Mortgage arrears: follow up - Treasury Contents

Written evidence submitted by the Council of Mortgage Lenders (CML)


  1.  The CML is the representative trade body for the first charge residential mortgage lending industry, which includes banks, building societies and specialist lenders, but not finance houses which are only active in the second charge market. Our 109 members currently hold around 94% of the assets of the UK mortgage market. We responded to the Committee's initial inquiry last June, and gave oral evidence to the Committee. We are pleased to respond on behalf of our members to this follow up inquiry on mortgage arrears.


  2.  The main points in this submission are as follows:

    — A range of factors have contributed to a significantly lower number of borrowers being in arrears or subject to possession than forecast in 2008.

    — We cannot be complacent about the scale of the financial problems and personal hardship to be managed as a result of the recent deep recession and uncertain economic prospects, nor be deflected from our collective focus on a problem which will persist for a number of years for a minority of home owners.

    — Lenders continue to treat customers in payment difficulties fairly, and are taking various measures to ensure possession is a last resort.

    — However, forbearance by lenders should not be seen as open ended, as the objective is to help customers through short term financial difficulties.

    — A more intensive and intrusive Financial Services Authority's regulatory approach is welcome if it is targeted and allows the majority of lenders to carry on their business as normal without undue additional cost or regulatory interference.

    — The CML and its members are actively engaged with the FSA on its arrears and possessions consultation, so it would be premature to confirm the outcome of this process.

    — Lenders continue to engage with the support mechanisms that the government has put in place to assist customers. We would like to see the retention of the short term changes to support for mortgage interest which are due to end shortly, and the mortgage rescue scheme incorporated as a permanent feature. A full review of the safety net for borrowers, provided by government, would be timely.

    — The Committee should look again at future access to mortgage finance as there is a risk that recent more positive trends will reverse in the next few years as the special liquidity scheme and the credit guarantee scheme close.

The number of homeowners in mortgage arrears, the number of homeowners who have had their properties repossessed, and forecasts for the trend in mortgage arrears and repossessions over the medium-term

  3.  Since the initial inquiry, our members have continued to do all they can to assist borrowers in short term payment difficulties, working closely with borrowers themselves, debt advice agencies, local authorities, government agencies and others, and these collective efforts are reflected in the latest figures for trends in 2009 set out below.

  4.  We cannot be complacent about the scale of the financial problems and personal hardship to be managed as a result of the recent deep recession and uncertain economic prospects, nor be deflected from our collective focus on a problem which will persist for a number of years for a minority of home owners.

  5.  Nevertheless, the recent experience does show a much better outturn than forecast in late 2008, and demonstrably better handling of the complex array of problems than in the last mortgage market recession in the 1980s-1990s.

(a)  Arrears

  6.  As the Committee is aware, the CML's data covers first-charge mortgages held by its members, and includes both mortgages to owner occupiers and landlords for private rental.

  7.  The number of borrowers behind on their mortgage has not risen nearly as sharply as we had anticipated in late 2008.

  8.  In February 2010, we reported that 188,300 loans (1.72% of all mortgages) were in arrears, representing 2.5% or more of outstanding balance at the end of 2009. This was a 3% fall from 194,600 (1.77%) reported at the end of September, and up only 3% from 182,600 at the end of 2008 despite the growth of unemployment in 2009. This is a considerably better outcome than our previous forecasts.


  9.  The main driver of this comparatively positive outcome, given the severe recession, has been record low interest rates reducing monthly mortgage bills. The average interest rate on all outstanding mortgages rate fell from 5.82% in October 2008 to 3.59% at the end of 2009 (source: Bank of England), and many on variable rates will have seen larger declines where their rates have tracked base rate down. In addition, unemployment has not risen as sharply as first anticipated. While there is evidence of some households facing a reduction in take-home pay due to pay cuts, reduced hours and lower bonuses, fewer workers have faced outright job loss than in the early 1990s recession.

(b)  Possessions

  10.  The CML reported last month that lenders took possession of 46,000 properties during the course of last year, up from 40,000 in 2008 and the most since 1995. However, this is considerably lower than the annual figures in the depth of the recession in the early 1990s, when the loss of economic output was not as severe as the recent downturn. Possessions peaked at 75,500 in 1991, and it is important to highlight there were around one million fewer borrowers during the last recession compared to now.

