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Mortgage arrears: follow up - Treasury Contents

Written evidence submitted by Shelter


  Shelter welcomes the opportunity to contribute to this inquiry and would like to highlight the following priority areas:

    — Support for Mortgage Interest (SMI) has been of particular significance in helping homeowners to avoid repossession throughout the economic downturn. We welcomed the government's decision, announced in December's Pre-Budget Report, to extend until June 2010 the temporary freeze at 6.08% of the standard interest rate (SIR) by which SMI is calculated. However, we are concerned about what might happen if in June the freeze is lifted and the rate drops. There is a strong case for extending the freeze for an additional twelve months or until the UK is more comfortably out of recession. Continuation of the fixed interest rate would give claimants some certainty about how they can meet their mortgage repayments in the short to medium term.

    — While many of the short term government measures to support people at risk of repossession have been quite effective, we believe that it is crucial to ensure that arrears and repossessions are far better managed in the future. Shelter is calling for the government to undertake a fundamental review of both private and state safety nets, to ensure that all low income borrowers have access to comprehensive help, and to give courts more flexible powers to help borrowers stay in their homes. It is also crucial that government continues to support the provision of professional advice services for people at risk of repossession.

    — Recent Shelter research has found that although many lenders have improved their treatment of people in arrears, not enough has changed. Too many lenders are failing to comply with the pre-action protocol and some are imposing high and disproportionate charges on borrowers, pushing them into further arrears and increasing their likelihood of repossession. Shelter believes that customers who have a repayment arrangement in place should not remain subject to arrears charges.

    — Shelter has welcomed the proposed reforms to the Financial Services Authority (FSA) regulatory framework but it is vital that these reforms are actually taken forward. With significant numbers of people still getting into arrears, there is a race against time to ensure that better arrears management handling and enforcement practices are put in place quickly enough for those most in need of them.


  Shelter appreciated the opportunity to contribute to last year's important inquiry into mortgage arrears and access to mortgage finance and welcomed the very sensible recommendations made by the Committee in its report. We are pleased that the Committee has decided to follow up on last year's inquiry, as it is important that developments are monitored closely in this fast-moving environment.

  There have been significant improvements since last year, with increased lender forbearance, the ongoing implementation of a range of government prevention initiatives across different parts of the UK, and some welcome proposals for reforms to the regulatory framework. However, it should be strongly emphasised that repossession remains a live issue and needs to remain a high priority. Hundreds of thousands of households are still dealing with mortgage arrears and living in fear of repossession. A lot of work still needs to be done to ensure that the mortgage safety nets and regulatory framework are adequate and fit for purpose.


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

    — Mortgage arrears and repossessions are still rising and may still worsen as interest rates increase and unemployment rises. It is vital that government and industry retain a strong focus on managing arrears and preventing repossessions for 2010-11.

  1.  The latest Council of Mortgage Lenders (CML) statistics show that:

    — 188,300 mortgages ended 2009 with arrears equivalent to at least 2.5% of the outstanding mortgage balance.

    — Mortgage lenders took 46,000 properties into possession in 2009.

    — CML's current forecast for 2010 is that there will be 205,000 arrears cases and 53,000 properties taken into possession.

  2.  While the 2009 figure of 46,000 repossessions was less than the CML's most recent forecast of 48,000 and far lower than the peak levels seen in the early 1990s, it is still 15% higher than the 40,000 in 2008 and the highest level of repossessions in 14 years. It is completely unacceptable that so many homeowners lost their home through repossession last year. Behind each one of these numbers is a real family losing their home and having to rebuild their lives. Furthermore, the number of repossessions is still expected to rise, with the CML having forecast 53,000 repossessions to take place in 2010.

  3.  Shelter continues to experience high demand for mortgage possession advice across all our face to face and Helpline services. We also give advice to anyone facing mortgage repossession at court as part of the Housing Possession Court Duty scheme. Our dedicated homeowner helpline takes around 300 calls relating to arrears and repossession every month and since February 2009 our advice web pages on repossession have had over 125,000 page views.

  4.  Shelter remains extremely concerned that high levels of repossessions will be sustained throughout 2010-11, The 1990s precedent indicates that, following a recession, levels of repossessions tend to remain high even after other areas of the economy have started to recover. In the wake of the repossessions crisis in the early 1990s, the annual number of repossessions only went down to the less acute rate of 10,000 in 2002. In 1996, four years on from the height of the crisis in 1992, the annual rate was still over 30,000.

