Examination of Witnesses (Question Numbers
23 MARCH 2010
Q80 Ms Keeble: You probably heard
the earlier witnesses saying that the impact of SMI forbearance
can end up with people moving quite substantially on to interest-only
mortgages. Do you agree with the warning bells around that and
the concerns that are set out in the Mortgage Market Review that
say that there is a need to have some qualms about a big move
towards interest-only mortgages in the longer term?
Mr Broadhead: I think there are
two points: first of all, there is a business-as-usual type approach,
so if somebody takes out a mortgage and they want to take it out
on an interest-only basis I do not see an issue with that, but
it is absolutely clear that they must have an appropriate repayment
vehicle in place. In terms of in times of difficulties when they
are finding it difficult to repay their mortgages, actually moving
them on to an interest-only mortgage for a short period of time
to reduce the payment due can be very helpful, as long as they
do not then remain on interest-only for the rest of the term where
they are going to have difficulty repaying the mortgage.
Q81 Ms Keeble: Do your members have
any kind of mechanisms to have periodic reviews, so if people
go on to interest-only mortgages then there is some mechanism
for getting them back again?
Mr Broadhead: Yes, absolutely.
What will happen is if somebody is having repayment difficulties
they will be in touch with them on at least a monthly basis to
assess their situation and make sure that the solutions remain
appropriate for them. If they rehabilitate themselves, so to speak,
out of arrears going forward, it will then be made clear to the
borrower that they must either switch back on to capital and interesta
repayment mortgageand actually what building societies
often do is then renegotiate the term so that they can then do
that over a longer period to maintain the low payments to help
them continue to be okay but do not leave them vulnerable at the
end of the term.
Q82 Ms Keeble: When that happens
(and other people might have comments on this as well), obviously,
if you extend the mortgage it means that it can go into their
retirement, which can be a big issue particularly for payment
protection insurance as well. There are warning bells in this
review also about the risks there. Has that been a feature of
what has happened with the mortgage arrears market?
Mr Broadhead: I do not think it
has been a huge feature. Clearly, there are rules at the moment
about lending into retirement and ensuring that the loan can be
serviced. I think there is a big, big difference if somebody is
in their 20s or 30s and taking a loan out that goes a couple of
years into retirement and somebody who is in their mid-50s looking
for something for 25 years. So it is absolutely right that that
should be assessed as part of the overall package to make sure
that whatever modification or changes to the loan are made are
sustainable for that borrower going forward.
Mr Coogan: The point here is that
we have only recently had experience of increasing arrears in
a significant number of customers in recent times, so we have
not really had the experience of people going into retirement
that you refer to. You are right to flag up the issue of interest-only
Q83 Ms Keeble: It is something that
I have come across quite a bit, particularly when people then
have problems; they end up paying more in payment protection insurance
than they pay in their mortgage, and the impact can be absolutely
Mr Coogan: In terms of the interest-only
point, you are right to flag it up as an issue because what you
want to use interest-only for as part of arrears management is
a coping strategy, so it takes you back to the question of why
did they fall into arrears, what is going to enable them to get
back on their feet, how are they going to be able to both make
the contractual payment and pay off their arrears, and then ensure
that they have a structure in place to repay their mortgage over
Q84 Ms Keeble: Stephen, do you have
a comment on this?
Mr Sklaroff: It is right that
we do need to be careful that we do not think that forbearance,
per se, is in and of itself a complete solution going into the
middle distance, because, of course, for the reasons that have
been stated, it is not, and I think that applies in all parts
of the lending market.
Q85 John Thurso: Mr Sklaroff, can
I ask you: in your submission you argued that the case for the
FSA to assume responsibility for regulating second-charge lenders
had yet to be made. Does this mean you would prefer to stick with
the status quo?
Mr Sklaroff: To be honest, we
do not have a strong view on whether the status quo should continue
as it is or not. There is an argument for simplicity that says
that many companies are regulated both by the OFT and by the FSA
and, therefore, it would make sense for there to be one regime.
