Set up to fail
CAB clients' experience of mortgage and secured loan arrears problems
Citizens Advice Bureaux have seen increasing numbers of mortgage and secured loan arrears problems in the last two years. Homeowners in arrears receive little help from benefits, insurance or their lenders. Poor lending and arrears collection practices made problems much worse for many borrowers. Government policy and mortgage markets have paid too little attention to what happens when things go wrong. Consequently, too many borrowers are being set up to fail.
This report calls on government and regulators to take co-ordinated action to ensure that homeownership for lower incomes households is sustainable in the long term.
Most people in the UK want to own their own homes and the Government want to help more people become homeowners. Public policy on homeownership is currently geared towards encouraging more people to get on the housing ladder by tackling affordability, rather than the risks of not being able to pay the mortgage over lifetime of the loan, particularly if circumstances change.
In the last year, Citizens Advice Bureaux dealt with over 57,000 problems about mortgage and secured loan arrears, an 11 per cent increase on the previous year. At the same time, the number of county court possession claims has increased sharply and is now at a similar level to that seen during the mortgage arrears crisis of the 1990's, even though the number of loans in serious arrears is much lower. This suggests that lenders are taking court action more readily and are less willing to help borrowers in arrears.
This report is based on 1,200 case studies from 360 Citizens Advice Bureaux in England, Wales and Northern Ireland, a survey of CAB clients with mortgage or secured loan arrears and interviews with CAB clients and advisers. We also analysed mortgage possession cases listed in 23 county courts in January 2007.
Most CAB clients seeking advice on mortgage and secured loan arrears are disproportionately from lower income households. They tend to borrow from sub-prime lenders at a higher rate of interest.
In many cases, CAB clients do not shop around for a good deal. Instead they rely on the recommendatiions made by a broker. Often, they end up with inappropriate and unaffordable mortgage and secured loans. Some of the people buying their council houses receive particularly poor advice from brokers on the suitability of the loans they take out.
CAB evidence shows that many lenders and brokers do not ensure that borrowers understand the risks of entering into a mortgage. In some cases, it seems that lenders do not check whether the borrower can afford the mortgage repayments from the onset.
Some borrowers also take additional secured loans for items such as home improvements or debt consolidation. In some cases, these are as large as their main mortgage. Many do not realise the risks and consequences associated with taking out further secured loans.
Lenders' arrears management practices often increased the arrears problems borrowers face. They take court action for possession rather than negotiate with the borrower. Our research shows that sub-prime lenders are responsible for a level of possession actions substantially above their market share. Lenders have little incentive to consider alternatives to court action, and so can take possession action quickly, adding substantial additional costs to the borrowers' debt.
The growth of mortgage arrears problems has been accompanied by the development of sale and rent back schemes. In these schemes, the borrower sell their property to a private landlord at a discount and in return can rent the property back as a tenant. CAB evidence suggests that homeowners in a financially and emotionally vulnerable situation end up selling their houses for much less than they are worth, in return for a tenancy that offers little security of tenure.
Safety nets are also failing. Take-up of mortgage payment protection insurance (MPPI) has declined. The Government's income support for mortgage interest payment scheme (ISMI) is also failing to keep CAB clients out of serious arrears problems, because of the limited help that it offers. Borrowers have to wait up to 39 weeks, because there is an assumption that MPPI will pay their mortgage during this period. After the waiting period, help is limited to a maximum mortgage size well below current average house prices and to a standard interest rate much lower than the sub-prime rates that many CAB clients have to pay. Furthermore, their is no equivalent of housing benefit to help homeowers in low paid work meet their housing costs, leading to hardship for some CAB clients.
The current system to protect consumers from unfair business practices in the mortgage and secured loan markets is not adequately dealing with the poor lending and arrears management practices outlined in this report. Whilst the Financial Services Authority (FSA) rules governing first charge mortgages are extensive, lenders are not always complying with them. Regulation of second charge lending by the Office of Fair Trading (OFT) has not been updated to take account of changes in the marketplace. The OFT also does not have a clear and proactive compliance strategy.
Over evidence suggests that sustainable homeownership is a challenge for many low income households. Better co-ordination of government policy and proactive regulation of bad business is needed to prevent these borrowers from being set up to fail.
- All secured lending should be included in a unified regulatory regime that takes the best from the existing regimes.
- In the meantime, the FSA and the OFT need to ensure that lenders treat borrowers fairly, both when making lending decisions and collecting and enforcing arrrears.
- The Ministry of Justice should develop a pre-action protocol to ensure that mortgage and secured lenders take court action for possession only as a last resort.
- The Government's strategies for financial inclusion and financial capability should take into account the needs of low income homeowners.
- The Government should ensure that the help available from the benefit system fits the needs of people borrowing from sub-prime lenders at higher rates of interest.
- The Government should develop rules for the cost and quality of MPPI for all mortgages and secured loans.
- The Government should develop a benefit, comparable to housing benefit, for low income homeowners in work.
- The Government should act to protect people who enter into sale and rent back schemes.
- The Government should develp a cross-departmental action plan to address the issues raised in this report.