Mortgage arrears: follow up - Treasury Contents

Examination of Witnesses (Question Numbers 42-59)


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 the loans.

  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 diversified.

  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 outcome.

  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 there.

  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.

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