CHAPTER SEVEN LENDERS, DEBT AND ADVICE
7.1 This chapter considers the mortgage lenders involved with the MTR scheme, issues of lending practice and advice to households with problem debt. It refers initially to administrative data on lenders before moving on to draw primarily on stakeholder and household interviews.
Lenders involved in MTR cases
7.2 Table 7.1 identifies the main lenders more commonly involved with MTR cases together accounting for 80% of applications. The first group are leading high street mortgage lenders well established in Scotland and their presence is not surprising.
Table 7.1: Main Lenders most frequently involved with MTR Cases
Bank of Scotland
Royal Bank of Scotland
Southern Pacific Mortgage Ltd
Preferred Mortgages Ltd
Lloyds TSB Scotland
GMAC- RFC Limited
Kensington Mortgage Co Ltd
Northern Rock B S 2
GE Money Home Finance Ltd
Platform Funding Ltd
Alliance & Leicester
Nationwide Building Society
Dunfermline Building Society
CitiFinancial Europe plc
I Group/Home Funding
Source: Analysis of MTR Administration database.
Note: 'Main lender' is one with largest loan.
7.3 The first group of 5 established lenders account for over 40% of MTR cases. However, the next set of lenders in the list comprises a wider variety of less familiar names. Some of these are well known as specialist sub-prime lenders; some follow a business model involving use of brokers/intermediaries and wholesale funding; others appear to be more general finance companies moving into the mortgage lending business.
7.4 Other well-established lenders, including prominent mutuals like Nationwide and Dunfermline, occur much further down the list and with shares well below their general market share.
7.5 Table 7.2 provides a slightly different take on lenders' involvement. It highlights those main lenders who are associated with relatively high secured loans (using the median values to avoid distortion by extreme values). The first column shows the sum of loans (i.e. main mortgage plus any secondary secured loans); the second column shows the amount of arrears if recorded (unfortunately this is not recorded in all cases); the third records the amount of loans treated as unallowable under the MTR scheme, where applicable (missing values here may be taken as zeroes).
Table 7.2: Lenders Involved with Higher Median Loans Outstanding
(total loans, grouped by main lender involved in each case)
by Main Lender
Sainsbury's Bank plc
Picture financial Services Ltd
Nemo Personal Finance Ltd
Amber Homeloans Ltd
The Funding Corporation
Chelsea Building Society
Accord Mortgages Ltd
Paragon Personal Finance
Stroud & Swindon Mortgage Co Ltd
UCB Home Loans
Redstone Mortgages plc
GMAC- RFC Limited
Kensington Mortgage Company Ltd
Coventry Building Society
Leeds & Holbeck Building Society
GE Money Mortgages Ltd
First Plus plc
Southern Pacific Mortgage Limited
Source: Analysis of MTR Administration Database.
7.6 The organisations at the top of this list are quite a different bunch from those just discussed. There is even more emphasis here on sub-prime, specialist and 'finance company' types of lender. These organisations may not have a large number of loans with MTR clients, but they tend to have large total amounts of debt. In some cases quite a lot of this debt may be in secondary secured loans, but the figures in column 3 are often not out of line with the overall scheme median shown at the bottom. For a typical MTR borrower who does have unallowable loans, the median amount is £16,730. The data on arrears outstanding are illustrative rather than comprehensive.
7.7 The distinctive profile of MTR lenders is part of a general picture, which will be reinforced by evidence presented below, whereby the debt problems leading to MTR applications are often neither simple nor 'traditional' mortgage debt problems. Secondary debt is often involved, typically entailing different lenders, in some cases this is sub-prime lending. Thus issues of how these different parts of the mortgage market are regulated arise, when we consider the policy implications of this study. In this context it is important to note that secondary secured lending is subject to a different regulatory regime (under the Consumer Credit Act, rather than MCOB).
7.8 From the database it appears that 45% of MTR applicants and no less than 69% of settled cases have additional secured debts beyond the original mortgage. On average the size of these secondary debts is more than half of the original mortgage debt (56%). There is no clear trend over time in these proportions. Secondary debt is most common in Lothian but the relative amount is greatest in Clydeside.