  11.  This outcome on possessions last year was also better than we had forecast in late 2008 when we expected possessions to rise to 75,000 as in the last recession. We reduced this estimate to 65,000 in June. The final out-turn was actually a little below even our November forecast of 48,000. However, as the following charts show, the trend of possessions extends across a number of years after the peak year of payment difficulties in a recession.

  12.  We attribute this outturn in 2009 to a range of factors. A slower than anticipated flow into arrears meant that there were fewer potential possession cases. However, there was a larger increase in "deeper" arrears cases (compared to less severe arrears). This suggests that lenders are working with borrowers in difficulty to try to keep them in their homes.



  13.  As a result of coordinated communication campaigns, more borrowers are speaking to their lenders at an early stage, or benefiting from debt advice before arrears have built up. Fewer have walked away from their debts by surrendering their keys than was the case in the early 1990s. Cumulatively, more borrowers have been able to repay arrears, and others in longer term arrears are managing affordable regular payments through arrangements with lenders.

  14.  For a minority of other borrowers, unable to make regular payments from their own income or from state support for mortgage interest, voluntary sales of the mortgaged property have been helped by the lender. This can be used in cases where the borrower is in negative equity and it is not in their interests or in the lender's interest for the debt to be allowed to accrue indefinitely.

  15.  In addition, there have been various government initiatives which have had an impact to varying degrees as we comment below.

  16.  Finally, it is worth comparing the number of possession actions by lenders against the number of possession actions by landlords. For Q4 2009, according to figures from the Ministry of Justice, the comparison is 22,061 mortgage possession actions as against 33,132 landlord possession actions. While more publicity has been given to possessions amongst home owners, as the predominant tenure, it is in fact in the rental sector where more possession action has been taken and less focus has been given on the impact on these social tenants.

(c)  Outlook

  17.  Assuming that official interest rates remain at or near current levels, we forecast a modest rise in mortgage arrears and possessions this year but the position remains volatile and subject to a range of external factors not just interest rates. We currently forecast that 205,000 borrowers will be in arrears of 2.5% of more of the value of their mortgage at the end of 2010.

  18.  Meanwhile, with the likelihood that a number of borrowers who have been shown forbearance are unable to recover their situation, or sell their property voluntarily, we have forecast a modest further rise in the number of possession cases to 53,000 over 2010. However, at our February 2010 update, we intimated that this may prove pessimistic as the various measures to help keep down possessions have been working effectively.

  19.  There are large uncertainties attached to our forecasts. Continuing lender forbearance, low interest rates and a relatively benign labour market could lead to a lower number of possessions than currently forecast. But, the shape of the economic recovery is far from clear, even in the short-term, and we cannot rule out a further rise in unemployment.

  20.  Even a relatively modest rise in interest rates rise would add to pressures faced by many variable rate borrowers, and make a worse outcome on arrears than forecast a reality. However, it should not impact dramatically on possession numbers, except where borrowers have been in long term arrears, are unable to make regular payments, and/or have shown no capacity to retrieve their position.

  21.  Looking beyond this year, even if the UK experiences a return to longer term rates of GDP growth, the experiences of the early and mid 1990's suggests that arrears and possessions will remain elevated for several years to come.

Changes in the treatment of homeowners in mortgage difficulties by lenders, including second charge and specialist lenders

  22.  As set out in our initial response, all first charge mortgages entered into on or after 31 October 2004 are subject to regulation by the Financial Services Authority. We set out a summary of those regulatory requirements in our previous response. We pointed to the findings of the FSA's thematic work which showed that mainstream lenders are largely compliant with the FSA's requirements, and the findings from the previous inquiry acknowledge this.

  23.  The access to the Financial Ombudsman Service gives additional comfort to customers who have complaints. In fact, there were substantially fewer mortgage complaints in 2009 than forecast which is illustrative that lenders are, by and large, managing these cases appropriately.

  24.  We reiterate our views from our previous submission that:

    "The vast majority of people who face temporary difficulties and talk with their lender successfully work with their lender to stay in their homes, and get their mortgage payments back on track over time. Where borrowers contact their lenders early, maintain good communications and are committed to paying what they can afford and resolving their arrears, lenders work hard to help wherever the household's future prospects look feasible."

  25.  This question specifically asks about treatment by 2nd charge and specialist lenders. We have previously made the point that being "specialist" does not in itself change your attitude to possession as a lender. However, some specialist sectors, such as lending to higher risk borrowers at higher mortgage rates, mean that there is an inherent risk that those customers may not meet their regular payment commitments to repay arrears.

