Sub-prime lending undermining home ownership

The dream of home ownership has turned sour for many people on low incomes who have taken out mortgages or secured loans with sub-prime lenders only to end up deep in debt and facing the prospect of homelessness, according to a report from Citizens Advice.

Set up to fail shows how dubious advice from brokers, irresponsible lending decisions and aggressive arrears management by sub-prime lenders are driving the current increase in mortgage arrears, court action and repossessions. It also shows how the regulation and safety nets currently in place are failing to protect vulnerable borrowers.

Citizens Advice concludes that government policy encouraging more people on lower incomes to buy their own homes, while a laudable aim, can only work if the problems its report highlights are addressed. The charity makes a series of recommendations which it believes would make home ownership more sustainable for those for whom at present it remains a high risk undertaking.

Last year (2006/07) Citizens Advice Bureaux dealt with over 57,000 problems about mortgage and secured loan arrears, an 11% increase on the previous year, and an NOP GFK survey for Citizens Advice suggested as many as 770,000 people had missed at least one mortgage or secured loan payment in the previous 12 months. At the same time, court action for repossession has risen steeply and is now at a similar level to that seen during the repossessions crisis of the 1990s.

The new 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.

A CAB analysis of mortgage possession cases listed in 23 county courts in January 2007 found that sub-prime lenders were responsible for a level of possession actions substantially above their market share - in some cases the equivalent of ten times more than mainstream lenders.

Citizens Advice Chief Executive David Harker said: " The cavalier behaviour of some brokers and sub-prime lenders is seriously undermining home ownership and hitting the most vulnerable borrowers hardest. Our research suggests that many aspiring home owners have been mis-sold unsuitable and costly home loans that are doomed to fail from the start. Many sub-prime lenders are flouting the rules on responsible lending by granting loans when it’s clear the borrower will not be able to afford to repay it from the very outset, then getting tough immediately things go wrong. Far from providing housing security and a valuable asset, home ownership has proved a fast track to debt and homelessness for many vulnerable borrowers on low incomes."

Many people who borrowed from sub-prime lenders start to struggle early on in the term of the mortgage, and CAB evidence shows that these lenders are often unwilling to negotiate affordable repayment arrangements with borrowers in difficulties, taking court action for relatively small amounts of arrears, significantly increasing the stress, risks and costs people face.

The hardline approach by lenders threatening court action, and escalating the debt by routinely piling on default charges, drives many to try and solve the problem by re-mortgaging or borrowing more in the form of secured loans, without realising they are putting themselves at even greater risk of losing their home by doing this.

Most people seeking CAB advice on mortgage and secured loan arrears are on low incomes and have borrowed from sub-prime lenders at higher rates of interest. More than a third had household incomes below the UK poverty line, one in five was reliant on means tested benefits, and nearly 70% had outstanding unsecured debts averaging £22,000.

Often they relied on the recommendations made by a broker, ending up with inappropriate and unaffordable mortgages. Many buying their council homes had had particularly bad advice on the suitability of the loans they took out. Some brokers encouraged borrowers under the greatest financial pressure to exaggerate their income, or submitted false information without the borrower’s knowledge.

Many lenders and brokers failed to carry out basic checks to ensure that borrowers would be able to meet the increased payments when discounted or fixed rates ended, and some had not even checked that payments could be afforded from the outset.

Many borrowers who had taken out additional secured loans for home improvements or debt consolidation – sometimes for amounts as large as their main mortgage - did not understand the risks, or the consequences of default.

Sub-prime lenders were often less willing than mainstream mortgage lenders to negotiate with borrowers in arrears and more likely to take court action for possession, making debt problems worse.

Sub-prime lenders were responsible for a level of possession actions substantially above their market share. Courts do not always check if the lender has complied with regulation and may not apply existing legal safeguards and remedies available to borrowers.

Some homeowners in arrears and in a financially and emotionally vulnerable situation had sold their houses for much less than they were worth in order to rent them back, with little security of tenure, from companies offering a new, unregulated form of ‘mortgage rescue’.

Many lenders are not complying with the extensive Financial Services Authority (FSA) rules governing first charge mortgages. Office of Fair Trading (OFT) rules on second charge lending are out of date and not always enforced, while second loans over £25,000 are currently not regulated at all.

Less than a quarter of home owners have mortgage payment protection insurance (MPPI) and those that do often find it does not pay out when needed. State support through the income support mortgage interest (ISMI) scheme is woefully inadequate to protect those in greatest need of help.

Citizens Advice is calling for tougher enforcement of existing regulation, and for the same rules to apply to all mortgages and other secured lending in future. It says these should combine the best elements of the existing regimes and should be actively monitored and enforced, taking firm action against bad businesses. It adds that improving the regulation of brokers should be a priority.

The charity also wants to see a guaranteed ‘pre-action protocol’ put in place to ensure that mortgage and secured lenders take court action for possession only as a last resort, and a housing benefit for homeowners similar to the help with rent available to tenants on low incomes.

Citizens Advice Chief Executive David Harker said: "Most people in this country want to own their own home, and we support the government’s commitment to helping them attain that goal. But the main focus has been on helping more people get a foot on the housing ladder, whereas sustainable home ownership has to be about helping people stay in their homes in the longer term, as well as helping them buy in the first place.

" The stark message of our report is that for many low income homeowners the risks have ultimately outweighed the benefits. Better protection must be put in place urgently if the dream of home ownership is not to turn into a nightmare of debt and homelessness for thousands more vulnerable people."