UK Finance and the Building Societies Association (BSA) both supported the overall goals of the Financial Conduct Authority (FCA) proposals to help mortgage prisoners by enabling lenders to utilise a modified affordability assessment.
The FCA’s initial proposals suggested only between 2,000 and 14,000 of the 500,000 mortgage prisoners might benefit from the changes.
However, the trade bodies raised concerns about the lack of data available on borrowers trapped with closed book lenders restricting understanding of those customers.
Customers on interest-only, high loan-to-value (LTV) or self-certified deals may be particularly difficult for lenders to help, Mortgage Solutions understands.
As a result, the bodies are calling on the FCA to obtain more granular data on customers within closed book lenders before finalising its rule changes and to setup a joint implementation working group.
They have added that it could take lenders around six months to make new products available once the FCA has finalised its rules, although this could take longer without good quality data.
In its response, the BSA said: “The provision of this data, profiling the mortgages held in these closed mortgage books, will help lenders determine whether they wish to adopt the modified affordability approach and also enable better targeting of communication with customers.
“Even with this additional information some societies may decide that adopting this modified approach is beyond their credit risk appetite.
“Adoption of these rules is, as the FCA has stated, a commercial decision for the mortgage lender.”
UK Finance added that it was not sure the perception of closed book customers paying very high interest rates was accurate.
And it highlighted concerns around lending practices for those lenders which issued the loans originally.
“It is well known that in the run up to the financial crash of 2007/08, a number of lenders were writing new mortgage business on a self-certified or fast track basis, often at high LTVs,” its response said.
Regarding interest-only borrowers it noted that lenders would not be prepared to accept a new mortgage on an interest-only basis where a customer does not have a credible repayment strategy in place.
“According to FCA data, the 2027 and 2032 peaks of interest-only customers include fewer affluent individuals with higher income multiples and less equity,” it continued.
“Accepting interest only customers who have no credible repayment strategy in place may mean that they are paying a lower rate of interest, but it would not improve their long-term position.
“In addition, acceptance of this type of lending may give the perception that lenders believe this to be an acceptable position for the customers to be in, which would not be the case.
“Lenders would then have to find solutions to help customers to repay the mortgage at the end of the mortgage term and possibly be open to mis-selling complaints or scrutiny around the decision to lend in this scenario.”
The trade body also noted that mortgage indemnity guarantee providers do not want to accept people onto this new method of assessing affordability.
The BSA agreed with UK Finance’s concerns around interest-only borrowers adding that it was “surprised the regulator had suggested its approach”.
“We disagree with this approach and are surprised the FCA has suggested it, none of our members have expressed a desire to take on customers without a suitable repayment vehicle and put simply you are moving the problem from one lender to another,” the BSA said.
Speed of introduction and application
Much focus has been on the potential speed of introduction of any changes, with the expectation that the FCA will finalise its rules by the end of the year.
However, the bodies warned that while some smaller lenders may be able to respond quicker, it would likely be the second quarter of next year at the earliest when products are available.
BSA head of mortgages and housing Paul Broadhead told Mortgage Solutions that in his experience it would typically take “at least six months to change systems”.
“Some of our smaller, more-nimble members might be able to do it a bit quicker,” he added.
UK Finance noted that lenders will not be in a position to offer new products until they have changed their underwriting systems and processes to capture, assess and record the different affordability data required to conduct a modified affordability assessment.
It added that staff in broker firms and lenders will also need to be trained in how the new affordability assessments will be implemented.
“Lenders and UK Finance believe that a joint implementation working group would be helpful in assisting lenders to prepare products following the changes to the rules and work towards a common launch date so that there is a range of products available to customers,” it said.
Honest about the challenges
Broadhead added: “At this stage I think it is important to be honest about the challenges and the reality that it will take some time to work through to a sensible conclusion.
“We recognise the importance of helping those mortgage borrowers that do not have the option to move to a better deal because their mortgage has been sold to an unregulated purchaser.
“However, information about these borrowers’ circumstances remains sketchy and we are therefore working blind.”
Debt charity StepChange said it supports the main proposals but that much more needs to be done to address the plight of those trapped in expensive mortgages with inactive or unregulated lenders.
It noted that the FCA had already accepted the principle of price intervention where vulnerable consumers were concerned in the rent-to-own credit market and so called for a similar approach in the mortgage market.
StepChange head of policy Peter Tutton said: “The FCA’s principle of making it easier for mortgage prisoners to switch is great, but it won’t work in practice for some of those in the greatest need of help.
“If people are on closed books with inactive or unregulated lenders and fall outside other lenders’ risk appetite, they don’t qualify.
“Given that these types of trapped customers are likely to be those who could benefit most from lower costs, we think greater intervention is justified, even if further legislation is needed to achieve it.”