  Other factors which may contribute to a sustained level of repossessions include:

    Interest rate rises: Shelter's recent research from the University of York[3] concluded that substantial reductions in bank base rates have been a significant form of arrears and repossession prevention to date, and rising interest rates are very likely to lead to rising arrears. However, lenders interviewed for this research saw the likely upward trajectory of interest rates as a "predictable but unexplored" issue.

    Rising unemployment: Loss of income is one of the major triggers for falling behind with mortgage payments. As a lagging indicator, unemployment is expected to keep rising throughout 2010, and job loss and other drop in income were the two most commonly cited reasons for arrears amongst a sample of people facing possession action at court.

    Lack of mortgage availability: Given the sharp contraction in mortgage lending, particularly in the sub-prime sector, many borrowers coming to the end of fixed-rate deals may be unable to secure remortgages at affordable rates, and will be forced into arrears through a hike in monthly payments.

    Time limit on prevention schemes: Shelter's York research concluded that the time limited nature of the current homeowner support initiatives suggests that government and lenders should be considering the exit process to avoid a spike in repossessions in 2011-12.

    Interest-only mortgages: Many borrowers have moved onto interest-only mortgages as a way of coping with short term arrears. But they may not have identified a way of paying off the capital sum in the long term. This could be storing up significant problems for the future.

Changes in the treatment of homeowners in mortgage difficulties by lenders, including second charge and specialist lenders; improving, increasing good practice

    — There have been some improvements in lender treatment of homeowners, but not enough has changed. Too many lenders are still failing to comply with good practice.

  5.  Recent research by Shelter, Citizens Advice and Advice UK[4] analysed over 450 repossession cases heard in county courts in July. We found that although many lenders have improved their treatment of people in arrears, not enough has changed:

    — In a third of the cases we looked at, advisers considered that the lender had not complied with the mortgage pre-action protocol, which requires lenders to take court action only as a last resort after offering borrowers other options for dealing with their arrears. Although judges did ask questions about this, they rarely applied sanctions for non-compliance.

    — Sub-prime lenders who specialise in lending to higher risk borrowers were taking court action earlier than high street lenders. A few sub-prime lenders in particular had significantly more court cases than their share of the mortgage market would suggest.

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

    — The FSA's proposals are very welcome but we have a race against time to ensure that better arrears management handling and enforcement practices are put in place quickly enough for those most in need of them.

  6.  Shelter has welcomed both of the FSA's recent papers. We support the thorough approach taken by the FSA to resolve long term issues and ensure that the current crisis does not happen again. It is vital that recent improvements in practice are enshrined in regulation to prevent more reckless lenders from returning to some of their former practices when the market has recovered.

  7.  We particularly welcome proposals for improving practice around arrears handling. The FSA's thematic work and our own casework and research have repeatedly shown instances of lenders failing to forbear and treat struggling homeowners reasonably, particularly in the sub-prime sector. We recommend that the proposals are implemented as soon as possible to improve outcomes for the many thousands of borrowers who are likely to struggle in 2010-11.

  8.  However, some of the proposals on arrears management handling do not go far enough—we would like to see even tougher rules proposed for MCOB 13, specifically:

    — Alongside reference to specific government initiatives, MCOB should explicitly require that lenders take account of state help (via benefits) or private mortgage insurance (such as MPPI), and be willing to extend forbearance where eligible borrowers are awaiting payments from these.

    — Lenders should be required to signpost borrowers in difficulty to, and where necessary make referrals to, sources of free, impartial advice and to co-operate fully with advice agencies.

    — Lenders should not be permitted to charge legal expenses to borrowers' mortgage accounts if a court determines that they have not followed pre-action expectations.

    — Beyond being required to have policies in place, lenders should be required to make these available to the FSA, to customers and to advisers. This would increase transparency and give all parties a clearer idea of what to expect.

    — The revised rules must be complementary to the pre-action protocol and other comparable measures in other parts of the UK.

  9.  In general, the issues of monitoring and enforcement have been neglected in both of the FSA's papers. A great deal of poor practice over recent years could have been avoided had a more stringent and effective compliance regime had been in place. For enforcement to be effective, it must be sufficiently resourced. Shelter believes that the FSA should also be more open about naming and shaming firms which have broken the rules, and publishing compliance data.

  10.  We also recognise that the availability of data on arrears and repossessions for the devolved administrations is very limited and constrains the way that those administrations are able to plan and evaluate policy.

