Written evidence submitted by Consumer
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
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
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
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
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 marketlenders 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
65 Right-to-Buy homeowners struggle to keep their homes:
Managing debt in the financial crisis, Consumer Focus (July 2009). Back
Set up to fail, Citizens Advice (December 2007). Back