SVR cap for mortgage prisoners withdrawn in House of Lords
Withdrawing the proposal is a blow to hard-hit mortgage prisoners but its originator Labour peer Lord Stevenson warned the government he would reintroduce it if there was not swift progress.
The move came after a Lords committee debate which included two other amendments to the Financial Services Bill that are designed to bring relief to the mortgage prisoners.
These were to address the availability of transfers to mainstream market deals, and to prevent more people becoming trapped by requiring borrowers’ consent before their mortgage is sold to an inactive or unregulated entity.
‘We need convincing’
Cabinet Office minister Lord True argued that comparisons made between SVRs faced by mortgage prisoners compared to those in the market were “often inappropriate”.
“I hope that noble Lords will appreciate that this is a complex topic. We are, as I have said, committed to finding practical ways to help,” he added.
In withdrawing the amendment, Lord Stevenson argued “this is more than just a complicated problem which needs to be bottomed out by working with the market.”
And he warned that action needed to be taken quickly by the government to address the situation.
“We need convincing that there is work going on that will result in a workable solution of benefit to those affected by this within a reasonable timescale, otherwise we will come back… in a way that makes it clear that the government cannot continue to let this settle itself,” Lord Stephenson continued.
“It has to be taken forward in policy terms otherwise too much damage will be caused.”
During the debate Lord Stevenson called it a “shameful episode”.
He was supported by Liberal Democrat peer Lord Sharkey, joint chair of the All-Party Parliamentary Group on Mortgage Prisoners, who spoke for all three amendments.
“Mortgage prisoners exist almost entirely because the Treasury made a terrible mistake when it sold the first tranche of former Northern Rock and Bradford & Bingley to unregulated American vulture fund Cerberus.
“The government has got the Financial Conduct Authority (FCA) to change affordability tests to let them switch to another lender, but only a very small number of lenders are willing to use the new flexibilities.
“The government created the problem of mortgage prisoners and it is their moral responsibility to rescue them from the significant decrement many still face,” he said.
However, Conservative peer Baroness Noakes argued against further market interventions.
“These amendments seek to go beyond what has already been achieved for mortgage prisoners by relaxation of affordability rules by the FCA.
“I have much sympathy for mortgage prisoners, but we should not lose sight of the fact these borrowers do not have sufficient financial credentials to qualify for new mortgage lending under currently regulatory rules and hence cannot remortgage.
“They are a hangover from a period when lending criteria were much less strict than they are now, and include interest-only borrowers who lack a credible way for repaying capital. We should be wary of going beyond what the FCA has already done.
“In particular, making the FCA specify maximum interest rates is, in my view, an unwarranted market intervention.
“The FCA is best placed to judge whether any solutions can be found for these problem borrowers.
“We should not try to solve the problems of a relatively small number of people with blunderbuss legislation.
“I cannot support any amendments in this group.”
Result of government action
But Liberal Democrat Baroness Kramer critiqued Baroness Noakes’ response, noting much of their financial insecurity was as a result of being made mortgage prisoners by Conservative governments.
“These are people the overwhelming majority of whom would not have any problem with their debt if they had been allowed to take advantage of the changes in interest rates and mortgage terms that have been available much more widely,” she said.
“The case to act for their protection is simply overwhelming. If we had not had the financial crash and they had remained with regulated lenders, the vast majority of them would not be facing any issue.
“They would have had their mortgages restructured to lower rates and they would not be facing stresses and strains today.”
The eight measures proposed to free mortgage prisoners in full
The report puts responsibility for the situation squarely at the government’s door and argues there is an ethical case and responsibility for solving it quickly.
Here are the eight proposals in the report:
Government equity loans
Some prisoners, including many with interest-only mortgages, do not qualify for new loans because they do not have enough equity in their homes to meet current deposit requirements and pass mortgage stress tests. A government equity loan would bring mortgage loan to values (LTVs) down, which would open up for some the possibility of securing a mortgage in the open market through the FCA’s modified affordability assessment.
The equity loan could be interest-free for an initial period – say five years. Loans could cover a proportion of the outstanding debt, with a cap on the equity-loan amount and possibly on the value of the mortgaged property. This mirrors the approach of the government’s successful Help to Buy scheme for buyers of new homes.
