Examination of Witnesses (Question Numbers
23 MARCH 2010
Q42 Chair: Welcome to the Committee to
this hearing on the Mortgage Market Review. Can you introduce
yourselves to the shorthand writer, please, starting with Stephen?
Mr Sklaroff: Stephen Sklaroff;
I am the Director-General of the Finance and Leasing Association.
Mr Broadhead: Paul Broadhead;
I am head of Mortgage Policy at the Building Societies Association.
Mr Coogan: I am Michael Coogan,
Director-General of the Council of Mortgage Lenders.
Q43 Chair: Welcome. The FSA has today
published a feedback document based on responses to the proposals
outlined in the Mortgage Market Review, and that included introducing
loan-to-value, loan-to-income or debt-to-income caps, affordability
tests and income verification measures, although the FSA itself
seems to see no place for LTV, LTI or DTI caps. Is the mortgage
industry supportive of these proposals, such as affordability
tests, which seek to curb irresponsible lending?
Mr Coogan: I think we need to
decide, as a result of this review, what sort of mortgage market
we want in the longer-term, how many people it is going to serve
and what we are trying to achieve by it as well as the systemic
stability that we are looking for going forward. We supported
the FSA's views that there should not be LTV caps or LTI caps
because the evidence does not show that they would make much difference.
We have also supported their views that we should look again at
how income verification is used in self-certification products,
because we recognise those products were sold to people they were
not designed for in a way they should not have been sold, but
we have also identified that there are a large number of lower
risk customers, who go through a faster process because it streamlines
it and is customer friendly, who are not the same sorts of risks,
and that is identified in the evidence in the arrears cases that
are arising, so it is simply wrong to lump all non-income verified
loans together. In terms of affordability, lenders do need to
ensure that they have good affordability assessments that take
account not only of the mortgage costs now, but if interest rates
go up, and, in particular, because the main problems are arising
in multiple debt cases, they need to take account of the costs
of other credit.
Q44 Chair: Stephen, a number of households
are facing severe problems. Some would ascribe that to irresponsible
lending during the boom years.
Mr Sklaroff: From the perspective
of the second charge market in particular, we do not believe that
there was a significant degree of irresponsible lending in the
past. One of the features of that market, as I know members of
the Committee are aware, is that the loans that are sold by my
members in that market are often used to consolidate higher interest
loans that people may have from other sources and, therefore,
there is a tendency for the arrears rate in that market to be
relatively high during times of recession. What we have been able
to show though, through the reduction in the level of repossession
in the market, is that members are being very responsible in dealing
with customers if they do find that they are having trouble repaying
Q45 Chair: Michael Coogan, the Governor
of the Bank of England has consistently slapped down your request
for an extension to the Special Liquidity Scheme and Credit Guarantee
Scheme. First of all, why is the Governor wrong and, secondly,
given his position, if that is maintained, will it have an adverse
effect in the future?
Mr Coogan: I think there is a
misapprehension. Our report on the outlook for funding highlighted
that £300 billion has to be repaid to government and the
Bank of England, and we indicated that that money was not going
to be in the back pockets of the banks; they are going to have
to find it from somewhere. It is not for us to decide whether
or not they should be extended, but there will be consequences.
Q46 Chair: You said £300 million?
Mr Coogan: £300 billion.
I think what we have got is a market where those banks will have
to act in a number of different ways in order to repay those particular
payments to the Bank of England next year and the Government in
due course. They are going to have to divest some of their businesses,
they are going to have to raise capital, they are going to have
to seek repayment of their loans quicker; they are also going
to have to put their mortgage prices up for customers new and
past. There are a number of strategies that institutions will
have to follow. The point we are making is that £300 billion
is a significant funding gap and we need to address it now, collectively,
with the Government and we need to address it as an urgent priority.
Q47 Chair: What do we do?
Mr Coogan: I think the first that
we have said to the Treasury since before the Crosby Report was
that they should actually put in place the expert group they promised
at that time. In the event the Crosby Report was a description
of the problem and a number of recommendations taken forward by
the Government, but it was never actually an expert group of industry
and government. I think what we are emphasising is that this Committee
has previously looked at access to finance, and we would suggest
that when you come back after this Parliament the successor committee
should look at it again as a matter of priority.
Q48 Jim Cousins: Pursuing that particular
point, there is a massive refinancing issue in front of us of
which we are now dealing with the housing issue, but it is much
broader than this, and it is on a quite formidable scale. What
measures would you like to see to deal with this refinancing issue?
