Mortgage arrears: follow up - Treasury Contents

Written evidence submitted by Citizens Advice


  1.  Citizens Advice welcomes this opportunity to submit evidence to the Treasury Select Committee's follow up inquiry on mortgage and secured loan arrears. The Citizens Advice service is a network of over 400 independent advice centres that provide free, impartial advice from more than 3,000 locations in England and Wales. including GPs' surgeries, hospitals, community centres, county courts and magistrates courts, and mobile services both in rural areas and to serve particular dispersed groups.

2.  The Citizens Advice service delivers a range of money related advice services, including: money guidance, which provides people with generic financial advice; financial capability, which provides people with the skills and knowledge they need to manage their money and choose financial products; and debt advice, which provide people with the information, advice and support they need to deal with unmanageable personal debt. Some of our debt advisers provide last minute advice and advocacy at court to people facing repossession or eviction for mortgage or rent arrears.


  3. Citizens Advice continues to see a high number of enquiries about mortgage and secured loan arrears problems; with 61,510 borrowers seeking advice about 99,000 problems in the period between April 2009 and 12 February 2010. The total for the 2009-10 year is likely to be higher than 2008-09, but not by much. After a huge leap in the number of enquiries between 2007-08 and 2008-09, enquiries to the Citizens Advice service about mortgage and secured loan arrears problems seem to be starting to stabilise.


  4. Citizens Advice continues to see examples of both good and bad arrears management practices by lenders. However there has clearly been a significant improvement in the standard of forbearance since we published Set up to fail in December 2007 that highlighted the absence of meaningful forbearance across much of the market. We believe that lenders are now offering forbearance options more readily and this includes extended options such as interest deferral or loan modification schemes that may allow borrowers to pay less than the original contractual mortgage payment for a period of time.

  5. Our 2007 evidence report and a later survey of Citizens Advice Bureaux clients with mortgage arrears in 2008 found better standards of arrears management practices among mainstream lenders than sub-prime lenders and some cases of particularly poor practice among sub prime lenders. However we have recently began to see evidence of significant improvement by some of sub prime lenders.

  6. Of course it could be argued that this improvement is a case of enlightened self-interest by lenders who have little choice but to show forbearance and hope that their borrowers' situations improve or otherwise take a large potential loss on repossession. While there is nothing wrong with this per se, the key question is why lenders were not showing similar forbearance before mortgage arrears became a widespread problem and why the FSA arrears management rules were ineffective in getting lenders to show forbearance until it was in the overwhelming interests of lenders to do so. A key point of mortgage regulation is surely to ensure that the consumers are treated fairly at all times and not just when this happens to coincide with the interests of lenders. A key challenge for the FSA mortgage market review will be to ensure that standards to not begin to slip backwards as market conditions improve for lenders.

  7. However the picture may still be patchy in certain respects. In June 2009 Advice UK, Citizens Advice and Shelter conducted a joint survey of people seeking advice about mortgage and secured loan arrears problems from county court advice help desks. The findings of this survey (published as Turning the Tide in December 2009) found that in around a third of cases advisers believed that lenders had not properly complied with the mortgage pre-action protocol that was introduced in November 2008 to ensure that lenders were not taking unnecessary court action. However since this survey, a pre-action protocol checklist has been introduced that should help courts to interrogate compliance by lenders and further drive up standards in pre action behaviour by lenders.

  8. The survey also found limited evidence of lenders offering the currently non-mandatory extended forbearance options (such as deferring interest, changing the loan to interest only, capitalising arrears etc) set out in the FSA mortgage conduct of business (MCOB) rules. Again there is the evidence to suggest that practices in the market may have improved since summer 2009, but these findings highlight the unsatisfactory nature of "non-mandatory" suggested options in FSA rules. Therefore Citizens Advice warmly welcome the proposals set out in the FSA mortgage market review to amend the MCOB rules so that lenders would have to consider a full range of forbearance options before taking court action.

  9. Over 80% of those taken to court were able to stay in their homes, receiving a suspending possession order from the court on the condition that they paid the current mortgage instalment plus an amount of the arrears. We believe that this highlights the value of the advice available from court help desks schemes in helping borrowers who may not have had advice before going to court to understand their rights and the options open to them. However the fact that around 80% of cases were resolved in this way again raises the question as to why lenders did not accept repayment proposals before going to court.

  10. The survey uncovered some potentially important findings about the people that seemed most likely to lose their homes because of mortgage arrears. The first point is that across the whole survey borrowers tended to be largely (by not solely) from lower income households (at the time of seeking advice) who lived in houses of around average value.

  11. The survey included a list of around 2,400 cases being heard in over 50 county courts in June 2009. Cases were taken disproportionately by sub-prime or specialist lenders that concentrate lending on credit impaired, lower to middle income (or both) borrowers. Over 20% of the cases before the courts related to four sub-prime lenders with less than 2.5% market share. This tends to support to previous finding that it is those borrowers more towards the margins of the mortgage market that are struggling the most. In this sense the situation during 2009 was perhaps a continuation of the pattern we were seeing in the years before the recession, with the more marginal and risk-vulnerable (and disproportionally sub-prime) borrowers tumbling out of homeownership often within several years of taking out their mortgage.