The measure could be available to prisoners who are up to date with payments, have no arrears in the past 12 months and are not in negative equity. Our calculations indicate that an equity loan of up to £25,000 for those not in arrears or negative equity almost eliminated cases with LTVs over 75 per cent in the Towd Point securitisation, one of the largest tranches of mortgages sold off by UKAR.
The total up-front cost for this portfolio alone would be approximately £800m in terms of the equity loans provided; the final cost would depend on interest rate and repayment flows uplifted by house price inflation if any.
Remove Together loans as an obstacle
There are at least 17,000 ex-Northern Rock Together mortgages still outstanding. Together loans have two elements: a secured mortgage loan and an unsecured loan, both with the same interest rate. The two loans are contractually linked. Changing lenders to take out a new, cheaper mortgage breaks the link with the unsecured loan, triggering a large increase in the interest rate on that element.
The FCA modified affordability assessment allows unsecured loans to be consolidated into the mortgage as long as the interest rate on the new loan is lower than either rate on the existing loans, but many Together customers will not qualify for new loans under this scheme.
There are a few potential ways to address these loans. First, government could take the lead in negotiating the decoupling of the two loan elements. Investors would not lose out, as they would receive the same interest payments they are getting now, and prisoners would not see the benefits of switching their first-charge loans swallowed up by higher payments on the unsecured loans.
Alternatively, a government equity loan on the terms set out above could repay the unsecured element of Together loans. This would recognise the government’s earlier failure to address these particularly detrimental loans before selling them out to the market.
Partial loan write-offs by investors plus government equity loans
Refinancing is impossible for prisoners who are in arrears or negative equity, and with the post-Covid economic downturn their numbers may well grow. A combination of a partial loan write-off and a government equity loan could reduce payments significantly and allow some borrowers to remortgage with an active lender. The government cannot compel investors to write down loans but could offer incentives for them to do so, particularly if the costs of default and possession exceed the costs of the modification – as may become more likely in the current economic environment.
This approach has been used elsewhere: the USA’s Home Affordable Modification Program, in operation between 2009-2016, offered financial incentives for private lenders and investors to fund loan adjustments. More recently, evidence from Ireland suggests that owners of closed books have become much more flexible in their approach towards restructuring, with an increased emphasis on long-term restructuring to reduce mortgage balances and repayments. Some of these investors, for example Cerberus, also operate in the UK and should be encouraged to demonstrate a similar degree of engagement and flexibility when it comes to long-term restructuring here.
At a later date, if borrowers are up to date and have avoided arrears for 12 months, they would become eligible for government equity loans as set out above.
Mortgage rescue – allowing borrowers to remain in their homes as tenants
There are some prisoners, particularly those with arrears and other debts, for whom a mortgage is financially unsustainable even if the payments are reduced. Such borrowers may do everything possible to avoid losing their homes, even at the cost of going deeper into debt. For many prisoners in this situation it is not enough to reduce LTVs or enable access to a cheaper loan.
A mortgage-rescue scheme would relieve the financial pressure on such prisoners while allowing them to remain in their homes. Any part of the loan not covered by the purchase price would be written off. The government could offer financial incentives for housing associations and investors to take part. Beneficiary households would have the option to buy their homes back in future as their circumstances allowed, possibly via a shared ownership structure. The design of any mortgage-rescue scheme should build on the lessons learned from past practice and from policies in other countries.
Bring all owners of closed books within the FCA’s regulatory perimeter
Currently there is no requirement for the owners of closed books to be authorised for lending. They may therefore sit beyond the regulatory perimeter – that is, be unregulated by the Financial Conduct Authority (FCA). In such cases the administration of loans must be carried out by an authorised third-party administrator (TPA).
The current version of the FCA’s Perimeter Guidance Manual runs to over 800 pages. Because financial services are constantly developing and innovating the perimeter is not static, and the FCA now publishes an Annual Perimeter Report.
Mortgage administration covers ‘a narrow range of activities such as notifying the borrower of changes in interest rates, payments due and other matters where notification is required under the contract, and collecting/recovering payments’ according to the FCA. Given that the regulator feels it necessary to regulate these activities there seems to be little justification for leaving some customers unprotected.
