Written evidence submitted by Shelter
Shelter welcomes the opportunity to contribute
to this inquiry and would like to highlight the following priority
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
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
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
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
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
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 enoughwe 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
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 £2,000three quarters of which were charges
that the judge ruled were unfairly imposed by the lender.
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 paymentsand the threat of evictionbecause
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%.
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
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 repossessionswith 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.
Of newer landlordsthose who entered the market less than
five years agothis 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.
3 Ford, J and Wallace, A, Uncharted territory? Managing
mortgage arrears and repossessions, Shelter, 2009. Back
Advice UK, Citizens Advice and Shelter, Turning the Tide,
ROOF, March/April 2010. Back
Turning the Tide. Back
Shelter and Money Advice Trust, Taking the Strain: The private
rented sector in the recession, November 2009. Back