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
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
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
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.
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.
NUMBER OF BORROWERS IN ARREARS
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.
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
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
NUMBER OF PROPERTIES TAKEN INTO POSSESSION
POSSESSIONS TREND 1989-96 AND 2006-09
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
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.
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
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
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
"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
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
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 lenderssome 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
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
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 presentwhat 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
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
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 ratethe prior
approachwould, 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
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
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
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
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
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 issuesaccess 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.