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The prisoner of lender

Paul Thomas looks at plans from lenders and the FSA to help borrowers trapped with their mortgages

Trade bodies are calling for the FSA to give lenders greater flexibility in how they deal with “mortgage prisoners”, rather than relying on optional transitional arrangements set out in the mortgage market review.

The FSA estimates around half of the 10.5 million people who took out mortgages between 2005 and 2011 could be prisoners because of high loan-to-value ratios, negative equity, contraction of the interest-only market and the extinction of self-certification mortgages.

Mortgage prisoners are particularly vulnerable if they are trapped in their lenders’ standard variable rate, which many lenders have increased in recent weeks. This month, the Financial Services Consumer Panel called for the FSA to strengthen its MMR transitional arrangements to protect borrowers who may be trapped in their current deals because they fall foul of the new rules.

A spokeswoman says: “Over-all lending criteria has become stricter and lenders are more cautious about who to lend to so, in short, it is not as easy as it was to get a mortgage.”

Under the MMR, the FSA has included transitional arrangements for those who do not meet the new requirements on affordability, which call for lenders to ensure borrowers can afford their monthly payments.

But these arrangements are not compulsory and do not allow lenders to increase the size of a borrower’s loan or raise monthly repayments.

The Association of Mortgage Intermediaries director Robert Sinclair says: “We believe the transitional arrangements have to be expanded. We have included a 10 per cent buffer in our submission to the latest consultation, meaning borrowers could borrow up to 10 per cent more and their monthly borrowing costs would be allowed to go up by 10 per cent. We think this gives some space for people who have been involved in self-cert or interest-only and maybe want to fix a little bit more latitude even though they cannot show evidence of affordability.”

Lender trade bodies are lobbying for their members to have more flexibility in how they deal with these customers.

The Council of Mortgage Lenders wants lenders to have the power to make exceptions. A spokes-woman says: “We believe an exception process operated by individual lenders would help more borrowers than the FSA’s proposed transitional arrangements.

“This process would enable lenders to look at individual cases and determine the most appropriate action, which may be to increase the borrower’s monthly payments by moving to a fixed rate or increasing the amount borrowed.”

The Building Societies Association does not believe the regulator should work to a set figure but wants lenders to make their own decisions.

Head of mortgage policy Paul Broadhead says: “I do not think putting an arbitrary figure on this is the best approach because that can get in the way of sensible lending decisions. We believe lenders should be given the flexibility to make their own choices to help these people, which would have to be signed off at a supervisory level to prevent lenders getting overexcited in their lending.”

The past few years have seen lenders tighten their criteria, with gross lending running at about a third of the £360bn lent in 2007. Some believe lenders will not see an incentive to be more lenient unless rules are made compulsory.

London & Country associate director of communications David Hollingworth says: “Lenders may give some slack to their existing borrowers off their own backs but I do not think the transitional arrangements will achieve as much as the FSA wants unless they are enforced.

“I cannot see lenders rushing to welcome mortgage prisoners from other lenders, so they may only concentrate on their existing clients.”

MAC Consulting chief executive Mark Chilton believes smaller lenders will be more likely to use this flexibility.

He says: “I do not think the major lenders would be rushing to take advantage of this but I think some of the smaller lenders might because it would give them an edge in the market and enable them to get business where others will not go.”

But Barclays intermediary managing director David Finlay says lenders will start to develop strategies for helping these people in the coming months. He says: “We will look to see how we can help our customers, what our risk profile is and what we can do in terms of lending.”

The FSCP also called for the delay of the responsible lending rules in the MMR concerning affordability and interest-only until the mortgage market has recovered and they can be sure customers will not be harmed. The rules are expected to be implemented in summer 2013.

Broadhead says: “I would support a delay. There is no rush for the MMR. The crisis was not caused by wide-spread irresponsible mortgage lending in the UK.”


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