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Grin and forbear it

The FSA has called for improvements to how lenders implement forbearance strategies, says Natalie Holt

The FSA has told lenders to review the way they deal with borrowers who are struggling to pay their mortgage, at an estimated cost to lenders of £3m.

Last week, the regulator published a guidance consultation paper on forbearance strategies.

Such strategies are used by lenders when borrowers are either in arrears or at risk of falling into arrears to keep them in their homes. Measures include reducing monthly payments, transferring the mortgage to an interest-only basis, offering payment holidays and extending the mortgage term.

In 2010, the regulator carried out a review of the way forbearance strategies affect lenders’ losses, following a thematic review of mortgage arrears handling, carried out between 2007 and 2010.

Based on its latest review, the FSA has warned that forbearance strategies can act against a borrower’s best interests and can leave them in a worse-off position.

The FSA says: “Forbear-ance has benefits for the customer in supporting them through periods of difficulty and enabling them to remain in their property. However, forbearance provided without due consideration of the financial circum-stances of the customer and the potential for future recovery can lead to increased difficulty in achieving recovery, which in turn can lead to the mortgage becoming non-sustainable or to higher losses for the customer and the firm if repossession takes place.”

The regulator is concerned that lenders are agreeing more flexible payment terms without regular reviews to see if a borrower’s financial position has changed and whether they can afford to return to the original agreed payments.

The FSA says the mort-gage term was extended beyond retirement age in a significant number of cases, with no process to reduce the term in future or no assessment of the retirement income avail-able to pay off the debt.

The FSA says the guidance will help lenders avoid mortgages becoming unsustainable or return the mortgage to sustainable terms within a reasonable timeframe.
The FSA wants lenders to develop company-wide forbearance polices and controls, which should be reviewed every year.

The FSA says lenders also need to improve the way they report mortgages that are subject to forbearance strategies. It says there is a market incentive for lenders not to disclose the true extent of arrears as this could lead to reduced profitability, adverse reaction from investors and rating agencies and a potential increase to the cost of capital.

The FSA says: “We require firms to report accurately and transparently the impairment of their mortgage book. We did not generally observe this, and reporting by firms of facilities provided, impairment, forbearance and the loss risk associated with these was found to be lacking across firms.”

A Council of Mortgage Lenders spokeswoman says: “Lenders need to balance the best interests of consumers, prudential requirements, regulatory expectations and market conditions when dealing with forbearance. They generally manage this successfully, keeping people in their homes where possible and lessening potential losses.”

But Chartwell Funding managing director Robert Winfield says: “When people get into arrears, keeping them in their home is not always the best thing to do. If borrowers can no longer afford their mortgage, it may be better for the lender to roll up the interest while the house is sold.

“As much as it pains me to say it, I think the FSA is right to ensure forbearance does not end up leaving consumers worse off.”

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