Mortgage arrears: follow up - Treasury Contents


Written evidence submitted by the Building Societies Association (BSA)

EXECUTIVE SUMMARY

  1. The BSA view of the market remains broadly unchanged from our evidence provided in June 2009. The outlook for 2010 remains dependant on wider economic factors, such as conditions in the labour markets and the level of interest rates. Unemployment figures tend to be a lagging indicator of the economic environment and if the numbers of unemployed borrowers rises during the year, this may increase the number of mortgages in arrears and impact on the number of repossessions.

  2.  The BSA is supportive of the principles that the FSA aims to achieve through the proposals detailed in the Arrears Consultation Paper (CP 10/2). We do not believe that the poor practices identified in the paper are indicative of the industry as a whole. Building societies, mutual lenders and the vast majority of high street lenders follow the stated policy aims of the FSA.

  3.  BSA members work extremely hard to ensure that they only charge customers in arrears where it is necessary to do so. Many BSA members report that their arrears management functions operate at a loss, as the charges ultimately levied on borrowers in arrears do not fully cover the costs of running the department.

  4.  We are concerned that the Repossession Prevention Fund has not attracted the high profile publicity that other Government initiatives have and we believe that this is limiting the success of the fund. Both borrowers and lenders have reported a lack of awareness in how to access this fund and in many instances have only accessed it via a mortgage rescue referral.

  5.  The BSA believes that there is potential for the mortgage rescue scheme to remain as a permanent safety net, particularly since it caters for the most vulnerable borrowers. We would urge the Government to consider how the scheme can continue to receive adequate funding and support in the future.

  6.  The BSA believes the Mortgage Repossession (Protection of Tenants etc.) Bill will place an unreasonable burden on lenders when executing a warrant for possession. Furthermore, and perhaps more importantly, it could cause additional, unwarranted distress and confusion to the majority of borrowers without an unauthorised tenancy.

  7.  The BSA believes that an amendment to the Bill, to require the lender to write to the occupiers at execution of the warrant for a suspended order only and/or where there is reason to believe the borrower is not in residence, would still fulfil the intentions of the Bill whilst removing the risk of causing distress and confusion to a borrower.

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

  8.  Figures from the FSA[55] for Q3 2009, show that new arrears cases fell by 10% in the quarter. The number of accounts in arrears also fell, albeit by a smaller proportion of 2%.

  9.  The figures also show that new possessions increased by 2.8% in Q3 2009 when compared to Q2 2009, however this is a reduction of 5% compared to the peak at the start of the year (2009).

  10.  Building societies, including subsidiaries, continue to have lower arrears proportionately than the rest of the industry.

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

  11.  Building societies and mutual lenders are committed to working closely with borrowers in financial difficulty and to helping those that are willing to resolve their situation. They also provide support which best meets the individual circumstances of the borrower, rather than adopting a "one size fits all" approach to arrears management.

  12.  Building societies and mutual lenders, will often agree bespoke payment arrangements with borrowers, based upon their individual circumstances, with the aim of stabilising the arrears position over a sustainable period. For example, by rescheduling payments over a longer term, switching to an interest only mortgage or accepting reduced payments for a period of time.

  13. This practice is imbedded in the culture of mutuals and does not vary depending on market conditions.

  14.  In September 2009 the BSA published research[56] Understanding Mortgage Arrears. The research looked at the causes of arrears and subsequent repossessions over a two year period. The research found that the majority of borrowers falling into arrears over the two year period have either repaid, or are currently repaying, their arrears. It also found that 97% of borrowers that had fallen into arrears during the last two years, have not faced repossession and remain in their homes.

  15.  A summary of the main findings are contained in Appendix A.

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

  16. The BSA is supportive of the consistent outcomes that the FSA aims to achieve with the proposed reforms, detailed in the Arrears Consultation Paper (CP 10/2).[57] We do not believe that the poor practices identified in some lenders are indicative of the industry as a whole. Building societies, mutual lenders and the vast majority of high street lenders abide by the current rules as required by the FSA. They adopt approaches that are fair and meet the needs of the both the borrower and the lender. It is our view that much of the consumer detriment identified in the thematic reviews can be more effectively dealt with by stronger supervision.

  17.  We do have concerns with the practical aspects of some of the proposals, particularly with regards to the impact and cost of some of the IT changes envisaged. We have raised concerns with the FSA and they have indicated that they are willing to work with the industry to overcome some of the practical difficulties. This is pleasing and we look forward to meeting with the FSA to identify solutions which are practical for lenders to implement, whilst still achieving the FSA objectives.