7.9 One note of qualification to put in at this point is that many of the secondary (and sub-prime) lenders are subsidiaries of larger financial institutions.
7.10 It is a condition of participating in the MTR scheme that people take independent financial advice. Many households may be referred to the scheme by advisers, while others will talk to advisers as part of the process to applying to the scheme. The most commonly-used advisory agency, by a wide margin, is the CAB/ CAS, used by 52% of clients. The next most used agency, Money Matters Advice Service, was used by 9%; this is followed by local authorities (unspecific)(7%), solicitors (5.5%), Money Advice Scotland (4.5%), IFAs (4.3%), 'Debt Advice'(2.8%), Trading Standards (2.4%) and Consumer Advice (2.3%) (both LA), Legal Services Agency (1.5%), and Welfare Rights (1.1%).
Multiple Debts and Securities
7.11 Evidence of multiple debts arose in both case files and stakeholder interviews. Many of the settled applications in the Case Files were straightforward, but there were a number of complex ones which involved several negotiations between lenders and clients for the payment of the shortfall. In particular, there were situations where evictions were delayed when settling of the case was imminent. The case file investigations also revealed situations where clients failed to disclose all creditors and after offers were made more inhibitions were revealed, causing cancellation of initial offer letters and new ones written.
7.12 Although applicants are required to provide information about their debts including lenders, loans and outstanding amounts and arrears, not all applicants provided the details required. But the files investigated show that most applicants had multiple debts, consisting for example of mortgage loans and secured loans consolidated for home improvement. There are also many unsecured loans observed among cases investigated. Where the information is provided, the mortgage loans tend to be larger sums compared to second loans, but arrears on second loans tend to be bigger. In two of the cases the second loan was nearly as much as the mortgage loan.
7.13 The stakeholder interviews confirmed that the presence of multiple debts in addition to the mortgage arrears was commonplace. There were concerns particularly among advisers relating to the scale of borrowing undertaken by some households, but also about the level of securities being charged to the properties by secondary lenders. Many MTR cases appear to be precipitated by action by secondary security holders taking action to repossess the property.
"It comes back to irresponsible lending; we're finding more and more that the actual securities on the house outweigh the actual value. Basically what's happening is that they've been lending on the assumption that the property is gaining in value. That's fine if you look at it on a long term basis, but people's circumstances can change very quickly in the short term. After being so willing to give money out on a secured loan, they are then quick enough to come back in and say they want their money back. They don't discuss in general proposals for repayment but apply for eviction. " (Adviser)
7.14 There are also debts relating to unsecured loans and arrears with other utilities and Council Tax that also contain the threat of sequestration and inhibitions on the property. It was reported by one adviser that the most common trigger for sequestration is the local authority Council Tax departments.
7.15 The main reason for financial crisis was thought to be households being overstretched in terms of financial commitments, with a crisis triggered by a period of unemployment or interruption or reduction in employment because of ill health. Advisers found people had taken multiple secured loans to consolidate debts but also for home improvements or other consumer goods like cars and holidays.
"Almost inevitably there are other debts. It can be if your income's dropped, so it's not just because of multiple debts, but there very often are, (the) usual debts such as Council Tax, but I must admit multiple and other debts are usually the problem as they've tried to get out of it by taking on other loans…I would say it's usually a change in circumstance, there is often something that has tipped them rather than simply over-stretching although obviously they are over-stretched. Usually loss of employment, relationship break up is a major one, unemployment is a bit unsteady and their income's dropped for some reason, maybe health problems." (Adviser)
7.16 There may be a number of secured loans and a ranking agreement. One lender stated that it is only interested in those ahead of them in the ranking agreement - and will want to ensure that it "comes out clean". It is likely to be the case for all lenders and for the purchasing RSL/Local authority that everyone will want full settlement and the title to be clear with no charges for the MTR sale to proceed. If there is insufficient value in the property for this to happen then the MTR transaction would be unlikely to take place and the property is likely to be repossessed. Where lenders are being asked to accept less than the full amount owed Advice Agencies can often become involved in extensive negotiation with lenders, impacting on the timescales involved.