  26.  Where individual lenders need to improve their processes to ensure regulatory compliance or fair treatment, this is a matter where there should be close supervision and enforcement action taken by the regulator.

  27.  We support action against outliers, and reiterate that this relates to a small minority of firms. Our anecdotal evidence suggests that the flow of possession cases in specialist sectors has been slower than anticipated in 2009, reflecting the commitment of all lenders to ensure possession is a last resort.

  28.  As far as buy to let lenders are concerned, recent trends have reversed some of the increases in arrears and possessions reported in 2008, and the receiver of rent option is being used more widely as a tool to help avoid possession action where tenants are able to pay the rent as normal.

  29.  On this question of lender treatment, it is also worth commenting briefly on whether the treatment of borrowers may change in the future if the economic environment worsens or if interest rates rise significantly. More generally, the question needs to be considered when would it be right for current forbearance arrangements to come to an end in cases where there is no sign that borrowers will be able to get back on their feet financially?

  30.  Concerns that are sometimes expressed about this are, we believe, overstated as lenders will not repossess when it is not in their borrowers' interests, nor commercially the best approach for their businesses. However, forbearance cannot continue indefinitely if there is no end in sight to the original cause of the financial problem.

  31.  Of course, the commercial impact of the recession has been different across lenders—some are not active in the market any more, or are looking to exit the mortgage market. Others will want to maintain long term relationships with their customers and help them through even extended periods of financial difficulty, so long as the customers match that commitment. However, all have to demonstrate that repossession is a last resort, and are subject to FSA or OFT supervision.

  32.  Where the housing market permits, a voluntary or assisted sale will be better for some borrowers.

  33.  For lenders, they will continue to have to balance the wider interests of their business (capital costs of long term higher arrears and provisioning) and their various customers (savers and borrowers who are making their payments in full).

  34.  It is not in their interests to crystallise a loss where their borrower is making efforts to repay arrears over an agreed period. So, it is those borrowers who are not committed, do not communicate, or have irregular income who are most at risk. For this reason, we hope that the government will not prematurely remove current financial support available to those borrowers from income support for mortgage interest.

  35.  The Committee will also be aware that mortgage debt cannot be looked at in isolation. In the majority of cases, borrowers who cannot pay their mortgage have other debts. Borrowers with multiple debt problems are less likely to benefit from forbearance on the part of first charge lenders, and have fewer options as to how to deal with their financial situation.

  36.  We are working with the Finance and Leasing Association on measures to enhance liaison between first and second charge lenders. Data protection rules can sometimes be a barrier to effective liaison, but we continue to work on measures to improve awareness of the customers' overall financial position, including through better court notification processes.

The package of measures outlined by the Financial Services Authority in its October 2009 Mortgage Market Review and subsequent January 2010 paper to improve arrears handling policies and practices by firms

  37.  As indicated in our detailed response to the FSA's Mortgage Market Review discussion paper, we support in principle targeted strengthening of the rules on firms' arrears management practices. Attached to this submission is an annex containing an extract from the CML response on the MMR on arrears and possessions.

  38.  However, the devil is in the detail of the latest consultation paper, and we are reviewing that detail with our members at present. We suspect that a considerable clarification is needed before the proposals can be implemented as drafted. They are not straightforward, and the cost benefit analysis is less clear cut than suggested in the consultation paper. We believe that there may be a substantial underestimate of the costs. On this basis, we will comment on the proposals when we have members' considered views and evidence.

The FSA's regulatory approach in this area, including the effectiveness of its enforcement strategy

  39.  To date the supervisory approach has failed in respect of outlier firms whose policies did not match up to the good standards set down in CML industry guidance or FSA requirements. The FSA is playing "catch up", but past criticisms have led in some quarters to unfair criticism of the whole industry.

  40.  In our view, the mortgage rules are clear at present—what has been lacking is an effective or timely supervisory focus from the FSA on the right firms whose behaviour has created systemic risks. This is to change, and the FSA's regulatory approach will be more intensive and intrusive in the future. If this means that those lenders which are compliant with the rules, and treat customers fairly, are allowed to carry on their businesses as usual, then this is a welcome move for the industry as a whole.

