Written evidence submitted by Citizens
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
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
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
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
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
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
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 systemthis
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
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 BillMortgage 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.