Mr Coogan: Clearly the Bank of
England, first of all, is introducing a discount window facility.
That will replace the Special Liquidity Scheme. It is out to consultation
at the moment. It will have some benefits. It will not replace
the SLS completely, it will be more expensive, I would expect,
and the whole intention of the Bank, quite clearly, from Mervyn
King's comments, is to wean banks off support, and that is right.
Clearly the Government have got the Credit Guarantee Scheme. They
have to be clear, hopefully, in an announcement in the Budget
or soon after an election, what their strategy will be going forward
in terms of the Credit Guarantee Scheme. We need to ensure that
the organisations can plan ahead to be able to repay these amounts
of money without having the adverse and unintended consequence
of not enabling them to meet lending commitments or not enabling
them to help the economy continue to improve. One of the ways
in which we have said co-ordination would help would be to reassure
investors, globally as well as in the UK, that investing in the
UK is something they should be doing sooner rather than later.
Opening up the markets will provide new sources of funding that
we used to have. It will not be enough that the £300 billion
will be covered in full, but it will be another helpful step in
the right direction. Co-ordination to help the markets, help ourselves,
plus co-ordination with the institutions to ensure that there
are not unintended consequences around how they actually act.
Q49 Jim Cousins: Will government
support be required to enable this globally secured refinancing
mechanism to work?
Mr Coogan: The UK is not the only
country in which there has been support from the Government and
central banks. There is a need for global co-ordination of efforts,
as we have seen, on a whole broad range of banking system issues,
and that will be something which I am sure is being discussed
as well in parallel. For us, I think the key question is how can
the UK help itself, and that is to encourage UK investors investing
in the UK and encouraging government in the industry to speak
in one language about the importance of funding markets being
Q50 Jim Cousins: There are two quite
different kinds of consequences if this situation produces problems.
One is the viability of the lending institutions which might be
put at risk and the second, with which I suppose we are more concerned
with here this morning, is the knock-on consequences for the people
that they are lending money to buy homes with who may be completely
unaware that there is this massive problem coming down the track
towards them. On the second of those you very swiftly went through
some of the things that lenders might do. I wonder if you could
go through it a little more slowly and spell some of that out.
Mr Coogan: I think for existing
customers, clearly one of the things that lenders might seek to
do is encourage those customers to accelerate repayment of their
mortgage, which gives them more money back sooner. Some customers
will see the benefit of that, some have already done so with interest
rates which have been reducing. For new customers the mortgage
funding will either not be available, because that money has been
kept back to repay the Bank or the Government, or it will be available
at a higher price, and we have already seen, as the Which?
representative highlighted, that mortgage pricing has increased,
and not simply pricing for risk.
Q51 Jim Cousins: So far these things
have been happening because people chose to do it, because ordinary
households are de-leveraging as well and, as part of that de-leveraging
strategy, they themselves are paying back faster. What you are
talking about is not people voluntarily repaying back faster but
perhaps being required to.
Mr Coogan: I am not talking about
that. We have seen already one example of an organisation offering
to allow customers to pay more back each year than they would
otherwise. I think what we would expect is more flexibility from
a range of organisations to encourage customers to repay. I do
not think we are going to have a situation that customers will
be asked to pay more than they are contractually liable to but,
clearly, one of the strategies is to encourage repayment sooner
rather that later.
Q52 John Mann: Mr Coogan, in your
evidence you say, "The number of borrowers behind on their
mortgages has not risen nearly as sharply as we had anticipated
in late 2008." What is the difference between your projections
now and what has happened?
Mr Coogan: I think there are a
range of reasons.
Q53 John Mann: What is the difference
in figures from what you projected?
Mr Coogan: The difference in totality
is that at the end of 2008 we expected, in a recession which was
at fear of becoming a great depression and an environment where
we have one million more borrowers now than we did in the 1990s,
when many of those borrowers are lower income, where 6% of them
are classed as subprime, to match the worst year of the 1990s
recession, which was 75,000 possessions in one year. We actually
ended up with 46,000 in 2009: so a substantial undershoot of that
Q54 John Mann: You have given us
the reasons for that. People staying in jobs plus low interest
rates are the two reasons in your evidence. Is that a policy that
you would like to see maintained?