7.17 There is a general issue here about "husbanding the loan", i.e. ensuring that some payment is made so that the amount of equity is not eaten up during the MTR negotiation process. Bankruptcy adds a layer of complication in as far as another professional is involved.
7.18 Cases of multiple secured debts were difficult to negotiate and advisers had to work hard with the MTR team to engage all the lenders, as they all need to agree to the property being bought by the social landlord. Negotiations with the first lender are often simple as their money is assured, but further negotiations with second or third lenders are more problematic as there are often cases where there is insufficient equity to cover the additional debts, and repayment plans need to be agreed to cover any shortfalls. In these circumstances, it can be difficult to get the second or third lender to agree to the MTR sale. The presence of multiple secured loans on properties also means any delays in MTR application process can mean some lenders changing their mind if they see little progress and begin to press for eviction once again.
7.19 The Accountant in Bankruptcy (AiB) plays a key role in relation to households with complex or insoluble debt problems. Since April 2008 the 'Low Income Low Assets' route is the main one for someone to be declared bankrupt, and they will come to this via an advice agency such as CAB. This agency might advise them to apply for the MTR scheme at the same time. The second main route to bankruptcy is if a creditor appoints a trustee, who may be a private sector insolvency firm. In that case AiB would still have a monitoring role but may not always know if they have applied for MTR. It should be noted that for AiB cases there are about 80 agents operating across the country and in broad terms AiB staff will have about 500 properties at any one time and the agents about 4,000.
7.20 AiB advises debtors that it will have to release (sell) their house and the options will be to move voluntarily, be evicted or MTR. MTR is recommended generally where the house value is not so high that it would be ineligible for MTR, and where there are children (because of the benefits of not needing to move, change school, etc.), although this is not intended to exclude other groups. The MTR scheme is appropriate for the majority of homeowners going through the Low Income Low Assets route, because "They are likely to have no other means of escape"(AiB representative). Where MTR is not appropriate, the options are to move voluntarily or be evicted. One lender referred to its 'Assisted Voluntary Sale Scheme', where it would work with borrowers to achieve the best possible sale price. Where a secured lender initiates possession proceedings, AiB generally waits for this to resolve itself.
Lender attitudes and practices
7.21 From discussion with lenders, advisers and other stakeholders it appeared that there was considerable variation between lenders in their attitudes and approaches. While many lenders engaged well with the scheme, especially if they held the first charge on the property, other lenders were less supportive and their attitudes were sometimes described as intransigent. One lender stated that it only takes a limited view of assets in the property and not other unsecured finance. It does not give payment holidays and will not extend the period of the loan, but will work with the borrower over the shorter term e.g. giving it time to repay debts. A view was expressed by a number of stakeholders that some lenders are not interested in keeping borrowers in their homes.
7.22 One adviser reported that there was no particular pattern to which lenders acted more favourably towards the scheme, whether they were considered prime, sub-prime, Scottish or national lenders. It was unclear whether advisers thought lenders were exercising less forbearance in the difficult environment within the mortgage markets, as although some thought they were becoming less willing to negotiate, others thought problems always existed.
" They want eviction orders. We won't use them but the whole point of the Mortgage Rights Act was to give control to the sheriff although some are more likely to grant the order than others some are more sympathetic and will give the people time" (Adviser)
" I think more and more lenders are probably playing hard ball now. It's always been there but a lot of lenders have got the jitters in the last year, with the current credit crunch but they've always been that way inclined. A lot of lenders are very unwilling to negotiate. Our client may have £2000 arrears and a 20 year mortgage period but they're not willing to allow time to clear off the arrears. What they invariably ask for is for the whole amount upfront to stop an eviction or sometimes half and then rest to be paid off in two months, people can just not afford that, so the decision is taken away from them because of their intransigence". (Adviser)
7.23 Some lenders were more willing than others to engage with the MTR scheme and one adviser felt that the CML or FSA could do more to promote the benefits of the scheme amongst their members. Given the non-statutory nature of the scheme, CML is, however supportive of MTR and has issued information referring to it on their website and cross-referring to scheme guidance for members.