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

  18. The FSA has undertaken a significant amount of work to identify issues within arrears handling practices by lenders, such as the Thematic Reviews[58] conducted during 2008 and 2009.

  19.  The recent enforcement action against GMAC RFC[59] is a clear sign that the FSA are willing to take action against lenders who consistently fail to treat customers in arrears fairly. However, we do have concerns that the issues identified, that resulted in this enforcement action, had been common practice since October 2004. We would question why action was not taken sooner.

  20.  The FSA has recognised that their approach to supervision needs to change and we welcome the steps already taken to enhance its supervisory regime. However, we believe it is important for the FSA to undertake a full evaluation of the effectiveness of the regime, to ensure that proposals to amend conduct of business rules are targeted where they are most needed. This considered approach will give a clearer picture of the likely outcomes of the changes.

  21.  We do believe that enforcement action taken by the FSA,[60] should remain confidential until the investigation is complete. More harm than good could be done by releasing details of investigations before conclusions have been finalised, particularly where it is found that no formal action should be taken and the lender is effectively "innocent".

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

  22. Under FSA requirements, lenders are required to produce a full tariff of charges which may be levied on the borrower, including when they fall into arrears. However, this tariff does not always put the charges into context of when they may be waived, therefore it should not automatically be assumed that the charges are always applied.

  23.  Furthermore, charges will apply at certain trigger points in the process only. For example, repossession costs would only apply to those borrowers who progress to this stage.

  24.  It is important that the charges are set at a level which reflect lenders' costs and that these charges do not form an additional profit stream.

  25.  Taking steps to contact the customer once they have fallen into arrears and the subsequent processes do incur costs for the lender. It is right that these are borne by the customer rather than subsidised through increased costs to all borrowers.

  26.  BSA members work extremely hard to ensure that they charge customers in arrears only where it is necessary and fair to do so. Many BSA members report that their arrears management functions operate at a loss; the charges ultimately levied on borrowers in arrears often do not fully cover the costs of running the department.

The effectiveness of Government Schemes to support homeowners in mortgage difficulties

Support for Mortgage Interest (SMI)

  27.  The BSA welcomed the announcement in the Pre-Budget Report[61] that the rate of interest payable will remain fixed at 6.08% for a further six months and that changes implemented in January 2009, to expand the benefit to cover loans up to £200,000 and to reduce the waiting period will continue. However, these changes were implemented for two years only and under current plans, will revert back to previous levels in January 2011.

  28.  We still believe further changes to SMI could make a significant difference to borrowers in financial difficulty, without significantly increasing the cost to the tax payer.

  29.  Fundamentally we believe that SMI should be applied to all loans secured on the property, regardless of their purpose. We also believe that the Government should reassess how the benefit is paid and de-link it from other employment related benefits.

  30.  We believe that changes to SMI would have a direct impact on the number of people being able to support their mortgage payments and remain in their home until their circumstances improve.

The Repossession Prevention Fund

  31.  The Repossession Prevention Fund was made available to local housing authorities in June 2009, to enable them to offer small loans to households to prevent repossession.

  32.  Anecdotal evidence from BSA members shows that access to this fund has allowed some borrowers to clear the arrears and to come to an arrangement with the lender on future payments. This has resulted in some borrowers avoiding repossession and the associated costs.

  33.  However, we are concerned that this fund has not received similar publicity as other Government initiatives. Both borrowers and lenders have reported that they were unaware of the process to access the fund, and in many instances have accessed it only via a mortgage rescue referral. We are also aware that local authorities are not clear when the fund should be used. We believe that this lack of awareness is impacting on the success of the fund.

Mortgage Rescue

  34.  On 16 January 2009 the Government launched a Mortgage Rescue Scheme for England, comprising of two options; Mortgage to Rent and Shared Equity.

  35.  At launch the Government anticipated that 6,000 homeowners would be helped over two years. The latest figures published on 11 February 2010, show that 276 households have been rescued since the scheme launched to the end of December 2009, although a further 1,294 are currently in the process.

  36.  We recognise that achieving significant numbers in year one was ambitious, especially as the new scheme took some time to establish. Furthermore there were extensive training requirements within local authorities and housing associations, which were perhaps underestimated.

