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Alan Lakey: Illogic is king in the mortgage market

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Astonishing as it may seem, some bloggers and commentators have been supportive of the debacle that is the mortgage market review, suggesting it has reined in bad lending and brought even-handedness to the sector. No doubt many of these were also devotees of the RDR experiment and still cannot see the long-term calamity that was set in motion by the regulator.

I am all for common sense but the mortgage market is no place to start searching.  Illogic is king, and while the madmen lenders delight in telling me the FCA made them do it, in reality it is their timidity and fear of breaching the rules that is causing the current constrained environment.

A friend approached me looking for a mortgage.  Aged 61, he was looking for a 50 per cent loan-to-value mortgage of £550,000 to age 75.  Being self-employed, he intended working to that age and with a provable net income of £126,300 the repayments are well within his capabilities. Being sensible he has life insurance of £800,000 and critical illness cover of £300,000.  His preference was for an interest-only mortgage where he could accumulate funds in better performing investments, make occasional capital repayments and fully repay the mortgage by selling one of his two businesses prior to age 75.

But in today’s oh-so-correct ‘Stepford Wife’ world those who profess to know far better than him have decreed this scenario impossible because it infringes on their rules.  The old adage that “rules are for the guidance of wise men and the obedience of fools” has never been more appropriate.

If my friend is forced into a repayment mortgage his monthly repayments will prove too high.  Equally, if the lender insists on repayment by age 65 then he cannot even apply because the simultaneous requirement of a minimum five-year term renders him, and all those aged over 59, ineligible.

I would be delighted to hear from any lender sensible and brave enough to agree with me that my friend represents a low risk.  You know how to find me.

This questionable judgement also extends to the Financial Ombudsman Service, as exemplified by a recent case.

Back in 1989 an adviser arranged a mortgage endowment. In 2004, the client complained and the adviser investigated and rejected the complaint advising the client he could escalate the matter to the FOS within six months.  The client approached the FOS and told them that whilst he was not formalising a complaint at this stage he was “registering his interest”.

Jump forward to 2014 and the client has now approached the FOS with a complaint.  Shockingly they have accepted the complaint as within their jurisdiction.  Registering your interest cannot be located within the Disp rules but whatever.

Disp rules state cases can only be considered outside of the six-month window in exceptional circumstances.  An exceptional circumstance might be a debilitating illness or being abroad during the period.  In this instance the FOS seems exceptionally eager to accept a case where no extenuating circumstances exist. This provides proof, if ever it was needed, that it is partisan and disposed to assist the claimant regardless of the rules, regardless of fairness and regardless of the fact that a court would reject the matter out of hand. 

Alan Lakey is partner at Highclere Financial Services

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Comments

There are 20 comments at the moment, we would love to hear your opinion too.

  1. Matthew Wiltshire 27th August 2014 at 2:00 pm

    Alan, I tend to agree with many of your articles…at least to some extent. In this instance however your “it’s not fair” attitude is ridiculous. There are often circumstances where a lenders decision is stupid but the explanation you have given for this guy being hard done by is just plane wrong. You explain that he earns this great salary and that he could easily afford the monthly repayments, then proceed to tell us that the repayments are too high…well which is it?! Are you proposing he makes a smaller contribution to a better performing investment? Oh wait a minute that sounds awfully like something I have heard before and yes! I think I am right in saying that resulted in rather a lot of compensation being paid?
    Secondly, you profess that merely “selling one of his business’s” will repay the mortgage as if this is the easiest thing in the world! Who is to say that business is going to be worth anything in 15 years time, there is no guarantee at all! You are basically offering the mortgage lender shares in an unlisted (I am assuming) company as way of payment…come on!
    If he wants a mortgage, just pay for it! If he cant…buy a cheaper house. These arguments are just petulant!

  2. Alan, if you were lending your client the money, you would be within your rights to determine the circumstances under which you did so. As you are asking someone else to lend them the money, do you not believe they have the same right?

  3. Contractually anon 27th August 2014 at 2:44 pm

    I can’t agree on the mortgage element of this. Granting a mortgage is essentially a risk decision for the lender and there are a number of reasons why a self-employed 61 year old who can’t afford a repayment mortgage could be considered high risk.

    The FOS decision to take on the case seems bizarre and I would hope that the firm concerned have made a strong case for dismissal under the statute of limitations (3 and 6 years). It’s obviously for the firm and not FOS to make the case.