  12. Over a third of borrowers facing court action had one or more secured loans in addition to a main mortgage. The court action was taken by a second charge lenders in relatively few cases (7% of the loans in the survey) but this finding raises the possibility that the additional payment burden of having a second charge loan increases the chances of experiencing mortgage arrears problems.

  13. Around 40% of the survey respondents said that they had unsecured debts in addition to mortgage or secured loan arrears and these households were much more likely to end up with full possession orders than households without unsecured debt. This highlights the continuing need to address problems with unsecured debt problems, where we believe that the Government's progress has been very much slower than the policy measures taken to address mortgage arrears and consumer problems in mortgage and secured loan markets.


  14. A key determining factor on whether people taken to court were likely to be able to remain in their homes was whether they were able to pay the current mortgage payment or not. Those borrowers who were not able to meet the ongoing contractual mortgage payments were much more likely to receive a full possession order. This seems an obvious point, but it highlights a key limit on the protection available for borrowers in financial difficulties.

  15. Legislation currently allows the court to suspend a possession order where the borrower demonstrates that they can meet the ongoing mortgage payments and paid off any arrears within a reasonable period (a term that has been defined by case law as being up to the remaining term of the loan). However we believe that courts have little discretion to help borrowers beyond this. So a borrower in temporary difficulties because of the recession may face losing their home when they can pay some but not all of their mortgage, even though they might otherwise have a good chance of recovery when employment markets improve.

  16. There we believe that courts should have more flexible powers to deal with borrowers in financial difficulties. The Consumer Credit Act 1974 gives courts powers to help secured loan borrowers by giving "time to pay" by allowing borrowers to make less than the contractual payments and also altering agreement terms such as default interest rates to ensure that the debt burden on the borrower does not grow because of the relief granted. The effect of these "time order" provisions is to allow borrowers space to recover and to share some of the costs of the arrears problem between the borrower and lender (in terms of default interest forgone for example). Citizens Advice believes that similar powers should be extended for all first charge lenders.

  17. We are currently seeing some lenders offering forbearance options that have a similar effect through loan modification schemes. But lenders do not have to offer such schemes and many don't. Equally we believe that the amendments to the MCOB 13 arrears handling rules proposed by the FSA will not require lenders to consider these sort of options. We believe that the question of how far forbearance should run and in what circumstances is still to be bottomed out. This may require further thinking about the FSA rules but we believe it also requires thinking about the powers of the court to help borrowers.

  18. In addition the survey found that a number of the borrowers who had received suspended possession order were only meeting mortgage and arrears payments by exposing themselves to severe hardship. We estimated that (where we had data) about a third of the households receiving a suspended possession order were left with income at or below the poverty line to meet all other expenses after making mortgage and mortgage arrears payments. This suggests that a large number of the borrowers currently avoiding repossession (or indeed otherwise granted forbearance by lenders) might be hanging on by their fingernails. If levels of high unemployment are sustained or interest rates rise these borrowers could easily fall over the edge in coming months. Again, we believe that this highlights the need for the courts to have powers to suspend possession on less onerous grounds than the current law allows.


  19. Citizens Advice has been very concerned about both the level of the mortgage arrears charges levied by some lenders and the circumstances in which the charges have been made. Citizens Advice Bureaux evidence has highlighted numerous cases where monthly arrears charges of £40 or more put borrowers under further financial difficulty. In some cases lenders have continued to make these charges even where borrowers have come to an arrangement to clear arrears and are sticking to the arrangement. We understand that some lenders have ceased this particular practice which is a welcome if somewhat belated improvement.

  20. Citizens Advice also welcomes the proposals set out in the current FSA consultation paper on arrears and approved persons (CP 10/02) that lenders should not levy arrears charges when a repayment plan is in place. We also welcome the proposal by the FSA to take a "more interventionist and robust approach to excessive and unfair charging practices". However we would argue that such an approach should have started when the mortgage market came under regulation by the FSA in 2004. This highlights two aspects of our general critique of FSA mortgage regulation in the period before the current recession. Firstly that fairly high level rules and principles will fail to protect consumers unless supported by detailed guidance and monitoring by the regulator in areas likely to cause consumer detriment (like arrears charges). Secondly, the FSA must be prepared to intervene where any aspect of the firm/consumer relationship causes consumer detriment. We believe that the FSA's previous heavy emphasis on disclosure and unwillingness to regulate "price" or product content issues has delivered inadequate consumer protection benefits. Therefore Citizens Advice warmly welcomes the more outcomes focused proposals set out in the mortgage market review.


  21. Recent Citizens Advice Bureaux evidence, including the above mentioned survey suggests that government schemes have had generally a positive effect on borrowers in financial difficulty. Although the effects are varied and the influence in some cases subtle.