Mr Coogan: Certainly, in terms
of the short-term policy, the biggest impact has been interest
rates. In terms of ensuring that the economy continues to get
back on its feet and come out of recession, the employment situation
is important. We heard earlier that one of the things that has
helped people is they have reduced income rather than lost income
completely, so they have been able to make payments as interest
rates have been low, but I think we have also seen the co-ordinated
efforts of both the lending industry and the advice sector with
borrowers engaged much sooner because of good communication to
them from government in local areas through to the lenders and
advice bodies themselves so that the message is getting through
sooner, the arrears are not building up as fast. As a result,
they are being addressed before they become serious problems and
possessions are avoided.
Q55 John Mann: Mr Broadhead, the
United States newspapers have been full of stories of huge numbers
of house repossessions or handbacks. I have seen figures that
suggest single towns have had as much as the whole of the United
Kingdom. Does that suggest that our approach is much more sensible
than that of the United States?
Mr Broadhead: I think it does.
I think I agree with Michael, there have been a number of factors.
The low interest rates and the fact that in the labour markets
we have seen a reduction in hours has helped. People have got
slightly less income but because of the interest rates many people
are paying slightly less on their mortgage. The advice is an absolutely
key point. The BSA carried out research towards the end of last
year that looked at borrowers that had entered arrears over a
two-year period particularly to get the message across that it
is vitally important to speak to your lender or take independent
money advice as soon as you believe you are going to have difficulties,
and that research found that of the group of borrowers surveyed,
which was quite a large number, 97% of them remained in their
home. So the message is absolutely getting across, but it is vital
that borrowers do contact their lender or take independent money
advice to keep these repossession figures lower.
Q56 John Mann: So three reasons seem
to be emerging: low interest rates, good available advice and
people remaining in work. Would you agree with that as well?
Mr Sklaroff: I would, very much.
To draw out one of the points, one of the very positive differences
in this recession has been the extent to which lenders and the
money advice community, if I can put it that way, have become
much more sophisticated and better at working together to the
advantage of somebody who might be having debt repayment problems,
and certainly the systems which exist in lending companies for
dealing with people, for identifying problems earlier and putting
people in the way of getting advice earlier are much better than
they were in the 1990s.
Q57 John Mann: If we as a Committee
were giving any advice, and obviously the Bank of England determines
interest rates, so they will not be interested in our advice on
that, but in terms of effective advice and information to consumers
and people being maintained in jobs and the impact on that, what
advice should we be giving?
Mr Broadhead: I think it is signposting
people to the advice that is there. We have seen a number of government
schemes introduced over the last couple of years, some of which
are fairly complex, and I think some of the money that has been
put in terms of developing those schemes could be better spent
signposting people to the advice and letting the advice agencies
and other lenders direct them to the most suitable scheme for
them. I think the message is that borrowers must go and get advice
if they think they are going to have repayment difficulties or,
indeed, already have difficulties.
Mr Coogan: If you take a higher
level strategic view, since 1999 we have been trying to engage
the Government in working out what the safety net was for sustainable
home ownership. The Communities and Local Government Department
has, rightly, in the last six to 12 months, not the least of which
is as a result of the last Committee report, been looking at the
safety net again, and we need to be clear to customers what the
safety net is, where the state is going to help them, whether
they should get insurance, what they can expect from the lender,
and once we have clarity as to what the safety net should be in
the public and private sector going forward, we should then plan
around it. Some of the schemes we have had introduced have been
tinkering around the edges.
Q58 Nick Ainger: Mr Coogan, in your
submission, in relation to arrears handling and repossession cases,
you argue that the current rules are clear and that the problem
lies with a few outlier organisations. In the earlier evidence
we had from Shelter and the CAB their survey had indicated that
of the 45 cases that they looked at that reached court, a third
had not complied with the pre-action protocols. That is more than
just outlier firms, is it not? This is back in July, and it may
have changed, but back in July why was such a high proportion
not complying with the pre-action protocol?
Mr Coogan: It is difficult to
know the precise answer to that question, firstly, because I do
not know how many lenders were in that sample who were perceived
not to have complied and I do not know the nature of the failure
to comply with the protocol and how serious. I am comforted by
the fact that the 80% of customers who got to court were not repossessed,
as was highlighted by the advisers. Clearly the courts took the
view there was more to be done. In terms of what the failure was,
it is difficult to comment.
Q59 Nick Ainger: Let me stop you
Mr Coogan: I would just reflect
back to you that when the FSA asked these questions in its thematic
review, it found that the mainstream lenders were compliant.