The FCA recently rejected calls to extend perimeter regulation to owners of closed books. They admit that ‘where the purchaser is not regulated, our reach over the regulated administrator may not be sufficient for us to deliver the same level of protection as for borrowers that have mortgages with regulated firms’. Even so, in practice, it says, most borrowers do have sufficient protection through existing arrangements and a change in the regulatory perimeter would help only a ‘relatively small number of borrowers’.
The All Party Parliamentary Group (APPG) says all owners of mortgage loans should be regulated, and this is the approach that has been taken in Ireland. Such a change would enable the FCA to exercise greater oversight over those closed-book owners whose practices are most detrimental to consumers and would reassure prisoners that their concerns are taken seriously.
Cap SVRs on closed books
Current closed-book standard variable rates (SVRs) are a much-debated issue. Typically, they are above the Bank of England average SVR rate across the wider market, although the difference is not large.
To reduce any harm caused by the difference in SVRs, closed-book SVRs could be capped at a nominal ceiling, or a certain margin above a reference rate or the market average. This is the approach advocated by the APPG and prisoners themselves.
Our analysis suggests that the benefits to prisoners of capping SVRs at near-market levels would be small. We modelled some possible caps with data for 41,000 loans in the Towd Point securitisation. About half were paying SVRs above five per cent as of end-2018.
Capping SVR at five per cent would cost on average about £30 annually per affected borrower; the annual cost would be £600,000 for this portfolio. A cap of 4.5 per cent would cover nearly all SVR borrowers. The average remediation cost would be approximately £360 per annum per affected borrower with an annual cost £13.3 million if applied to the loans in this securitisation.
The APPG on mortgage prisoners has proposed a cap on closed-book SVRs of two per cent above Bank Rate. Such a cap would result in an SVR of 2.1 per cent, as Bank Rate stands at a historic low. This is broadly in line with market rates for new loans for low-risk borrowers, and well below the current average SVR charged by active lenders of approximately 4.39 per cent. A cap at this level would be beneficial for many prisoners but would undermine the principle of risk-based pricing that underlies the mortgage market, and we do not recommend it.
If an SVR cap were to be adopted it should apply to closed-book borrowers only. An across-the-board cap on SVRs would have serious adverse effects on the business model of many active lenders, particularly building societies that charge relatively high SVRs in order to pay higher rates to their depositors. This would have the effect of transferring harm from prisoners to savers. Even limiting an SVR cap to closed books would not be cost-free. As a retrospective change to the contractual conditions of loans held in securitised portfolios, such a measure could have negative effects on the wider securitisation market.
Provide better information
Prisoners express frustration at how difficult it is to find out what has happened to their loans, including who the current owners are. More transparency about the owners of the loans including contact details and the securitisations in which they are held would benefit all prisoners.
This information might be brought together in a dedicated web portal, perhaps the Money and Pensions Service, which should:
- Give borrowers an easy way to check the regulatory status of the legal owners of prisoner loans including both closed books and active lenders,
- Set out what protections are already in place through UKAR and the regulator. This should include an outline of current FCA powers by a simple schematic according to regulatory standing of legal owner/servicer,
- Issue a clear recommendation that Together prisoners should repay the unsecured element first.
Fund and signpost debt counselling and advice
Many prisoners have other types of debt in addition to their mortgages. This includes not only the unsecured element of Together loans, but also credit card debt, car loans, for example.
Many would benefit from holistic financial advice: evidence from both Ireland and the US suggests that loan modifications and restructuring to improve loan affordability are more likely to be successful if independent debt counselling rather than just mortgage advice is received by the borrower.
Borrowers in financial difficulty should actively be encouraged to seek independent advice; this may identify ways they can improve their financial situations so as to qualify for new mortgages in future. This could also have immense wider benefits if it could be applied to all potential borrowers.
Another group of prisoners that could benefit from debt advice are older borrowers with interest-only mortgages. They may have mortgages with only a few years of their terms left and are likely to be unable to change lender if they cannot demonstrate that they can repay the whole of their loan. Debt advice may be the most appropriate remedy.
The government could fund independent debt-counselling organisations to work with these borrowers and signpost their services to prisoners. Other influencers such as Money Saving Expert, the media and mortgage prisoner support groups could encourage prisoners to access such advice.
