Examination of Witnesses (Question Numbers
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
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
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
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
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 downturnrelationship 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
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
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
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.