There are, also, some arguments that say that existing rules around,
for example, forbearance, that we have just been talking about,
are a little bit difficult or clunky under the existing OFT regime
and, maybe, in a new combined regime they could be made easier,
but, on the other hand, any such regulatory change carries costs
for the industry and, therefore, through to customers. What we
have not seen from the government or anybody else is a terribly
strong case that says: "Look, there is a big regulatory problem
with the current situation and, therefore, there is clearly a
cost-benefit case to be made for change". We have not seen
that argument yet.
Q86 John Thurso: Presumably, one
of the main arguments might be to ensure that all borrowers received
a consistent, standard protection across the whole assured credit
market, given that, as it is a second mortgage, by definition,
they have a first mortgage, so the regulation is already coming
from one direction, and it would be simpler, albeit a cost and
changes take place.
Mr Sklaroff: That argument can
indeed be made. The problem (if that is the right word) is that
what you have therefore done, if you do that, and of course it
depends on the terms on which you do it but, parking that for
a moment, you have simply changed where the boundary line is.
At the moment, second-charge mortgages, because of their size,
as was said earlier, and the nature of the purpose of the loan,
had been classified for rather good reasons as part of the general
credit markets, and they have been regulated as part of the general
credit markets. Of course, moving them into the FSA regime means
that you have shifted the boundary line from point A to point
B so there would now be a difference if you stopped there (begging
a question, obviously), but if you stopped there, there would
now be a dividing line between this form of consumer credit and
other forms of consumer credit. You could argue, similarly, that
would have its own disbenefits.
Q87 John Thurso: So the counterbalancing
argument is actually this is about a form of consumer credit which
falls more properly within the general consumer credit
Mr Sklaroff: Yes, because of the
size of the loan, the purpose and so on.
Q88 John Thurso: Can I ask you one
more question? The Treasury's December 2009 consultation paper
on mortgage regulation said that FLA data supplied by your members
suggests that second-charge mortgage lending leads to a relatively
low level of repossessions, but went on to express concern that
"arrears and repossessions may be particularly concentrated
in second-charge mortgage lenders that are not FLA members".
Do you accept the Treasury's conclusion that there are problems
in the second-charge market, but not so much within your members?
Mr Sklaroff: What I have not seen
from the Treasury, or from anyone else (because I have seen this
asserted in a number of ways and forms over the last couple of
years actually) is any evidence for it. I have seen it asserted
but I have not seen any evidence for it. With regard to the question
of the sector of the market that is outside FLA membership, we
are, of course, like any good trade body, trying to do our best
to attract everybody in. We have actually got some more members
over the last year or so such that now we are 85% of the market
Q89 John Thurso: So if you took that
view of the Treasury, they would say that what they are basically
saying is 15% of the market is producing a large proportion of
Mr Sklaroff: If that is the case
and if there is a problem. As I say, we have not really seen that
Q90 John Thurso: If one does accept
what the Treasury are saying, what action do you think should
be taken to deal with that?
Mr Sklaroff: A great deal of action
has been taken under the existing regulatory situation so that,
for example, the OFT has, under the new Consumer Credit Act, brought
in a new specific set of guidance which had the effect of rules
on the second-charge mortgage sector. Of course, that applies
to everybody, not just my member companies. That is on top of
the code that we had already created for the same sector under
the FLA's lending code, which of course applies to our members.
So those two things taken together plus (just about to be published)
a complete new set of rules from the OFT on the general question
of responsible lending, which will apply to the second-charge
market and to the rest of the credit markets.
John Thurso: Thank you.
Chair: I think we have exhausted our
Jim Cousins: We have not exhausted our
Q91 Chair: Thank you for your time.
Mr Sklaroff: Chairman, if I could
say, just in case this is, as I think it might be, the last opportunity
to give evidence in front of you, it has been a privilege over
the years, in various different incarnations, to come here and
answer your questions.
Chair: You will not be back! Thank you.