According to a recent report from the London School of Economics (LSE), loan portfolios from failed mortgage lenders after the financial crisis were taken into government ownership and were transferred to wholly-government owned UK Asset Resolution (UKAR) in 2010.
UKAR then progressively disposed of these loans, with the last transaction occurring in 2021 to Davidson Kempner, an investment management business.
The entity has fully repaid the loans and surplus funds are being distributed, with £48.5bn over the organisation’s lifetime, and the report said that the sale of UKAR portfolios has generated £2.4bn surplus.
“It might well be argued that this gives sufficient headroom to allow government to step forward and help struggling borrowers with ex-UKAR loans,” the report said.
The report added that in 2009 the government acknowledged that selling the mortgages to inactive lenders had the potential to “severely harm” consumers but did not take any action.
Over the past year alone, monthly mortgage rates have increased from 4.5 per cent to 8.29 per cent, and that mortgage prisoners had “suffered financially, mentally, and physically for more than a decade”.
The report was funded by a £60,000 private donation from Martin Lewis’s charitable trust, part of MoneySavingExpert.
Four proposed solutions
The report proposed four solutions to mortgage prisoners, which it said could cost between £50m and £347m over the next decade depending on take-up. This assumed that the government would hold some equity loans itself.
1. Financial advice
The first solution is offering free comprehensive financial advice for all prisoners, which is around 200,000 closed-book borrowers.
The report recommended that all the borrowers should be contacted individually to access “comprehensive and holistic financial advice” around mortgages, debt, benefits and income.
The advice would be paid for by the government and delivered through firms like Citizens Advice and StepChange, with complex cases being referred to specialist finance advisers.
2. Interest-free equity loans to pay off Northern Rock’s Together loans
The second solution was interest-free equity loans to clear the “unsecured element” of Northern Rock’s Together loans.
The product was taken out by many mortgage prisoners and is made up of a 95 per cent loan to value (LTV) loan and a linked unsecured loan of up to 30 per cent of the value of the property.
The report said that the interest goes up “dramatically” upon remortgaging, making it a “particularly toxic product”.
LSE said that the secured and unsecured parts of these loans could be “uncoupled” by clearing the unsecured element through a second charge loan product offered by the government. This would remove some barriers to remortgaging and free some mortgage prisoners.
It recommended that it be interest-free for the first five years and have no requirements for regular repayments.
3. Equity loans
LSE also recommended that the government should offer equity loans, similar in structure to the Help to Buy scheme, for those with more “substantial arrears”.
The equity loan would be a maximum of 40 per cent of the value of the property, or 20 per cent elsewhere, and could be used to pay down the mortgage and other existing debt.
Borrowers with interest-only loans could be shifted to part loans, where parts of the repayment goes against the capital.
Similar to the equity loans this would be interest-free for five years and then attract similar interest rates to those on the Help to Buy scheme.
The report explained that this would help borrowers keep some equity in their loans and would not incur extra debt, while lowering the mortgage prisoners’ LTV and help them refinance.
4. Government guarantee
The final solution is offering a government guarantee for active lenders to offer mortgage prisoners new mortgages.
The report said that this would change lenders’ perceptions and actions for lending to borrowers at a higher LTV bracket.
It pointed to the Mortgage Guarantee Scheme as a similar scheme which allowed high LTV lending to be maintained.
The report noted that the government could offer something similar for mortgage prisoners who have done the above, which it would make more attractive to mainstream lenders and release them to the open market.
Government has duty to mortgage prisoners
Lewis said that the report laid out “starkly” that the government sold these borrowers into poverty “knowing it could cause them harm, and made billions doing it”.
“The result has destroyed lives. People have been left in financial, physical and mental misery, exacerbated by the pandemic and cost of living crisis ripping through their already dire situations,” he added.
Lewis said: “When we put solutions to the Treasury in the past, it said it wanted to look at them, but couldn’t as they weren’t costed. Now, having fought tooth and nail to get some of the data needed from official institutions, it is costed.
“The government has a moral and financial responsibility to mitigate some of the damage done. Mortgage prisoners are the forgotten victims of the financial crash. The banks were bailed out at the expense of these borrowers.”
He said that he hoped the Treasury lived up to its “past promise” to “investigate at speed” and use this report as a “springboard to find any and all solutions to free mortgage prisoners”.
Rachel Neale, from the UK Mortgage Prisoners group, thanked Lewis for funding the report and showing that the Treasury made £2.4bn surplus out of the sale of mortgage prisoner loans. It also showed that mortgage prisoners “continue to be profiteered from”.
“The report also confirms what UK Mortgage Prisoners has always known, that harm and detriment to borrowers caused by the sale of these mortgages was disregarded by government as far back as 2009 when it opted not to act to protect borrowers,” she added.
Neale continued that the “severe harm” endured for over a decade has been aggravated by 10 consecutive rate rises and shows that “time is not a currency mortgage prisoners have”.
“The proposed solutions need to be considered in detail, and urgent action is required now before more homes and lives are lost,” she noted.
Kath Scanlon, distinguished policy fellow at LSE London and lead author of the report, said that since research began in 2019, the situation facing mortgage prisoners has “become dramatically more difficult”.
“Rises in interest rates and the cost of living pressures occasioned by the conflict in Ukraine have made it more urgent to address the issue. We hope that our report contributes to finding real solutions,” she added.
