Mortgage arrears: follow up - Treasury Contents

Examination of Witnesses (Question Numbers 80-91)


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 interest—a repayment mortgage—and 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 devastating.

  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 the term.

  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 now.

  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 the problem.

  Mr Sklaroff: If that is the case and if there is a problem. As I say, we have not really seen that evidence.

  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 questions!

  Jim Cousins: We have not exhausted our questioners!

  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.

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