  4. @ Matthew

    You are missing the point old son – it is the fact that a commercial consideration cannot be made for fear of flouting the regulator’s rules. Commercial considerations from the two grown-ups involved in the transaction(one wishing to borrow and one willing to lend) based on risk, cost and return are nothing to do with theorising bureaucrats and ministers – that’s Bizarre in any other walk of capitalism life

    It is the fact that regulatory interference in commercial considerations almost always results in a cock up and MMR ‘meddling mortgage regulator’ is a perfect example !

    Oh and your assumption about using an ‘endowment’ is also flawed given that if the two grown-ups agree terms acceptable to both that is where it should start and ultimately finish in the real commercial world !.

  5. Invest instead of repaying a debt that he can’t afford to repay?

    I think you need to step back and read what you have written. This is an extremely risk laden approach. If it all works out good for him, if it doesn’t who’s going to pick up the mis-selling tab?

  6. And if any further assurance that lenders are perfectly happy to take the commercial view if regulatory interference does not exist – let us look at the CML submissions about the ACTUAL situation to FSA PRIOR to the MMR ‘Mortgage Meddling Regulator’ got involved and totally ignored them !

    Council of Mortgage Lenders Director General Michael Coogan said in submission to the FSA:
    “Interest-only mortgages are an appropriate choice for a range of different types of consumers, including borrowers who rationally choose them as an alternative to renting, financially capable customers who make acceptable arrangements to repay the capital over the long term, and buy-to-let investors.
    “We do not want to see measures that would effectively regulate them out of the market, and we believe it is possible to address the FSA’s concerns, without imposing costs and requirements on lenders and borrowers that are likely to prove to be unacceptable.”
    The CML believes that the compliance costs for lenders of annually checking the existence of borrowers’ repayment methods, and the regulatory risk of the lender making a judgement on the adequacy of the repayment method, would prove prohibitive.
    In its submission, the CML acknowledges concerns about borrowers having a shortfall at the end of their term, and lenders being exposed to a prudential risk by having a number of borrowers with unknown repayment methods.
    However, the number of borrowers with a shortfall at the end of their term is extremely low, and where this occurs the lender is normally able to arrange an acceptable repayment plan with the borrower. Lenders do not see significant losses from interest-only mortgages, meaning that the majority of borrowers’ repayment methods work.

  7. No mis-selling as he knows exactly what he is doing.

    The worst circumstance is that he is forced to sell and downsize – the risk to the lender is infinitesimal and, yes, I would lend to this chap far more readily than a 25 year 90% loan to an unproven first-time buyer.

    As finance professionals I think many will agree that over a 5 year period there is a decent chance of exceeding the 3% p.a. he’ll pay on a fixed rate. No guarantees but then again there never is. If the consumer is happy to absorb a degree of risk in order to achieve a desired outcome and the advice process fully documents the risk and the rationale then there is little risk of a complaint – even from the most venal CMC opportunist.

  8. Does your client already have a mortgage that he’s been servicing satisfactorily for a number of years already? If so, one might expect that to be taken into account.

  9. @ Julian Stevens.

    Yes, a mortgage of £733,000 int only

  10. This issue is a commercial one – Specifically, in this case an advance of £550,000 on £1,100,000 – without MMR I guarantee we would not be having this conversation because a commercial view would be taken and the loan advanced based on the risk, cost and return for BOTH parties

    That’s why MMR (Meddling Mortgage Regulator) should not be involved and why the CML above stated clearly that situations like this (and many others) were NOT and never had been a problem. Its only a problem in a theorist’s mind and as a result of theorising a whole new raft of problems have been caused (mortgage prisoners, rate switching affordability etc etc) which previously did not exist and which will cause huge problems in the market in the not too distant future

  11. Alan underlines a huge problem I myself flagged in July 2013
    http://www.ifamagazine.com/opinion/shaking-the-foundations-interest-only-279903
    As ever he is 100% correct on all points

  12. Wrong again. If you refer a complaint to FOS, that stops 6 months running.

    he Ombudsman cannot consider a complaint if the complainant refers it to the Financial Ombudsman Service:
    (1) more than six months after the date on which the respondent sent the complainant its final response or redress determination; or
    (2) more than:
    (a) six years after the event complained of; or (if later)
    (b) three years from the date on which the complainant became aware (or ought reasonably to have become aware) that he had cause for complaint;
    unless the complainant referred the complaint to the respondent or to the Ombudsman within that period and has a written acknowledgement or some other record of the complaint having been received;

  13. The quote is from DISP 2.8.2R and obviously begins “The”.

    There is of course no 3 or 6 year implication if the complaint was originally referred to the firm within 6 years of the event or three years from when the complaint should have known that he had cause to complain. This is highly likely because the special endowment rule usually runs the three years from a red letter and most were not sent out that early.