  11.  While we welcome the commitment shown in these papers to stamping out reckless lending, action is also needed to address other weaknesses in the mortgage system. We would like to see greater momentum on reform of:

    Mortgage law: to close legal loopholes; give judges greater discretion in repossession cases; and give the pre-action protocol a stronger statutory footing. We note that the Home Owner and Debtor Protection (Scotland) Bill recently passed by the Scottish Parliament recasts the pre-action protocol as a set of statutory pre-action requirements and consider that this model should be looked at elsewhere in the UK.

    Safety nets: including both Support for Mortgage Interest (SMI) and Mortgage Payment Protection Insurance (MPPI), so that there is comprehensive help available if things go wrong for borrowers.

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

    — FSA monitoring and enforcement is showing some signs of improvement but remains hugely flawed. The FSA must bolster its enforcement practice in order to implement their new regulatory proposals effectively.

  12.  Shelter believes that there are flaws in the way that mortgage regulations are monitored and enforced, and we have particular concerns about the effectiveness of the regulatory regime within the sub-prime sector. The usual result of an enforcement action is a fine and an agreement sought that the company will review its business practices, or in some cases the company will agree not to continue the practice any more. However, fines are often negligible when compared to the company turnover. Shelter does not believe that the penalties for misconduct are stringent enough. Nonetheless, we believe that the FSA has improved in this area and welcome its recent fining of GMAC-RFC for £2.8million plus payments of £7.7 million in customer redress.

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

    — Too many lenders are levying unfair charges on borrowers even when payment plans are in place. Shelter supports the FSA's proposals to introduce fairer rules on charges.

  13.  Shelter shares the concern expressed in the Committee's Mortgage Arrears and Access to Mortgage Finance report about high and excessive charges being levied by some lenders. We believe that customers who have a repayment arrangement in place should not be subject to arrears charges, and we welcome the FSA's proposal to clarify the rules on this. It is highly unreasonable to continue to add default charges when the borrower has agreed a new repayment plan with the lender and is keeping up with this. In some cases we have seen, the arrears fees account for more money than the arrears themselves. This makes it impossible for the borrower to rehabilitate their account. We also repeat our call made above that lenders should not be entitled to recover expenses or charges where they have not followed the pre-action protocol or requirements.

  14.  A recent investigation by ROOF magazine discovered many cases of lenders imposing massive and disproportionate charges on borrowers, pushing them into further arrears and increasing the likelihood that they would be repossessed. The sub-prime lender Southern Pacific was highlighted as a particular offender for having, for example, recently taken a borrower to court for arrears of almost £2,000—three quarters of which were charges that the judge ruled were unfairly imposed by the lender.[5]

The effectiveness of Government schemes to support homeowners in mortgage difficulties

    — Government schemes, particularly additional funding for advice provision, have been helpful but are mostly time limited. The government needs to urgently develop a longer-term strategy for supporting homeowners in mortgage difficulties.

  15.  While the absolute numbers of homeowners who have taken advantage of the Mortgage Rescue Scheme (MRS) and Homeowner Mortgage Support scheme (HMS) are not as high as initially hoped, the schemes have been very helpful in encouraging people who are in trouble to engage with the system and to seek advice. For example, while 276 homeowners have completed the full MRS process (as of February 2010), 1200 households had been helped by the scheme to stop the immediate threat of repossession. In Scotland the Mortgage to Rent and Mortgage to Shared Equity schemes have recently been evaluated and we suggest that the recommendations from this evaluation are taken into account by the inquiry.

  16.  The availability of professional advice has been crucial in helping people to avoid repossession. For example, housing possession court duty schemes are extremely valuable in helping borrowers to understand their rights and show at the hearing how they propose to meet their mortgage. Shelter's recent court desk survey found that court outcomes were the same as requested by the court duty desk adviser in 88% of cases, which underlines how important it is for people to have access to a court duty desk adviser to help them decide what outcome to pursue at their hearing. It is crucial that these and other advice schemes are adequately funded through the recession and beyond.

  17.  Advice organisations have seen evidence of clients not claiming SMI because of poor information given by Jobcentre Plus. Shelter is calling on Jobcentre Plus to ensure that it has procedures in place to advise clients who are potentially eligible for SMI to claim it immediately, in addition to signposting them to housing/debt advice agencies if appropriate. It is also crucial that all government schemes continue to be advertised widely to maximise awareness.

