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Mortgage arrears: follow up - Treasury Contents

Written evidence submitted by Consumer Focus

  Consumer Focus is the statutory organisation campaigning for a fair deal for consumers in England, Wales, Scotland, and, for postal services, Northern Ireland. We will be the voice of the consumer, and work to secure a fair deal on their behalf.

  We welcome the opportunity to provide this evidence to the committee.

  1.  The financial crisis has led to a stark increase in repossessions. Recent figures released by the Council of Mortgage Lenders showed that, in 2009, repossessions reached their highest level since 1996. Consumer Focus is concerned that many of those who find themselves losing, or at risk of losing, their homes will be from the most vulnerable groups in society.

  2.  Our own research[65] of a cross section of consumers has shown that those who have bought under right-to-buy are reporting more difficulty in keeping up with their mortgage payments and a higher level of indebtedness than other mortgage holders. We therefore believe that there is a need for additional monitoring of this group.

  3.  The Consumer Focus research, which was carried out in Spring 2009, found that nearly one in 10 (8%) of those with mortgages who had bought under right-to buy (RTB) were struggling with their mortgage repayments. They were twice as likely to report problems with making their repayments as mortgage holders who had not bought their homes in this way who were having difficulties (3%). RTB mortgage holders were also 50% more likely to have second or subsequent charges secured on their homes.

  4.  An earlier report by Citizens Advice[66] found that, among their clients with mortgage or secured loan arrears, borrowers who had bought their homes under right-to-buy tended to be on low incomes, with limited financial knowledge and especially vulnerable to irresponsible lending practices. The Citizens Advice report characterised these borrowers as "often also vulnerable", due to reasons of "mental health, physical disability, literacy or language difficulties". It also refers to former tenants who had bought under right-to-buy who were not aware that housing benefit would not be available to pay their mortgage.

  5.  The Financial Services Authority (FSA) Mortgage Market Review also refers to the particular problems associated with RTB mortgage holders. It found that borrowers who bought from a council or housing association were "two to three times more likely to fall into arrears than someone with a standard mortgage". However, the review does not propose any additional requirements in relation to RTB purchasers. We are concerned that, because this group is particularly vulnerable to inappropriate and/or irresponsible lending, there should be a very high level of scrutiny of affordability prior to the grant of a mortgage for a RTB purchase. In addition, before a sale can proceed, there should be a requirement that the borrower has received independent advice on the full financial and legal implications of the transaction.

  6.  Since January 2005, tenants must have at least five years' tenancy to exercise RTB (an increase from two years' tenancy). Thus, while this change meant fewer people were eligible to exercise a RTB there is now a new and growing tranche of tenants who will become eligible and, once an economic recovery begins, the activity in this sector is likely to increase once more.

  7.  It should be noted that the situation in Scotland with RTB is different to England and Wales. Under proposals within the newly introduced Housing (Scotland) Bill, new council house and housing association tenants will no longer have the Right to Buy.

  8.  Issues of affordability are not just limited to RTB purchasers. Irresponsible lending practices have contributed to the difficulties homeowners are now having in keeping up with their mortgages. The FSA Mortgage Market Review identified that, in response to the rapidly expanding demand for home finance, some lenders began to make their lending decisions on the assumption that property values would continue to increase, rather than the affordability of the mortgage to the borrower concerned.

  9.  Non-income verified mortgages became commonplace, accounting for 45% of all mortgage advances in 2006-07. Furthermore, in 2006-07, 33% of all mortgages were sold on an interest-only basis, but most of them were without a strategy for repayment of the capital sum.

  10.  The arrears rates for non-income verified and interest-only mortgages are higher than for standard income verified mortgages. Many low income consumers are likely to have taken out these types of mortgages. In addition, a number of mortgages were available with low introductory interest rates, but these reverted to a much higher rate after a year and became unaffordable to low income consumers at that point. In the height of the boom, it might have been possible for these consumers to switch to another mortgage, also at a low introductory rate, but the financial crisis has significantly reduced the possibility for low income consumers to do this.

  11.  It appears that the low income and high equity profile of RTB purchasers has made them more susceptible to lending practices which were more concerned with the value of the property than the affordability of the mortgage. Accordingly, we have welcomed the FSA's proposals in its Mortgage Market Review to ban self-certification for mortgages and to strengthen requirements for the assessment of affordability in our response to the review. We also support the FSA proposals to strengthen the requirements that repossession should only be sought as a matter of last resort and to convert current forbearance guidance to rules in the Mortgage Conduct of Business Rules. We also agree with the proposal to prohibit arrears charges where borrowers are keeping to an agreed arrangement to repay their arrears.

  12.  While repossession levels are high, they are still significantly lower than the highest numbers reached during the market collapse of the early 1990s. Government interventions and lender forbearance would appear to be contributory factors here.

  13.  However, it is also the case that interest rates are considerably lower than they were in the 1990s and this may be as much a factor in preventing repossessions as other measures being taken. A rise in interest rates as the country leaves recession could result in an increase in the number of repossessions. Furthermore, current lender forbearance may be equally due to the depressed nature of the housing market—lenders are disinclined to repossess homes that they are unlikely to be able to sell quickly and recover their costs. Should the market recover, lenders may be more willing to move to repossession.

  14.  Government initiatives to prevent repossession and requirements on lenders only to repossess as a last resort will take on even greater importance should such changes occur in the mortgage market.


  15.  RTB borrowers are likely to be among those most at risk of repossession, as their vulnerability means they are often the first hit by recession. It is here that failure in the system to protect the interests of mortgage holders will be felt particularly hard.

  16.  The following recommendations, therefore, pay particular regard to protecting this vulnerable group, but can also be more widely applicable to other low income consumers.

  17.  Consumer Focus recommends that:

    — lenders be required to scrutinise affordability for a RTB purchase, looking not only at what a person's income is but also what their current rental expenditure is and how the additional costs for mortgage payments, maintenance and insurance will be met; and

    — the situation of RTB owners be monitored by government so that adequate protections can be put in place. As RTB tend to be hit first by economic fluctuations and recession, this will also provide an early indicator of problems for the wider market.

March 2010

65   Right-to-Buy homeowners struggle to keep their homes: Managing debt in the financial crisis, Consumer Focus (July 2009). Back

66   Set up to fail, Citizens Advice (December 2007). Back

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