7.24 Several stakeholders suggested that the business model employed by some lenders may rely on income from repossessions and make them less willing participants. Only anecdotal evidence of these practices was obtained during the research. CML stressed that its members adhere to regulations which would preclude such practices and that if this was the case it would relate to non-member organisations.
7.25 The lenders report that each case is considered on its merits and borrowers advised about the MTR scheme. Advisers reported that forbearance was more easily achieved if the lenders were approached early in the process, and the space to manoeuvre diminished as the arrears and stages of recovery advanced. A non High Street lender stated that it welcomes the scheme as they want to keep the borrower in their home so long as it is in everyone's best interests. It fits well with other processes except in relation to the timescale.
" Depending on individual circumstances it will usually be worth waiting the three months or so it might take to see if the situation can be resolved through Mortgage to Rent." (Lender)
Seeking Help and Advice
7.26 The complex nature of applicants' debts means that most had come into contact with debt advice services before applying to Mortgage to Rent. Indeed, debt advice agencies and Trustees involved in debt and bankruptcy procedures are important conduits in the MTR scheme. Most applicants are unaware of the existence of the MTR scheme before coming into contact with debt advisers.
7.27 The point at which applicants sought help or advice about their financial difficulties varies. Respondents told quite remarkable stories about the 'self denial' involved in their debts. Debts are concealed from partners and partners are drawn into new debts without their knowledge. In one instance one respondent's partner had 14 credit cards without their knowledge and in another the eviction notice was served before the respondent had the courage to let their partner know about the mortgage difficulties.
"I completely ignored it. I buried my head in the sand until I'd missed 5 or 6 payments […] I was 'faird to tell my husband"
7.28 These are extreme examples of the 'denial' response that many people adopt in the face of mounting debts.
Quality of debt advice
7.29 The type of information and advice provided to by debt advice agencies to applicants depends on their circumstances but options do tend to be limited because of the typical complexity and severity of debt profiles. Most had mainly discussed MTR while for around 1 in 10 selling on the open market was discussed. A similar proportion had severe debts and had not yet been involved in Trust Deed or bankruptcy, so also discussed this with debt advisers.
7.30 On the whole, respondents felt the advice and information they received was very helpful. There were, however, a few cases where respondents believed information or advice was incorrect or unhelpful. One person was advised to ignore court papers while a few respondents were advised not to make payments if they could not afford to. However, there were far more examples of cases where advice agencies dealt with lenders on the applicant's behalf, negotiating payment plans and helping reduce the stress applicants felt.
Communicating with lenders
7.31 Most of the help and advice applicants receive is tailored to their financial difficulties and the options open are affected by the level of their difficulties and when they decide to seek help. Some people are only accessing debt advice after receiving an eviction notice or court papers so the decision to apply for MTR can be taken in a whirlwind of activity.
"I didn't speak to any lenders. I tried to rob Peter to pay Paul. I borrowed to pay off arrears."
"To be honest, I just kind of ignored it. I thought the sooner I started talking to them, the sooner they'd apply the pressure."
7.32 Other applicants are able to take a more considered path to MTR. These are applicants who have contacted their lender just at the point where they think they may have difficulties paying their mortgage, or when they have only missed one or two payments. These respondents are more likely to say their communication with their mortgage lender has been helpful or their lender has been patient.
7.33 In over half of cases, the mortgage lender was described as 'helpful' or 'patient' or had discussed some possible options with the applicant before the applicant decided to apply for MTR. The most common options discussed were the suspension of capital payments, a payment plan or other reduced payment option, the suspension of payments or a payment holiday and (less commonly) the extension of the loan term.