  18.  We recognise that SMI in particular has been of great significance in helping homeowners to avoid repossession throughout the economic downturn and we welcomed the government's decision to extend by six months to June 2010 the temporary freeze at 6.08%of the standard interest rate by which SMI is calculated. However, we are concerned about what may happen if in June the freeze is lifted and the rate returns to the previous calculation of the Bank of England base rate plus 1.58%. We believe there is a strong case for extending the 6.08% freeze for an additional twelve months after June. Continuation of the fixed interest rate would give existing and new claimants some certainty about how they can meet their mortgage repayments in the short to medium term.

  19.  Whilst 6.08% is a high figure when compared to the base rate, many vulnerable and indebted homeowners actually pay a higher rate than this. Sub-prime loans, for example, can attract interest rates as high as 12%, and evidence shows that sub-prime borrowers are particularly exposed to risk of arrears and repossession. Advice agencies see numerous clients who face a shortfall in payments—and the threat of eviction—because the rate of interest they pay is significantly higher than the SIR, and this would worsen if the rate were to be lowered. Recent research into possession cases at court also points towards this trend. In 47 out of 93 individual possession actions where the interest rate charged was recorded, the rate was higher than 6.08%.[6]

  20.  Shelter's research has also revealed that government safety nets are still not catching all those low income households which need support in coping with a temporary loss of income. Further research is needed to understand the reasons for this, but our survey indicated some shortfall in take-up of MRS and support for mortgage interest (SMI) in particular.

  21.  We agree with the recommendation made by the Committee in last year's report that there is a strong case for reviewing the government's longer-term strategy towards supporting homeowners in mortgage difficulties.

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

    — The current regulatory framework for the private rented sector is wholly inadequate and needs fundamental reform to better protect tenants and look after landlord and taxpayer interests.

  22.  Shelter does not believe that the current regulatory framework adequately protects people in the private rented sector. We strongly support the proposal to extend the scope of FSA regulation to include buy-to-let lending and we are supporting efforts to legislate to protect tenants at risk of eviction when their landlords are repossessed, in the Mortgage Possession (Protection of Tenants) Bill and in section 142 of the Housing (Scotland) Bill.

  23.  We believe that the lack of regulatory oversight in the buy-to-let market has been a serious problem. Buy-to-let mortgages have fuelled the notion of property as a one-way financial investment with little responsibility attached. Poor lending decisions or poor arrears management in the case of buy-to-let mortgages can have damaging effects on both the borrower (landlord) financially, and on the tenant in terms of their housing stability.

  24.  The trend of amateur landlords entering the market with little by way of affordability checks or scrutiny of business plans has been a real problem. A failure to ensure that lending to landlords was sustainable has lead to an increase in landlord mortgage arrears and repossessions—with obvious detriment to tenants who may have to move home if their landlord defaults, or may find that the landlord cannot afford to pay for repairs and maintenance. Recent Shelter research into the effects of the recession on the private rented sector showed that around 1 in 10 landlords were constantly struggling or falling behind.[7] Of newer landlords—those who entered the market less than five years ago—this rose to more than half.

  25.  Shelter is strongly supportive of proposals to legislate to protect tenants in cases of landlord mortgage default. Repossession of rented properties can be catastrophic for tenants, some of whom have no rights at all and may be evicted with just a few days' notice. We have actively campaigned for some time for better legal protection for tenants in this situation, and continue to see numerous cases of sudden eviction following landlord repossession through our advice services. We urge all parliamentarians to support the successful passage of the Mortgage Possession (Protection of Tenants) Bill given the severe time constraints it faces.

  26.  These problems are only part of the story. The private rented sector as a whole suffers from poor regulation and inadequate regulatory enforcement. Shelter is supporting proposals for the introduction of a landlord register, to help landlords, tenants and taxpayers by improving conditions; to make everyone's obligations clear; to ensure that tax is paid on rental income; and to reduce the amount of government money that is spent clearing up the mess created by problems in this sector.

March 2010

3   Ford, J and Wallace, A, Uncharted territory? Managing mortgage arrears and repossessions, Shelter, 2009. Back

4   Advice UK, Citizens Advice and Shelter, Turning the Tide, 2009. Back

5   ROOF, March/April 2010. Back

6   Turning the TideBack

7   Shelter and Money Advice Trust, Taking the Strain: The private rented sector in the recession, November 2009. Back

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