Lenders outline steps to address credit crunch problems

The Council of Mortgage Lenders has written to the Chancellor of the Exchequer outlining the range of steps that lenders are taking to minimise the potential problems that may face some borrowers in the wake of the credit crunch.

The CML also looks forward to hearing the government's views on the potential reform of the "last resort" state safety net for borrowers who suffer a severe change in their financial circumstances.

In absolute terms, the CML continues to expect the number of mortgage arrears cases and repossessions to remain low. But the situation is clearly worse than it was before the credit crunch, and the shortage and cost of mortgage funding will affect some borrowers coming off low-rate deals by increasing their monthly payments more than they might previously have expected.

Repossession is already a last resort. FSA rules require all lenders to have arrears management policies that are designed to avoid repossession except where realistic alternatives are not possible. But these are not delivered in a single standard approach, and will differ between lenders. To ensure all possible avenues are being followed to minimise difficulties, the CML is undertaking a wide range of activities as set out in the letter. And CML members have committed to four significant specific measures, namely:

To analyse their existing arrears management policies and implement any changes identified as a result of the industry guidance that the CML is preparing.

To provide information for consumers on their own arrears management process to help borrowers understand what to expect and how they will be treated fairly.

To support the principle of a pre-action protocol for mortgage cases for use before court proceedings, providing an additional assurance that only appropriate cases go to court.

To inform borrowers in good time when they are coming out of initial deals onto higher rates with increased monthly repayments, and encourage them to make contact if a financial problem is likely to arise.

Borrowers can also do a great deal to help themselves, by ensuring they make contact with their lender as soon as they realise they may face difficulties, by continuing to pay as much as they can even if they cannot meet their full mortgage payment, and by seeking advice to help them prioritise and manage their debts and maximise their income.

CML director general Michael Coogan concludes the letter to the Chancellor by saying: "We continue to expect the absolute level of mortgage arrears and possessions to remain low, as we forecast in October 2007. With a worsening economic environment, and an incomplete safety net for borrowers, we cannot be complacent about prospects and the challenges facing borrowers, lenders and public policy makers.

"We will continue to work closely with Ministers, and look forward to a clear statement of the government's own position on the safety net for borrowers. The Department of Work and Pensions' proposals to reform ISMI [income support for mortgage interest] and to implement improvements to state support remain urgent for those borrowers committed to staying in their homes who face a short term loss of income."