"The (lender) were very good. They let us pay less and let us pay it up."
"The (lender) were really good. As long as you told them what was happening."
7.34 In around a third of cases, the applicant described the lender as 'unhelpful' or as 'just wanting their money'. In some of these cases, the lender may not have offered options to the applicant because the arrears were already substantial before the applicant had made contact or responded to letters from the lender. Negotiations were also more difficult with a new lender which respondents had re-mortgaged to.
"I contacted the lender to ask if things could maybe be re-shuffled, to make the payments less. You know, even if I could extend the mortgage over a longer period of time but they wouldn't allow that. They just said there was nothing they could do."
"[…] they (the lender) didn't want to know. […] We went to see them. We did all the right things and we got nowhere."
"I said 'Can I extend this mortgage'? But because it was a new mortgage they wouldn't let me. They wanted the normal payment plus extra."
7.35 The tendency for some borrowers to attempt to conceal or deny their financial difficulties (to lenders and even from themselves) is a major barrier to early solutions to mortgage difficulties. At the earliest opportunity, borrowers need to be made aware by lenders and advice agencies that positive outcomes strongly depend on early intervention.
7.36 1 in 5 respondents were unable to negotiate with their mortgage lender because they did not have mortgage arrears at all. These applicants' properties were under threat due to secondary secured or unsecured loans, or credit card debts. The mortgage is sometimes the only thing paid but then the property is under threat as part of a Trust Deed or other arrangement.
7.37 The debt retrieval practices of secondary lenders tended to be far more aggressive, with more frequent 'threatening' letters and telephone calls. Debt advice agencies and Trustees (bankruptcy accountants) appear to have a very important role in mediating between applicants and their creditors. Apart from making applicants aware of MTR and helping them to apply, this mediator role is the major benefit of dealing with these agencies.
7.38 Although considerable work has been done on mortgage sustainability and homeless prevention with mortgage lenders, it is clear that secondary lenders are important and work needs done to consider how to engage with these institutions.
Sub-prime lenders - problem or solution?
7.39 Less well known 'sub-prime' lenders appear to be part of both the problem and the solution to some applicants' financial difficulties. In a few cases, respondents had their mortgage from a sub-prime lender from the outset. However, more commonly, applicants had re-mortgaged to a sub-prime lender as part of a consolidation plan after getting into some financial difficulties. These sub-prime re-mortgages were often very unaffordable and after re-mortgaging, financial difficulties escalated However, in some instances, where MTR had been unsuccessful, it was sub-prime lenders that applicants turned to for re-mortgage finance.
7.40 It would be unfair to suggest that sub-prime lenders are those most likely to have aggressive debt-retrieval practices, although Stephens & Quilgars (2004) found them to be less likely to exercise forebearance. There are examples of High Street financial institutions being aggressive and obstructive and of sub-prime lenders being accommodating and supportive (and vice versa). It is more possible to generalise that mortgage lenders would appear to be more accommodating and supportive than secondary lenders.
7.41 Although sub-prime lending may be a mixed blessing, it was also pointed out that this market has probably dried up for the time being as a result of the Credit Crunch.
Regulation and the Secondary Market
7.42 Conventional first mortgage lending is regulated through the Financial Services Authority ( FSA) and, since 2004, subject to the Mortgage Conduct of Business ( MCOB) regime, as discussed in Chapter 2. The most important parts of MCOB deal with the basis on which loans are granted (part 11) and with the arrears/possession processes (part 13). Part 11 requires that a lender must be able to demonstrate that they have taken account of ability to pay, according to written 'responsible lending' policies and with written case records. It must take account of income and allow for repayment as well as interest and the longer term position after any initial discount period. The main thrust of MCOB 13 is that the lender should make reasonable efforts to reach agreement with the borrower and should be reasonable and flexible in looking at options involving extended terms for repayment, capitalisation of arrears; there are also requirements in terms of the provision of information, of not putting pressure on customers; and on the possession process itself. The overarching principle is one of 'treating customers fairly'.
