CML: Helping borrowers with payment problems

1 The extent to which lender forbearance can help people avoid having their home taken into possession;

2 What the government can do to help borrowers in difficulty;

3 Ensuring that people who choose to sell their home to avoid possession get a fair deal; and

4 What borrowers in difficulty can do to help themselves.

Lender forbearance

Rules overseen by the Financial Services Authority (FSA) already require lenders to seek possession only as a last resort. The courts also provide an important level of protection for home-owners facing possession action. So does the Financial Ombudsman Service.

We continue to promote among members the use of possession only as a last resort. We have been working with the government for some time now on industry-wide measures and a court protocol that will reinforce this approach, and we expect these to be announced shortly.

The chief secretary to the Treasury, Yvette Cooper, referred to this in her comments at the weekend about “doing everything that we can to keep people in their homes.”

The reality is that because lenders and borrowers do work together effectively, the vast majority of people are able to find a solution that enables them to stay in their property with the help of the lender. It is certainly not inevitable that falling into arrears leads automatically to possession.

That is why the number of possessions remains very small compared with the number of borrowers in arrears, and with the total of 11.7 million mortgages outstanding. Our prediction of 45,000 properties to be taken into possession this year remains exactly as we forecast last October, despite the impact of the credit crunch, market instability and worsening unemployment.

Most people who face mortgage difficulties do so because of a change in their circumstances, not because of the original lending decision. But while we support lenders helping borrowers find a solution to their problems, sometimes there is no easy answer.

In those circumstances, postponing possession may not be in the long-term interests of the borrower. It may simply be storing up problems as arrears continue to build, with the borrower in the end owing more as a result.

The important thing is to ensure that those people who are likely to be able to clear their arrears are able to do so, while minimising the fallout for those whose problems cannot be solved so easily.

As well as working with the government to reinforce the use of possession as the final option, we are also helping ministers develop a new mortgage rescue scheme. This will offer further help to some households that may not be able to pay off their mortgage arrears – and face homelessness as a result – by enabling them to become tenants of housing associations in the home they have previously owned.

Help from the government

We have consistently argued over many years for better state support for home-owners in difficulty, and for the removal of the bias that provides more help for tenants with payment problems than for home-owners.

In 1995, the former Conservative government scaled back support for home-owners with payment problems by capping the limit for help to mortgage interest payments on loans up to £100,000. It also extended the qualification period for new claims to 39 weeks.

Despite widespread criticism of these measures at the time, the Labour government did nothing to improve state support for home-owners during its first 11 years in power. Throughout that period, it oversaw a system in which state assistance continued to favour tenants – despite its stated support for home-ownership and its aspirations to extend it.

Finally, the government acted last month to improve state help for home-owners by announcing that it intended to raise the size of loan qualifying for income support for mortgage interest (ISMI) to £175,000 and shorten the qualifying period from 39 to 13 weeks. But there is a significant time lag until this is due to be implemented next April.

We welcome this belated action by the government. Lenders will find it much easier to extend forbearance until benefit payments begin for borrowers who find that all or most of their future payments are covered by ISMI after 13 weeks.

We believe that, given the increased likelihood of mortgage payment difficulties going forward, the government should implement the proposed changes as soon as possible – and apply them to outstanding claimants, not just new ones.

Sale-and-leaseback: a fair deal for consumers

In recent months, there has been an increase in the activities of firms offering to buy the homes of owner-occupiers with payment difficulties and lease the properties back to them as tenants.

Along with Shelter and Citizens Advice, we have been concerned that these firms have remained unregulated. There has been widespread media coverage of the potential for consumer detriment, including properties being bought for significantly less than their market value and a lack of security for tenants who agree to sell their homes and become leaseholders.

Earlier this month – a year after we called jointly with Shelter and Citizens Advice for the regulation of sale-and-leaseback – the Office of Fair Trading (OFT) recommended that these schemes should be regulated by the FSA.

The OFT believes that this could be achieved relatively quickly, and we would like to see prompt implementation of its proposals. A level playing field requires a regulatory approach to provide appropriate protection from unscrupulous operators for consumers who may be in a vulnerable position. We await a government announcement.

How borrowers can help themselves

The most important things that borrowers facing payment difficulties can do are to speak to their lender about their problems – preferably even before they miss a mortgage payment – to seek debt advice if they need it, and to make regular payments of what they can realistically afford.

Those who help themselves are more likely to be able to manage their short-term problems, and are likely to find that lenders have more options to help them through a period of difficulty.

Conversely, those who won’t pay, or do not make any payments, or those with little or no equity in their property, will inevitably be at a greater risk of possession. Earlier, this year, we issued survival guide for borrowers in difficulty, in conjunction with Citizens Advice and Shelter.

Other options

With payment difficulties set to increase, what more can be done to help? One option would be to widen the government’s proposed mortgage rescue scheme. Eligibility is currently very restricted. If the government wants to do more to help people stay in their homes, it could provide more financial support for the scheme, and widen its eligibility.

The government could also look to improve ISMI further by, for example, paying interest at the real rate applied to the loan, rather than a standard one, and widening eligibility for payments further. As we have pointed out before, it could consider recovering some of the higher costs of improved state support by making benefit payments a second charge on the home, to be recovered when the property is eventually sold.