  41.  Clearly, the FSA's enforcement strategy is ongoing in relation to arrears handling policies, and it is hard to comment in detail on its effectiveness at this stage in advance of any further announcements on the conclusion of current proceedings.

Mortgage arrears charges levied by lenders on homeowners in arrears, including changes in practice by lenders in this area

  42.  In addition to the FSA's consultation paper, we understand that the FSA is undertaking a major review of lenders' fees. It would be appropriate to let this work conclude before commenting in detail on charges, beyond what we have said in response to the MMR paper in the annex, and in previous evidence to the Committee.

  43.  It is worth briefly making the following comments about charges. As identified in the previous inquiry, MCOB rules on fees and charges are very clear.

  44.  If a borrower thinks that charges are not appropriate, then a Financial Ombudsman complaint can be made.

  45.  It is fair that charges are attributed to the borrower in arrears where administrative work is necessary, but in turn we accept that arrears administration should not be seen as a profit centre for lenders.

  46.  Nevertheless, new work such as that involved in mortgage rescue and other government schemes is very labour intensive. There is a risk that fees may have to increase for some lenders, in relation to some borrowers, rather than reduce as a result of this additional administrative work.

  47.  We understand that the majority of our members do not charge a fee where there is a performing agreement to pay in place. However, the existence of such an agreement does not mean that lenders do not carry out work. First charge mortgage lenders are competing with other creditors to ensure ongoing payments, and many work hard to ensure that the customer regards the secured debt as a priority (when some other creditors may be pressing for early payment). Therefore, there will be administrative work in cases where arrangements are not met as agreed.

The effectiveness of Government schemes to support homeowners in mortgage difficulties

  48.  Early communication in possession "hotspots" avoids a build up of problems if borrowers speak to their lender early.

  49.  We welcomed the continuation of the fixed rate at 6.08% for support for mortgage interest, and hope that this will be extended post June when it is due to expire. Lenders are very supportive of the reduction in qualifying time for SMI from nine months to three months. This has proved a major aid to forbearance.

  50.  We hope that this, and the other changes currently in force, will continue beyond the two year period initially announced. Given that employment difficulties are a significant cause of arrears, the two year limit on jobseeker's allowance would seem to us to be in need of particular review. In the long term, a move to payment of SMI at the actual mortgage rate would be welcomed. We continue to suggest that taxpayers' money could be recovered through a second charge over the property, so restructuring this benefit could be cost neutral over time.

  51.  If there is to be a reduction in rate payable under SMI, despite what we have said, this should be a staged process so that there is less payment shock to affected borrowers A sudden return to 1.58% above base rate—the prior approach—would, in our view, have major adverse implications for borrowers and our possession forecasts.

  52.  The pre-action protocol is a highly effective back stop which ensures compliance with regulation. A pre-action protocol agreed with the industry has ensured that lenders need to demonstrate their actions have sought to ensure that possession is only taken as a last resort. Support targeted at advice at court desks has helped to ensure that many customers are able even at this late stage to get advice to help avoid possession at the court hearing.

  53.  Lenders took the introduction of the protocol very seriously, and it was the first charge lending industry that called for a standard form checklist to evidence compliance to ensure consistency in the courts.

  54.  There have been some claims that some lenders are not complying with the protocol. We do not accept this. A significant amount of work was undertaken by lenders when the protocol was introduced to ensure compliance. That work continues.

  55.  Concern has also been raised that there are no sanctions behind the protocol. Again, we do not believe that this is correct. There is considerable judicial discretion available to courts when the borrower can pay. That discretion applied before the protocol, and the protocol has heightened judges' awareness of those powers.

  56.  However, the ethos behind a court protocol is to encourage liaison between the parties with a view to reducing litigation, and therefore court costs. Problems are more likely to arise, and lead to possession action, where borrowers fail to engage in the arrears or court process either at all, or at a very late stage.

  57.  After a period of settling in, the new mortgage rescue scheme arrangements under which borrowers can stay in their homes as tenants of a registered social landlord are also starting to accelerate in number. It is clear that many lenders have actively sought to identify potential users of mortgage rescue to help their customers who might otherwise be at risk of repossession.

  58.  Since the introduction of the government's fast track team, completions have risen substantially, and this has been a major improvement making the scheme far more effective. There are still some issues regarding housing authorities' and some second charge lenders' willingness to engage but, by and large, this is an extremely useful scheme. We would like to see this scheme become a permanent feature of the safety net for borrowers in financial difficulty.