  37.  A fast track team was introduced in September 2009 to allow lenders to send potential MRS referrals to a centralised team; this is already showing signs of success. However, there is a concern with capacity within the team and whether a significant increase in referrals from lenders would result in delays.

  38.  The BSA believes that there is potential for the mortgage rescue scheme to remain as a permanent safety net, particularly since it caters for the most vulnerable borrowers. We would urge the Government to consider how the scheme can continue to receive adequate funding and support in the future.

Homeowner Mortgage Support (HMS)

  39.  The Homeowner Mortgage Support Scheme (HMS) was launched on 21 April 2009. It was backed by all nationalised or part-nationalised banks, along with some specialist lenders and one building society.

  40.  The BSA had reservations with the scheme from the outset, in particular with the primary basis of the scheme being that lenders will defer interest. This has always been offered by BSA members as a forbearance option, therefore it did not expand on the options already available to homeowners in difficulty.

  41.  Furthermore, the administrative and reporting requirements were complex and burdensome and would have resulted in increased costs and staff time to ensure the requirements were fulfilled. It is for these reasons that the majority of BSA members decided not to formally participate and instead offer suitable alternative arrangements where appropriate for the customer.

  42.  The figures released by Communities and Local Government (CLG) on 9 December 2009[62] showed that only 15 homeowners have been placed on the scheme since it launched in April 2009.

  43.  The total costs of the development of HMS are due to be published in the 2009-10 CLG Annual Report, therefore we do not know the exact sum which was spent. However, we expect these costs to be significant and disproportionate to the number of borrowers formally placed on the scheme.

  44.  We would not hold CLG solely accountable for the failings of this scheme. We firmly believe CLG have worked hard to make the scheme workable for lenders, but were constrained by the requirement to offer a scheme based solely on the use of deferred interest.

  45.  Despite the failings of the scheme we do recognise that a major benefit from all Government initiatives is that the publicity generated has led to many additional borrowers seeking money advice and/or contacting their lender much sooner in an effort to resolve their situation. As a result many more customers are receiving assistance with their mortgage difficulties.

  46.  This should not be underestimated, but we would question with hindsight whether it may have been more appropriate to have spent the money signposting borrowers to seek money advice or contact their lender.

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

  47.  The BSA recognises that there has been an increase in the levels of arrears and possessions in the Buy to Let (BTL) sector. However, we believe that this can be attributed to increased levels of fraud in the sector, rather than an inability amongst borrowers to meet their mortgage repayments. The FSA recognised in the Mortgage Market Review,[63] that there is scope for collusion between developers, estate agents, mortgage intermediaries and others. This may have seen many buy to let investors encouraged to make an unwise investment decision, that has been inadvertently funded by some lenders chasing increased lending volumes.

  48.  The BSA does not believe that the regulation of BTL lending under the existing residential mortgage regime would resolve this. Applying conduct of business rules to what is an investment decision, would not achieve the desired outcomes of adequately protecting consumers.

Unauthorised tenants

  49.  The BSA fully supports the intentions of the Mortgage Repossession (Protection of Tenants etc.) Bill[64] that is currently progressing through Parliament. It aims to provide greater protection for tenants whose landlord has let the property without the knowledge or consent of the lender and has subsequently defaulted on their mortgage (ie unauthorised tenants).

  50.  The BSA recognises that these unauthorised tenants find themselves in a difficult situation through no fault of their own. The BSA and its members are very sympathetic to this situation and in many cases already provide the tenant with additional time to vacate the property. We entirely support giving unauthorised tenants the opportunity to request a two month delay in possession at the court hearing to give them time to secure alternative accommodation.

  51.  However, it is very important that any legislation balances the needs of the tenant, with the needs of the borrower and also considers the legal and regulatory obligations of the lender. As drafted, we remain to be convinced that the Bill will achieve this.

  52.  Our primary concern is that the Bill places an unfair burden on lenders at the point of execution of the warrant. As currently drafted, the Bill requires the lender to send a further notification, addressed to the occupier, in every case where there is a prospect of a repossession. We believe that this is disproportionate and places an unfair burden upon the lender, as well as increasing costs for virtually all repossessions. For mutuals, these costs will ultimately be borne by their members.

  53.  Furthermore it will also cause additional, unwarranted distress and confusion to the majority of borrowers not affected by an unauthorised tenancy. This confusion arises when the borrower receives notification that they are to be evicted from the property, yet also receive a separate mailing as "occupiers", advising them that a two month delay is available to them.