    A reference to FOS does not need to take any particular form. FOS probably thought that it was doing the firm a favour by not processing the case hoping that the complainant would lose interest. This is usually the case. The firm should have kept its papers once FOS told it that it had received a reference.

  14. Slightly confused (as ever) by your arguments in this article Alan. On one hand you are saying the rules are too tight and should be relaxed to allow you to what you like with your clients and on the other the rules are too lax and clients should not be allowed to do what they like?

    However, if the adviser you mentioned has not got the brain cells to indicate to the FOS that the case is time barred then he(she) is in real trouble! The FOS can agree an interest has been registered and therefore within their jurisdiction, but that doesn’t mean the client wasn’t aware there was an issue more than 3 years ago and therefore should have dealt with it – time bar rules. The regulations are therefore to protect advisers as well as clients.

    As for your mate who wants to borrow over £1million but cant afford the capital and interest repayments – I think a similar argument was made by many many people pre the 08 crash! And I am sure many many of them had businesses they could sell or were in VERY secure jobs with companies like Lehmans!!!

  15. maybe, but it happened

  16. Matt

    The issue you illustrate has no relevance to the basis of repayment of the mortgage and illustrates precisely the point regarding commercial risk ie a 50% advance based on a salary which constitutes less than 4.5 times income and ‘fits’ affordability. MMR and the regulatory interference do !!

    As a matter of interest, I have arranged a number of large (in excess of 1,500,000) low LTV mortgages recently for HNW clients and every one of them requested interest only – funny that !

    As far as the FOS are concerned yes the DISP rules (the 6 and 3 rule) were ignored in the case of endowments in favour of a traffic light system and notice to time bar (post June 2004 from memory). And whilst it maybe that this complaint can be batted away, the FOS appear to have assumed jurisdiction notwithstanding the DISP rules so eloquently illustrated by Adam Samuel.

  17. The DISP rule 2.8.2R required FOS to assume jurisdiction since the complaint was referred to FOS in time.

    The case probably was not time-barred since the customer probably did not know that he had been badly advised until after 2001 and in any event, the traffic light system adopted in 2002 and currently found in DISP 2.8.7 would have prevented the case being time-barred in 2004.

    FOS appears to have been right on jurisdiction actually.

  18. @ Adam Samuel

    So, let me get this right.

    Any complainant, having had his complaint rejected by a firm, can approach FOS and say I am not escalating a complaint to you at the moment but I reserve the right to do so in the future. And that is, in your opinion, within the Disp rules?

  19. Correct because the complaint will have “referred” the matter to FOS within the timeframe allowed by DISP 2.8.2R.

    The firm could ask FOS to proceed to a decision. More often than not it won’t do so because it will hope that the case withers away. FOS will probably be inactive for the same reason although it could choose to proceed to clear the case off its books.

    This is a very unusual occurrence in practice which explains why nobody has given it very much thought. The ADR Directive will extend the period for going to FOS to a year from the final response which is reasonable.

    Always remember that the law provides no such deadline for going to court after a response has been received to a protocol (the equivalent of a complaint or the old letter before action) letter so long as the case is filed with the court within the Limitation Act period. The regimes are quite different from this perspective. In other words, in some court cases, the claimant can delay five years (or more) before going to court after receiving the defendant’s final response without being time-barred.

  20. There are many millions of “council tenants and renters” who will NEVER own their own home and NEVER participate in the growth of underlying assets.

    Yes it would be lovely if everyone in the UK owned their own home, but then there would be a shortage of cash in the economy for us to spend on luxuries and the corollary, many sales assistants in shops out of work!.

    There may also be a shortage of workers who have strived to own property and when they actually do, sit back and stop work.

    I have an interest only mortgage and I am quite happy. When I choose to retire I will trade down and possibly put money into my bank .

    I also invest outside of my home in pensions schemes and other such income producing assets.

    Actually keeping a debt on your estate and investing in something possibly outside your taxable estate (if you want to be ultra-tax efficient) is possibly a good idea for the sophisticated investor.

    I suspect that your client is such!

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