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Will claims firms now turn to interest-only?

The number of claims management companies focusing on mortgages has more than doubled since March, leading to fears that claims chasers plan to target borrowers who have been sold interest-only mortgages.

The FSA’s mortgage market review final rules, published last month, permit interest-only mortgages on the provision that lenders ensure a credible repayment strategy is in place to deal with the capital payment at the end of the term.

In 2011, 75 per cent of the 57,400 interest-only loans did not have a stated repayment method, according to the Council of Mortgage Lenders.

In September, Barclays chief executive Antony Jenkins warned that interest-only mortgages could become the next big misselling scandal.

The Ministry of Justice register reveals the number of CMCs with ‘mortgage’ in the name has grown from 21 in March to 46 currently.

Nick Baxter, partner at Baxters Business Consultants which provides training, marketing and expert witness services to the residential mortgage industry, says lenders should start making the necessary preparations for an infux of complaints.

He says: “I think there is potentially a big problem with interest-only, simply because it was written a lot without any full assessment of why people were going for interest-only or what the repayment vehicle was. A potentially huge problem is brewing up. Some cases are starting to come to light but it is not huge yet.

“Lenders need to be proactive and look at their own portfolios and start working with borrowers who have been missold. The lenders need to take the lead. If you look at PPI, they hoped it would go away. It did not and neither will this.

“I think this could prove potentially bigger than PPI if you look at how many loans went ahead on an interest-only basis.”

One claims management company with a focus on the mortgage market is Missoldinterestonly.com. Claims manager Tim Griffiths says: “There are some good claims out there but just because you have got an interest-only mortgage does not mean it has been missold.

“The pure aspect of interest-only misselling will be the hardest aspect to prove because it does say in the customer’s mortgage offer that they need a repayment vehicle.

“On one hand, the lender has lent it with no repayment vehicle in place, and on the other the customer has taken it out with no vehicle in place. There will, however, be cases where it has never been properly explained to customers.”

Conceyancer and claims management firm Goldsmith Williams Solicitors founding partner Edward Goldsmith says direct lenders may have the most to worry about in terms of claims.

He says: “This is a potential new area of work. If there are going to be any types of claims at all, they are more likely to be against direct lenders than brokers. Brokers will, by and large, have kept good records and a good audit trail.”

Compliance consultant Adam Samuel says the potential for claims could present a real threat to both intermediaries and lenders.

He says: “The job of the adviser is to make the recommendation. If you are the lender and you have not bothered to check if the repayment vehicle is in place or if the whole transaction is affordable, it is your fault as well.

“The responsibility lies with both the lender and the broker. A lot of interest-only lending is sub-prime, to people who cannot afford a mortgage at all. A number of these have mortgage fraud written all over them.”

In the case where assets have been identified as a repayment vehicle, Samuel says both parties could still be on the hook if the assets have later depleted in value.

He says: “Lenders have to find out what the assets are and what the risk factor is. All it takes is for a buy-to-let landlord who owns several properties to experience a fall in value to then find themselves in negative equity with no way to pay the mortgage back.”

But John Charcol senior technical director Ray Boulger says the majority of claims about interest-only mortgages are unlikely to succeed.

He says: “Claims management companies are going to have a much bigger challenge with interest-only than they have with PPI. With PPI, the courts gave firms a huge help by saying the banks had missold on a large scale. Interest-only is a totally different ball game and I believe the vast majority of these mortgages are held by people who know exactly what the score is.

“While I am sure some people will try to get some cash back from their bank despite knowing what they were taking out, I think the majority are unlikely to succeed.”

Boulger says interest-only claims are also unlikely to bring in much revenue for claims firms.

He says: “Claims management firms are going to have to think very carefully about how they would get paid. With PPI, the lender sends a cheque to the person who has been missold so there is obviously plenty of cash. With interest-only mortgages, if it is proven it was missold, I do not see any of the lenders sending a cheque to the customers. They will just credit the amount due to the mortgage account. If CMCs are not going to get paid, they are not going to be very interested in doing this type of work.”

Telos Solutions director Richard Farr dismisses the notion there is a misselling scandal brewing, saying it is just hype.

He says:“Claims management firms have not availed themselves in glory. I am not aware of any case for the misselling of interest-only.

“Interest-only is still a valid strategy for the right client. I do not see this as a misselling scandal.”

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Comments

There are 2 comments at the moment, we would love to hear your opinion too.

  1. In response to Mr Boulger, surely a lender could only apply monies to a mortgage account if there were arrears on it. Set off can only apply to any monies which are immediately owed, not against the total balance.

  2. by “monies” do you mean scheduled payments, arrears, SP and arrears, or all plus penalties . You can argue that any contested of these (if proven) are thus availble for set off

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