  54.  The BSA believes that an amendment to the Bill, to require the lender to write to the occupiers at execution of the warrant for a suspended order only and/or where there is reason to believe the borrower is not in residence, would still fulfil the intentions of the Bill whilst removing the risk of causing distress and confusion to a borrower.

  55.  This amendment would still provide an unauthorised tenant with the opportunity to apply for a delay, even at a late stage, without fundamentally overhauling the repossession process for all borrowers and increasing costs for all.

APPENDIX A

BSA RESEARCH—UNDERSTANDING MORTGAGE ARREARS

MAIN FINDINGS

The majority of borrowers that have been in arrears have stayed in their homes, and have repaid or are repaying their arrears

  33% of borrowers have repaid their arrears in full, 41% are currently repaying their arrears, and 12% have come to an arrangement with their lender but are not yet repaying their arrears. Just 3% had their property taken into possession by their lender.

Borrowers that spoke to their lender promptly were more likely to repay their arrears

  46% of borrowers that spoke to their lender before they actually got into financial difficulty had repaid their arrears. This is significantly more than the 19% of borrowers that spoke to their lender a number of weeks or more after getting into problems who had fully repaid their arrears.

Borrowers that sought independent debt or money advice tended to have repaid their arrears

  Just 46% of borrowers in arrears had sought independent debt or money advice. While 43% of those that had fully repaid their arrears had sought advice, 54% of those that were currently repaying their arrears had advice. This compares to just 22% of those that were still in arrears and had no arrangement with their lender, and 36% of those that had come to an arrangement but were not yet repaying their arrears.

Arrears were frequently due to fluctuations in income or expenditure

  The most common cause of arrears was the loss of a job or income, chosen by 43% of respondents. Arrears caused by such events that disrupted a borrowers' livelihood tended to persist, compared to arrears caused by fluctuations in expenditure that were relatively easier to repay.

Most borrowers believe they have been treated fairly by their lender, and think that their lender was helpful through the arrears process

  59% of borrowers in arrears agreed to some extent that their lender treated them fairly, with 17% disagreeing. 58% thought that their lender was very or quite helpful, but 18% thought their lender was very or quite unhelpful.

The most common source of the funds to repay arrears was to work more

  Working additional hours, or getting a new or additional job contributed to the repayments of 60% of borrowers that had repaid or were repaying their arrears. As unemployment rises, it might become more difficult for borrowers to repay their arrears in the future.

  The Building Societies Association (BSA) represents mutual lenders and deposit takers in the UK including all 52 UK building societies. Mutual lenders and deposit takers have total assets of over £390 billion and, together with their subsidiaries, hold residential mortgages of almost £260 billion, 21% of the total outstanding in the UK. They hold over £250 billion of retail deposits, accounting for just under 23% of all such deposits in the UK. They employ approximately 50,000 full and part-time staff and operate through approximately 2,000 branches. Building societies alone account for about 32% of all cash ISA balances.

March 2010




http://www.bsa.org.uk/docs/publications/understanding_mortgage_arrears.pdf

http://www.fsa.gov.uk/Pages/Library/Other_publications/Miscellaneous/2009/mortgage_arrears_1/index.shtml





http://services.parliament.uk/bills/2009-10/mortgagerepossessionsprotectionoftenantsetc.html



55   http://www.fsa.gov.uk/Pages/Doing/Regulated/Returns/IRR/statistics/index.shtml Back

56   BSA Research "Understanding Mortgage ArrearsBack

57   FSA MMR Arrears & Approved Persons Consultation http://www.fsa.gov.uk/pubs/cp/cp10_02.pdf Back

58   FSA review into arrears handling Back

59   Final Notice issued to GMAC RFC http://www.fsa.gov.uk/pubs/final/gmac_rfc.pdf Back

60   Enforcement process http://www.fsa.gov.uk/pages/doing/regulated/law/pdf/enf_procedure.pdf Back

61   Pre-Budget Report confirmation of the extension of the interest rate used to calculate SMI http://www.hm-treasury.gov.uk/d/pbr09_chapter5.pdf Back

62   Publication of HMS figures http://www.communities.gov.uk/news/corporate/1408110 Back

63   FSA MMR Issue analysis (Buy to Let) paragraph 9.16 onwards http://www.fsa.gov.uk/pubs/discussion/dp09_03.pdf Back

64   Mortgage Repossession (Protection of Tenants Etc) Bill Back


 
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