  59.  The homeowner support scheme has not yet produced an effective impact in terms of numbers of borrowers helped compared to costs of implementation. However, it has led to closer relationships between the advice sector, borrowers and lenders with more customers coming forward to discuss options with lenders. Other forbearance options have proved more popular, particularly given the low interest rate environment, but an increase in rates might lead to more borrowers wishing to participate in the scheme.

  60.  The government has started a debate with the industry and consumer representatives about the future safety net for borrowers in financial difficulties. The CML first called for this in its Sustainable Home Ownership Initiative in 1999, so we welcome this new engagement on how to structure an appropriate level of support for home owners with short term financial difficulties due to circumstances outside of their control.

The extent to which the current regulatory framework protects households in the private rented sector

  61.  This touches on a range of issues including regulation of sale and rent back transactions, proposals relating to unauthorised tenancies, buy to let mortgage regulation and regulations directly related to tenants such as the deposit protection scheme, mandatory houses in multiple occupation regulation and further regulatory changes that have recently been proposed by the Communities and Local Government department. However, drafting time and the limit on the length of this response does not permit a full critique of all of the recent developments in this sector.

  62.  We recently responded to the Treasury consultation paper on regulation of buy-to-let mortgages highlighting that the case for mortgage regulation is unproven. The potential risk to consumers is an ill-advised investment in residential property, rather than some other long term investment, and not the buy-to-let mortgage itself.

  63.  We have also been liaising closely with the Government on the Iddon Bill to cover unauthorised tenants. We believe improvements can be made to the draft Bill which, unfortunately, have not yet been addressed in the Private Members' Bill process.

  64.  One particular issue for Scotland is in that jurisdiction the ability to appoint a Law of Property Act receiver does not exist. This gives lenders fewer options when dealing with tenanted properties when the borrower is in arrears.

Other issues—Scotland

  65.  In Scotland, a mortgage to rent scheme has operated since 2003. In March 2009, the Scottish Government announced the setting up of a Homeowners Support Scheme which included a revised mortgage to rent scheme, a new mortgage to shared equity scheme, and advice for those homeowners facing mortgage difficulties.

  66.  An interim review of the new Scheme suggests that there are some administration issues with a number of applications under mortgage to rent which are taking a long time to assess. In light of the introduction of the Homeowner and Debtor Protection (Scotland) Bill, we are urging the Scottish Government to improve the administration of the Scheme as an application under mortgage to rent is likely to be a factor which a Sheriff would take into account in deciding whether it is reasonable to grant possession.

  67.  The Homeowner and Debtor Protection (Scotland) Bill has now passed all its stages in the Scottish Parliament and currently awaits Royal Assent. The new legislation will require all possession cases to call in court whether they are defended or undefended (at present only defended cases call in court). Lenders in raising possession proceedings will have to comply with certain pre-action requirements, and the Sheriff will have discretion in terms of whether it is reasonable in the circumstances to grant possession.

  68.  The pre-action requirements will be contained in a Statutory Instrument which has yet to be published, but it is believed that the requirements will closely follow the pre-action protocol in England and Wales. The only exception is where the property has been voluntary surrendered, and a calling up notice procedure can be used. It is likely that this legislation will mean that it will take longer to obtain possession in Scotland, and it will be more costly in the future.

  69.  The court requirement will give more protection to borrowers but needs to be matched by sufficient court capacity to cope with this procedural change to prevent unnecessary delay and additional cost to customers.

Other issues—access to mortgage finance

  70.  The second aspect of the original inquiry related to access to mortgage finance. It would be timely for the Committee to review developments on this issue as well in the light of the recently published CML report on the outlook for funding in 2010 to 2015.

  71.  The government has provided a wide range of support measures. The most important of which has helped ongoing access to mortgage finance through the £300 billion of support for lenders via the special liquidity scheme and the credit guarantee scheme. These have provided essential underpinning for the sector and created the leeway in which lenders can also consider forbearance action across a broad spectrum of borrowers despite higher capital costs with higher expected provisioning for losses.

  72.  Our over-riding concern is that the tripartite authorities do not have a robust framework for unwinding such public support in the stated time frame, with the result that lenders may have little option but to reduce future lending (and it may also cause changes to their approach to forbearance). We believe that this is an area which the Committee should also follow up to review developments since the initial inquiry.

March 2010

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