Conservative MP Michael Fallon asked about the impact on the mortgage market of last October’s bail-out of the banking industry, allowing us to press the case for a review of the terms of the re-capitalisation scheme, the impact of which has been to constrain lending.
One outcome has been that, while existing borrowers with good payment records and a reasonable amount of housing equity are still able to find attractively priced mortgages, first-time buyers are in a more difficult position and have a much more limited range of options. Our concerns have, however, been partially addressed by the measures announced by the government on 19 January, five days after the Treasury hearing.
Issues for building societies
Mr Fallon also asked about the impact of the bail-out of failed deposit-takers, which triggered calls on the Financial Services Compensation Scheme. We argued that an unintended consequence has been to reduce new lending, particularly among smaller building societies.
If the government wants to encourage a wider range of lenders back into the market this year, it must address the impact of the bail-out on deposit-takers, preferably by transferring the cost to taxpayers generally or at least by reviewing the amount of interest payable on the government’s loan to the FSCS. This was not mentioned in the government’s announcements last week, but remains a significant issue for deposit-takers.
Labour MP Nick Ainger asked about the remortgaging prospects for borrowers who, because of falling house prices, now have only a small amount of equity in their homes. We believe that their prospects would improve if government measures to restore mortgage funding – targeted mainly at large banks - were open to a wider range of lenders. But lower borrowing rates do at least mean that remortgaging customers are now less likely to experience “payment shock” when their existing deal comes to an end.
Mr Ainger also asked about recent correspondence from Abbey to its borrowers on flexible mortgages on the need to re-pay some of the debt because of house price falls. Abbey had subsequently confirmed that it would not rely on this term. We emphasised the importance of lenders showing they apply fair terms, which is, of course, a regulatory requirement.
Asked if lenders should share some of the risks of falling house prices, we argued that firms already do so, sometimes incurring losses as a result of possession and facing the risk that a forced sale produces a shortfall on the outstanding amount owed. It is not in the lender’s commercial interests to take possession of a property if there are viable alternatives.
Policy on possessions
Pressed on the possibility of lenders being able to pursue possession after only two months’ arrears had accrued, we pointed out that the legislative framework was being reviewed by the government.
While seeking possession after only two months may be possible legally, it was not a real threat in practice. Lenders collectively have backed a three-month moratorium, and some lenders have agreed longer periods. The Civil Justice Council, with our support, has introduced a pre-action protocol reinforcing the use of possession only as a final option. And we have reinforced this with industry guidance on best practice.
However, we warned that there were potentially harmful consequences, both for lenders and for individual borrowers, if home-owners experiencing payment difficulty are allowed to stay in their homes with their debt continuing to grow when owner-occupation is no longer a sustainable option. And all borrowers will end up paying more if measures to reduce the number of possessions are forced through.
Labour MP Andy Love asked about mortgage pricing in response to lower Bank rates, and whether banks receiving public funds should lead the way in reducing borrowing costs. He also asked whether the mortgage market would be less competitive in future and what could be done about this.
We argued that the market is currently dysfunctional and needs to be opened up to encourage a level of competition that existed before the credit crunch. We need a return to market conditions in which there is a broad range of loans available, provided by different types of large and small suppliers, and offering an increased choice to consumers. We are working with the government to ensure that its recent package of measures delivers this outcome.
