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Prison break

Much has been written about the plight of the so-called mortgage prisoners and there will be much more to come. Consumers could be forgiven for not being aware of the problem that is storing up and it will hit hard unless something radical changes in the short term.

I shall not list all the scenarios where mortgage borrowers are trapped as the list is long. In short, there are well over a million borrowers that will not be underwritten as they were when their mortgage first completed and for many that means they will be unable to buy the home they want to or even extend the one they live in now. There is also a large group of borrowers who are trapped on record-low mortgage rates that they will lose if they move home although I certainly do not feel sorrow for them.
Lenders and the FSA should be applauded for recognising the problem and debating it. However, what has been put forward is far from perfect.

Nobody can argue that prudent underwriting should always apply but overly onerous rules should not be applied to this population. Underwriting in many areas was too lax in the days of excess but in many instances now it is far too strict to the point of excluding many would-be borrowers that could afford a mortgage.

There are some important moral points around this. It feels wrong that in one economic cycle it is fine to attract these people with lax criteria and competitive terms and then when rules tighten and competition vanishes from the market, lenders lock the doors and windows and dictate terms to these prisoners.

The closest parallel to this is the demise of the centralised mortgage lenders in the early 1990s. At that time, most of them ceased new lending and shoved up their variable rates for existing borrowers. Most were trapped for many years paying more than they should have been paying.

The thing that worries me most is what happens when the base rate finally starts to rise. Are lenders planning to protect these borrowers just as much as they are the top-quality, low-risk borrowers that now fit what a lender wants to court and retain? I hope so.

As a minimum, I would want to be convinced that these borrowers are treated equally to all others and are able to protect their mortgage payments from future rises and on highly competitive terms,that is, as valued as they were more than five years ago.

This would at least feel better morally. Of course, in terms of borrowing additional money, this is harder but rules need to be found that make this more flexible, too, perhaps making fixed rates conditional. Well done to the AMI for putting forward its suggestions on this topic.

Lenders cannot be forced to do things that run counter to various pieces of regulation but some sort of ring needs to be placed around these borrowers to ensure they are exempt in many ways and can be justifiably treated differently.

When rates do rise and elections come closer, this topic will be front page news. We need to find a way to prevent this now by working together as an industry to show that we do care.

Ben Thompson is managing director of Legal & General Mortgage Club

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