it has seemed that it has been quite difficult to get the deals going through. This is one of the reasons why C&LG set up their fast-track team. As I understand it that has been helpful in negotiating, particularly in some of these cases where what you have is multiple charge holders. You will have a first charge, a second charge, maybe a third charge and somehow you have got to get them all to agree to take a haircut and accept the deal going through. If that is a local authority or housing association trying to do that, maybe one or two, it is very slow and difficult, so having a centralised team might make that quicker. In some other cases some of the evidence we have got from our bureaux suggest that there is some lumpiness in the geographical coverage. It may be the case that people in some areas do not have access if there is not a participating housing association. There are some other questions and problems as well. We have seen some cases, for instance, of charge holders refusing to give up their charge. Particularly, I saw a case yesterday of a debt collector who had a charging order for an unsecured debt refusing to give up their charge, so the mortgage rescue failed. There are lots of blockages in the system that make it difficult.

  Q38  Jim Cousins: What about the situation of tenants who are faced with eviction because their landlord, perhaps a buy-to-let landlord, is repossessed? Do we need to do more to assist such people?

  Ms Hughes: There is a major problem here in that some tenants, particularly where the landlord has not sought permission to let from the lender, are being repossessed and evicted from their houses with very little or, in some cases, no notice at all. I am pleased to say that some members of the Committee have supported our campaigning on this and the Government consulted on the issue. Since then a private Member's bill was taken forward to give tenants greater protections. It had very strong cross-party support and sailed through the House of Commons. That Bill is now going through its stages in the House of Lords and we think it is really vital that that Bill gets passed before the election to help tenants right now.

  Q39  Jim Cousins: Do you think that some of the longer-term housing market consequences of all this turbulence have been properly taken on board? For example, we have just now been discussing this complex menu of specific fire-fighting schemes. Do we, in fact, need something that is much more broadly based and permanent to deal with low income home owners whose circumstances change or whose incomes suddenly change? We live in a country which has flexible labour markets and inflexible patterns of housing tenure.

  Ms Hughes: I think that is absolutely right. The Government is starting to look at this issue. We do need to look at it across the board and think about, if we are encouraging low income households into home ownership, how can we make that sustainable for them over the long-term and how can we ensure that it can keep going where things do change. I think we need a safety net that is comprehensive, that is realistic and covers the situations where people do get into trouble. We need to look at it in terms of other debts that people might have and we need to think about it holistically as well. If we were not helping borrowers to sustain their homes through state support there, they will probably go into the rented sector and there we would probably be paying them housing benefit if they are on very low incomes. Also, in the private rented sector we have problems with affordability and with security of tenure. There is a really big picture to look at here, and I think the Government need to take that forward as a very serious and major review.

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