Onus and ethical responsibility on government to rescue mortgage prisoners – LSE
The authors emphasised that a succession of governments contributed to creating the problem and that prioritising profit over consumer protection when selling off loan books had led to significant harm.
“There is an ethical case therefore that government should bear proportionate responsibility for resolving the situation, especially given that UK Asset Resolution (UKAR) has now repaid its government loans in full,” they wrote.
The report also revealed the significant mental and physical toll on the borrowers in their precarious state and warned the proposed measures would likely be necessary to help when more people hardest hit by the coronavirus pandemic were dragged into similar situations.
The solutions are: government provided equity loans, partial loan write-offs, mortgage rescue, bringing lenders under the FCA oversight, capping very high standard variable rates on closed books, provide better information, and fund and signpost debt counselling and advice.
The authors estimate the upfront cost of the equity loan just for one portfolio of loans would be around £800m, however the government would likely recoup much if not all of this initial outlay.
So far HM Treasury has refused to act on pleas from the mortgage prisoners themselves and MPs in the All Party Parliamentary Group on Mortgage Prisoners to ease the burden and tackle the situation.
It has even ignored calls from the Financial Conduct Authority (FCA) to widen the regulator’s oversight to include the closed book and inactive lenders which hold the loans.
And seven years ago, then-economic secretary to the Treasury Sajid Javid torpedoed proposed regulation that could have saved trapped borrowers thousands of pounds each along with the resulting years of distress.
Current economic secretary to the Treasury John Glen has agreed to review the findings, but he has been one of the key protagonists in recent years to ignore the mortgage prisoners calls for help despite several meetings.
Government must act ‘at speed’
The report authors noted the solutions used so far “have had limited impact”, adding the FCA had largely extended itself as far as it could without greater powers and that its changes only helped a small minority of the mortgage prisoners.
“There is no immediately obvious silver bullet that could solve this longstanding problem,” they said.
“The next steps, which need to be taken at speed, are for government to calculate the benefits and costs of remediating the situation more accurately — and then to take action.
“Any new solutions devised to address the mortgage-prisoner problem will almost certainly have wider applicability in coming months and years, as the economic damage caused by coronavirus affects more borrowers and puts them in similar positions,” they added.
Prisoners ‘not to blame’
The borrowers themselves were not to blame, the report said.
They took out widely available mortgages with features such as high loan to values (LTVs) and interest-only with no repayment vehicle that were seen at the time as positive innovations enabling wider home ownership, it noted.
“No one who borrowed in 2005 with Northern Rock or Bradford & Bingley, both household names, could have been expected to foresee what happened to those lenders a few years later,” it added.
As banks collapsed as a result of the financial crisis in 2008 the UK government took over ownership of thousands of loans.
In 2010 the newly elected Conservative-led coalition then created UKAR and transferred the loans to it to manage and sell off.
The report noted that “UKAR’s primary focus was on financial return to the government, rather than impact on customers”.
The scale of the impact on health and wellbeing of the mortgage prisoners over the last ten years was another key finding from the report.
Many prisoners said their situation affected their physical and mental health and undermined their general wellbeing, which has costs for them, their families, the NHS and the wider economy.
They were also more likely than the average borrower to have general debt problems or be in arrears.
And the economic impact of the pandemic has deepened the crisis with LSE’s modelling showing under the Brexit planning scenario that some borrowers could be almost 40 per cent more likely to default on mortgage payments.
However, while three of the country’s biggest lenders have offered products using the FCA’s relaxed rules, lenders across the market are becoming more risk-averse in the pandemic.
Eight suggested remedies
The authors said there was a strong case for a wider variety of solutions, with the choice depending on the policy goal.
While this is typically to reduce mortgage payments, they argued in this situation the overall goal should be reducing harm by preventing defaults, keeping people in their homes and mitigating overall debt problems including other types of debt.
They added lessons could be learned from countries that have seen millions of borrowers affected by mortgage debt difficulties and explained while some could help all mortgage prisoners; others would benefit specific groups.
The report was funded by MoneySavingExpert and written by five authors: Kath Scanlon, distinguished policy fellow and deputy director of LSE London; Bob Pannell, economic adviser to the Intermediary Mortgage Lenders Association (IMLA); Peter Williams, departmental fellow at the department of land economy at the University of Cambridge; Andrew Longbottom a consultant on risk and economic issues; and Prof Christine Whitehead, professor emeritus in housing economics at the LSE.