  22. Citizens Advice strongly supported the 2009 changes the SMI scheme that reduced the most common waiting period from 39 weeks to 13 weeks before help could be paid and increased capital limits that had become seriously outdated with regard to average house prices. Our 2009 survey found that only around 6% of borrowers facing court action were either in receipt of SMI or had claimed help with housing costs from the benefit system—this in the period following a steep increase in unemployment. This suggests that help from the benefit system has been effective in helping to keep homeowners out of court.

  23. However we saw some cases where borrowers who may have been eligible for help from SMI were not getting that help. Other Citizens Advice Bureaux evidence has highlighted cases where borrowers appear to have received insufficient advice from Jobcentre plus about their possible entitlement to SMI help. This may have been compounded by a complicated adverse loophole in the rules whereby certain households judged as having income in excess of their requirements apart from mortgage interest payments still had to wait for 39 weeks even though the help was needed. We believe that this problem has been resolved by recent amending regulations.

  24. We remain concerned that the 2009 changes to SMI include an absolute two-year cut off in the SMI support available for homeowners in receipt of jobseekers allowance. Some borrowers may now be over a year into that period and living in areas where unemployment remains high and could remain high for at least another year. This creates a potential cliff edge that some particularly vulnerable borrowers may fall off.

  25. The effectiveness of SMI help might also be reduced by the way that the recession has affected household employment patterns. Around 61% of the people we surveyed said that a key cause of their mortgage arrears problem was a drop in income related to the economic downturn. Yet 54% of borrowers said their household had income from employment and 17% for self-employment. People accepting reduced hours or pay cuts rather than full unemployment has been a feature of this recession. Likewise we believe that increases in housing and other living costs mean that many households need two adults working to make ends meet. It is therefore not surprising that households cite loss of employment income as a key reason for financial difficulties while at the same time not fulfilling the SMI conditions that no-one in the house is working for more than 24/16 hours. In this respect the way that the benefit system only helps homeowners in households with little or no employment may be out of step with current household employment patterns. We believe that getting help to lower income-working homeowners remains a key outstanding policy question.

  26. The Homeowner Mortgage Support (HMS) scheme appears to be designed primarily for this purpose. However take up of the scheme by borrowers has been very low. We believe that this is in part because the scheme has features that make it unattractive for borrowers (deferral interest build up a balloon of debt that must be dealt with in the near future) and lenders (additional administration). However the main reason for low take up has probably been the significant improvement in the range and extent of forbearance options offers by lenders. In this sense the argument that HMS has been partly successful in encouraging lenders to extend forbearance is probably justified. However if the incentives for lenders to extend forbearance change (as outline above) then the sort of underpinning guarantee that an HMS type scheme can provide may become more important. However we believe that the Government should consider how such a scheme might be set up on a loan modification basis rather than an interest deferral basis as this provides more certainty and less risk of ballooning mortgage debt for borrowers.

  27. Citizens Advice Bureaux evidence is beginning to highlight more cases where the Mortgage Rescue scheme has kept families in their homes where there was no other option but repossession. The number of those helped so far is still relatively low but rising and we believe that the establishment of a centralised fast track team has helped to push MRS proposals through more quickly. However the MRS scheme appears to be cash heavy (although the wider costs of repossession for priority need families are likely to be significant as well) and in most cases the household will lose their homeownership status. As such we believe that MRS should remain very much as a last resort option for families who have little hope of continuing with their mortgage and/or secured loan repayments. Again, this raises a key policy question going forward as to what other support can be provided to give these households a better chance of remaining in home ownership.


  28. Citizens Advice welcomes recent enforcement action by the FSA against both lenders and mortgage brokers who have been found engaging in practices that resulted in consumer detriment. We particularly welcome the requirement for firms to compensate consumers for the bad practices they suffered. However even substantial compensation may not undo the detriment consumers have experienced and enforcement is no substitute for ensuring that widespread consumer detriment does not happen in the first place. Therefore we believe that the FSA needs to ensure that its rules do provide robust consumer protection safeguards and that it commits resources to ensure that firms are in practice complying with the rules.


Sale and rent back

  29. Citizens Advice strongly supports the regulation of sale and rent back providers by the FSA. While we do not fully agree with every aspect of full-regime rules, we believe that this framework of regulation will provide consumers with significant protection and should deal with the most serious problems that we saw in the previously unregulated market. We believe that sale and rent back regulation is a good example of a regulator delivering effective consumer protection quickly and decisively and we congratulate the FSA for this work.

Landlord mortgage arrears

  30. A significant concern for the Citizens Advice service over the past 18 months has been the lack of protection for unauthorised private tenants when their landlord is repossessed for mortgage arrears. Bureaux are advising around 1,000 households a year who face homelessness because they are evicted, often with only a few days' notice, and having had no idea that their landlord was in mortgage difficulties.

  31. We welcomed the Government's commitment to legislate urgently to address this gap and we therefore strongly support Brian Iddon's Private Members Bill—Mortgage Repossessions (Protection of Tenants) Bill which is currently going through Parliament. The Bill would give the courts the discretion to delay the eviction process by up to two months, to give tenants time to find alternative accommodation.

  32. It is vital that nothing prevents this Bill, which has cross party support, from reaching the statute book as soon as possible.

March 2010

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