Chancellor urges lenders to help mortgage prisoners
18 May 2016
Paul Thomas
http://www.mortgagestrategy.co.uk/chancellor-urges-lenders-to-help-mortgage-prisoners/
Chancellor George Osborne has written to lenders urging them to help mortgage prisoners. The letter follows last week’s meeting with MoneySavingExpert.com founder Martin Lewis on the issue. Earlier this week, the FCA published a paper analysing the success of its lending rules following the Mortgage Market Review. It concluded that the new rules had not stopped certain borrowers, such as those entering or in retirement and the self-employed, from accessing finance. The regulator also said the “majority” of lenders were using the MMR’s transitional provisions, which allow for affordability checks to be waived to avoid borrowers being trapped on their deals.
However, Association of Mortgage Intermediaries chief executive Robert Sinclair refuted the FCA’s claim that there are no issues with mortgage prisoners. He said interest-only, lending into retirement, self-employed, contract workers, foreign currency earners and expats find it difficult to get finance at present. The Chancellor has since written to lenders urging them to use the transitional arrangements to avoid the creation of mortgage prisoners.
He said: “Responsible lending is important from both a prudential and a consumer protection perspective. But it is also important that consumers are not prevented from accessing the financial services that they need and can afford.“People seek to make changes to their mortgages for a variety of reasons. In the low interest rate environment of recent years many borrowers have looked to switch products to take advantage of lower rate deals. To facilitate this the FCA allows lenders to waive affordability assessment requirements where an existing customer wants to make a change to their mortgage and is not taking on additional debt.
“I am encouraged by the FCA’s findings that the majority of lenders are making use of this flexibility. I want to emphasise how important I consider this to be. It is vital that consumers who want to access a cheaper deal are able to do so. This will ensure that the mortgage market works well for both lenders and consumers.”
When the MMR was introduced, in April 2014, the regulator allowed lenders to waive an affordability assessment to stop borrowers being trapped on their existing deals. But the assessment can only be waived as long as the customer does not wish to borrow more money, there is no “material impact” on affordability and they have a good payment history.
The MMR allowed lenders to apply the rules to their own customers and customers coming from rivals. However, the Mortgage Credit Directive, which came into effect in March, dictates that lenders must apply an affordability test on borrowers who switch over from a rival, although borrowers staying with the same lender are not affected. But experts stress that the directive does not state how lenders should conduct the affordability test for borrowers switching lenders.
Association of Mortgage Intermediaries chairman Pat Bunton says: “How can anyone argue that the mortgage you have been paying is unaffordable and therefore you can’t have it on better terms? The only people who benefit from that is the lender who keeps them on their back book and who offers them terms that aren’t as good because they know they can’t shop around.
“The only other way to deal with it is to force lenders to make their new business rates available to their back book customers, or to apply the same transitional provisions to new customers as they do for existing ones. This is the only way that the customer is not disadvantaged and it would appear that some are spinning the convenience of using for back book customers only as the issue being dealt with, that doesn’t even tell half of the story.”
The Chancellor’s letter to mortgage lenders:
Pat Bunton: Chancellor has just half of the facts on mortgage prisoner ‘scandal’
19th May 2016 12:08 pm
Yesterday, Chancellor George Osborne quite rightly questioned the absurdity of an existing borrower who has not missed payments being told by a lender that they cannot afford a new mortgage at a lower rate. Bravo, Mr Osborne, you are spot on and it is great that you have twigged this absolute scandal that has been working against consumers for the past two years. Credit also to Martin Lewis, of MoneySavingExpert, for gaining your ear on this. It would appear, however, that Mr Osborne has not been given all of the facts, at least not in an unbiased way. Whilst Martin Lewis explained things fully, it would appear that others may be trying to portray an alternate and fictitious reality to try to downplay the real issues the MMR has created.
Ever since the MMR lenders have tucked up sections of their back books by implementing transitional provisions for existing customers, but not new ones, despite the fact the provisions were specifically designed to cover both types of borrower. The FCA pointed out correctly that transitional provisions on affordability could not be applied post-Mortgage Credit Directive as it required an affordability assessment on all new cases – and this was also an over simplification that has not helped either. I remember clearly when this last minute entry into the FCA’s MCD implementation thinking surfaced that many lenders breathed a huge sigh of relief. Deep down they knew that partial use of transitional provisions in such a market-wide fashion laid them open to the charge that they were benefiting at borrowers’ expense.
Here is the crux of my problem: while MCD states that an affordability assessment must take place, it does not stipulate the form of that assessment. Being a reasonable person I think it is fair to say that a borrower who has maintained all existing mortgage payments; is not borrowing more money; has a clear credit check; can evidence their current income; and has not racked up other borrowing can be fairly assessed as meeting any ‘reasonable’ affordability test, whether they be staying put, or switching lender. Perversely, many lenders have taken a different view, as many seem to think that if these questions relate to an existing customer, it is fine and they will let them take a product transfer, but God forbid that they relate to a new customer.
Bizarrely, the customers may be exact clones but the new borrower may be told: “We are very sorry but we can’t lend to you as we don’t believe the mortgage you want (and have been paying) is affordable.” This is an absolute scandal. So who exactly benefits when borrowers are stripped of their right to vote with their feet – the lender, or the borrower?
I have shouted about this loud and hard to lenders, trade bodies and regulators alike for the past two years. Despite presenting the facts, I was amazed to read FCA’s Mortgage Market Competition & Responsible Lending Reviews saying that there was no material issue with mortgage prisoners. This view feeds into Mr Osborne’s letter where the FCA is referenced in the last paragraph alongside an assurance about lenders using transitional provisions.
Yes, Mr Osborne, lenders are using them, but only for existing customers. And in so doing they are stripping many customers of their ability to vote with their feet and search for a better deal. At the very least lenders should either be forced to apply transitional provisions in a fair and consistent way to both new and existing customers (i.e, not for one, but not the other) or offer their new business products to existing customers.These actions would rebalance matters and make things fairer for hard working borrowers who have met all of their past commitments.
The FCA’s has recently published its Business Plan, which included the treatment of existing customers as one of seven key themes. Now is the time for them to take a leadership position on this and place consumers’ interests first. Many product transfers executed by lenders for existing customers are conveniently carried out on an execution-only basis without the advice that would, in many instances, have been compulsory if they had been a new borrower. This creates yet more consumer detriment with the lenders interests trumping those of their borrowers.
A major lender has recently estimated that this hidden, unreported part of the market (retention product transfers) may now amount to as much as £80-100 billion. I am sure that for such a significant amount of lending the FCA will be able to provide full data on these breakdowns in both the lender and intermediary channels. In a £220bn market, this is a very significant chunk of business. I can only think that certain parties have had the wool pulled over their eyes before reaching certain conclusions. The only alternative is that they have knowingly ignored such an important issue – either way it is scary.
Pat Bunton is chairman of the Association of Mortgage Intermediaries and a director of London & Country Mortgages