‘Fair and ethical solution’
Rachel Neale, lead campaigner from the UK Mortgage Prisoners group, thanked MoneySavingExpert founder Martin Lewis for funding the research and the researchers at LSE.
She said it was “abundantly clear that borrowers were not to blame” and that “responsibility lies largely with successive governments”.
“The financial and emotional harm sustained for over a decade has been devastating for mortgage prisoners,” she said.
“These consequences are well known by the government; therefore it is now time to find a fair and ethical solution for all mortgage prisoners.”
Martin Lewis added that mortgage prisoners were the forgotten victims of the 2008 financial crash.
“The government at the time chose to bail out the banks, but unfairly – immorally – hundreds of thousands of their victims were left without adequate help, trapped in their mortgages and the financial misery caused by it. And they have been forgotten ever since,” he said.
“The prime minister has touted the idea of subsidising five per cent deposit mortgages for first-time buyers. Alongside that, there is a moral responsibility to release money to free mortgage prisoners from their penury.
“The independent, practical solutions in this report leave no excuse for not tackling this, though as an urgent first step, the government must agree to do the remedial work, using critical data it has access to, to cost the solutions up fully,” he added.
Update: Lloyds Bank confirms Tesco mortgage borrowers can product switch at end of fixed term
The lender’s purchase of Tesco Bank’s book of more than 23,000 mortgages for £3.8bn was revealed this morning.
It will place these borrowers under the Halifax brand and allow them to move to Halifax terms when their existing deal expires.
The All-Party Parliamentary Group on Mortgage Prisoners called on Tesco Bank to seek an active lender for a buyer back in June, after the book was put on the block.
The portfolio has a lending balance of £3.7bn and generated pre-tax profit of £9.1m in 2018-19.
The portfolio, and arrangements for ongoing administration, will transfer to Halifax, a division of Bank of Scotland, which is wholly owned by Lloyds Bank.
Customer accounts will transfer “once the necessary transitional arrangements have been delivered”. Beneficial ownership transfers at the end of September 2019, with legal title occurring by end of March 2020.
Commercially acceptable transaction
Gerry Mallon, chief executive of Tesco Bank (pictured), said: “Our priority has been to complete a commercially acceptable transaction with a purchaser who will continue to serve our customers well.
“After a thorough process, we are pleased to confirm that we have agreed the sale of our mortgage book to Lloyds Banking Group, operating under the Halifax brand. We are confident that they will continue to provide our customers with an excellent customer experience,” he said.
Tesco Bank said the sale reflected its strategy to focus on a reduced number of products and services and that it would lower operating and funding costs.
Proceeds from the sale will be used to reinvest in the business, to fund ongoing transformation and to re-balance retail and wholesale funding sources.
Mallon said: “Our focus is on how we best serve Tesco customers and align our resources effectively to their needs while ensuring that our offer remains sustainable in the long term.”
All-party group of MPs calls for evidence in mortgage prisoners probe
The inquiry will look at how government and Financial Conduct Authority (FCA) policies are affecting people whose mortgages were sold to inactive lenders.
“More than anything, mortgage prisoners told us how frustrating it is to be paying five per cent or six per cent and to be told that you cannot ‘afford’ a mortgage which would halve your interest rate and reduce your mortgage payment significantly,” said Seema Malhotra MP, co-chair of the APPG.
The inquiry will ask whether the FCA’s proposed new affordability rules provide adequate options for mortgage prisoners. The mooted changes allow mortgage prisoners a modified affordability assessment, which will potentially waive questions about their income.
The probe will further consider the effectiveness of the UK Finance voluntary agreement to which the majority of active lenders have signed up.
The APPG said it was “particularly interested” in hearing from mortgage prisoners about their situation and what changes they would like to see introduced.
The move follows on from a letter sent to Tesco Bank chief executive Gerry Mallon last month, asking him to seek an active lender as a buyer for its mortgage book. The letter was signed by 29 MPs and was co-ordinated by the APPG.
Malhotra and Charlie Elphicke MP established the APPG on mortgage prisoners in early May 2019 to represent those who become trapped into mortgages when their provider sells the business to an inactive or unregulated lender.