IMLA: Citizens Advice report ‘Set Up to Fail’

Responding to the Citizens Advice report, IMLA’s Executive Director Peter Williams comments: “Although much of the content of the Citizens Advice (CA) report offers a sensible review of the issues around mortgage arrears and possessions, the report contains a number of sweeping generalisations which ignore the generally positive position of most home buyers and the work lenders do to work with the small minority who get into difficulty. The report implies that there is a “hidden crisis in the sustainability of home ownership” and ignores the fact that the fundamentals of the market remain very strong even if we are experiencing short term difficulties.”

“CA also focuses on a sample of cases where individuals in both prime and sub prime markets have clearly experienced considerable financial hardship. The study is based on a variety of sources but all of which focus on borrowers in difficulty. The problems identified date back over several years and in many cases probably pre-date the MCOB regulatory regime introduced on 31 October 2004.”

“CA examines in some depth the variation in the approach towards arrears management and possessions adopted by different lenders and, indeed, different courts and different judges. Unsurprisingly borrowers with credit problems are more likely to get into difficulties. The ability of lenders to handle these situations in accordance with their own procedures, subject to the terms of the mortgage deed and the law, is important to the industry and has potential repercussions on the risk profile of mortgage assets that have been securitised or sold. Lenders have a clear vested interest in working with borrowers who are struggling to pay their mortgages, in order to minimise the significant costs of arrears and possessions (only some of which are recovered), the loss of customers and damage to reputation. Taking possesion of a property is the last resort for lenders.”

“IMLA is ready to explore ways the current system can be improved. We do agree with CA that the different regulatory regimes for first and second charge loans (and indeed the current regulatory ‘gap’ for secured loans over £25,000) has created complications, and note the government is now proposing to address this. Similarly, while judges can and do take account of individual people’s circumstances, there is evidence that borrowers are not always treated consistently by the courts, and we would favour further consideration being given to this point.”

“Inevitably, in a market as large as ours, there are occasions where borrowers have taken on a mortgage or other secured loan that proves to be unaffordable or only marginally affordable, and where a payment shock or other change in circumstances makes it difficult for them to pay. However, without denying that some customers do have a legitimate grievance, there is also a matter of personal responsibility. Borrowers do need to read the small print, consider their financial position carefully and make sure they will be able to meet their obligations even if their financial position should deteriorate temporarily in the future.”

“The study draws attention to the failure of the benefits system to provide financial support to claimants quickly enough to enable them to remain in their homes, and highlights discrepancies between the treatment (for benefits purposes) of people who pay rent and those who pay a mortgage. It also draws attention to the significant gap between the standard interest rate on which income support for un-employed home owners is based (October 2007, 7.33% and the actual mortgage rate being paid by a sub-prime borrower (which may be at least 2% higher). IMLA would urge the government to review the current Income Support for Mortgage Interest regime which has remained unaltered for some years despite fundamental change in the mortgage market.”

“In conclusion, given its significant membership in these specialist sectors, IMLA remains committed to promoting best practice in the lending industry and helping to ensure that mortgage finance is readily available to people who are in a position to afford and sustain home ownership. As indicated, we believe some of CA’s proposals are worthy of further consideration, but we would stress that sub-prime represents less than 10% of the market, and the incidence of difficulties in this market has been small. The CA report does little to recognise the important role the sub-prime market plays in helping those with poor or damaged credit histories to enter or re-enter the mortgage market. Most borrowers do well from this and though we recognise there are failings on occasions we should not allow this to obscure the overall success of this market place.”