7.43 Secondary lending is largely covered by a separate regime, that for Consumer Credit under the Consumer Credit Acts ( CCA) and the Office for Fair Trading ( OFT). There is an additional layer of self regulation through the Finance and Leasing Association ( FLA) and its code of practice .
7.44 The FLA representative pointed out the following to us
FLA members are committed to considering cases of financial difficulty sympathetically and positively. Possession is a last resort when all other options for helping customers have been explored. This approach is also influenced by the fact that second charge lenders are unlikely to recover the full amount of any loan after repossession...The order of creditor payment after the sale means that the first charge lender recovers the expenses of the sale first, and only then would a second charge mortgage provider recoup any money (Finance and Leasing Association).
7.45 CCA has parallel provisions to MCOB ('the same but different'). It puts more emphasis on provision of information before the borrower commits to a credit contract and opportunities to withdraw. However, one significant anomaly was that secondary loans in excess of £25,000 were not covered by CCA (until April 2008). Given the data on secondary loans referred to earlier it is likely that quite a lot of MTR cases would have had secondary loans above this size threshold. In addition, some of the secondary lenders associated with MTR cases may not be FLA members (who represent 75% of the sector overall).
7.46 The FLA lending code 2006 commits lenders to going through 'a sound and proper credit assessment' before making any loan (s.1C). This assessment 'may look at a combination of' factors including credit commitments, ability to repay, 'how you have handled your financial affairs in the past', information from credit reference agencies and others, credit scoring, income, age, location and any security. It defines 'high risk' as having four or more credit commitments, spending more than 25% of gross income on consumer credit or more than 50% on consumer credit plus mortgages. We would comment that the latter ratio looks very high compared with most recommendations regarding housing affordability, particularly for people on low to moderate incomes.
7.47 FLA is currently working on an additional package of measures to support customers with paying difficulties, including
- Good practice guidance, building on the lending code and emphasizing early contact and use of money advice
- A root and branch review of FLA lending code
- Improved information for customers
- Improved exchange of information between first and second charge lenders
- Regular contact with advice agencies to identify trends and consult on codes
7.48 The main lenders most commonly represented among MTR cases are leading high street banks in Scotland. However, also quite important is a group of less well-known names, including sub-prime and specialist mortgage lenders and general consumer finance companies. Major mutuals are less significantly represented. Lenders with relatively large secured loans tend to be a rather different group, with even more emphasis on sub-prime, specialist and consumer finance companies.
7.49 Multiple, secondary debts are very common in MTR cases and are widely cited as the immediate cause of problems, and then create additional problems in attempting to resolve the situation, whether through MTR or otherwise. Secondary lenders are criticised for irresponsible lending and an over-readiness to seek possession. However, secondary debts also include public authorities (Council Tax). In addition, many households can be seen as having overstretched themselves in taking on secondary debt, for a wide range of purposes, even though a loss of income may have triggered the crisis.
7.50 Cases of multiple secured debts were difficult to negotiate and advisers had to work hard with the MTR team to engage all the lenders, particularly the secondary lenders. The attitudes and practices of lenders appear to vary a great deal, despite general support for MTR from CML. There was some evidence of hardening attitudes among lenders, but also of cases becoming more complex.
7.51 Bankruptcy may be becoming more common, with a new 'low income low assets' route often being recommended by advisers. This generally requires the sale of the home, with the MTR route being seen as particularly appropriate where values are low and there are children present.
7.52 Citizens Advice Bureaux are by far the most common source of advice used by MTR clients, although a wide variety of others are used by smaller numbers. Most applicants contact debt advice agencies before they apply to MTR, and some effectively communicate mainly through the advisers rather than through the MTR team. In this sense the advisers are the key front-line professionals working with these households.
7.53 On the whole, respondents felt the advice and information they received was very helpful. There were, however, a few cases where respondents believed information or advice was incorrect or unhelpful. This indicates the need for more training among money and debt advisers on legislation, as well as processes for mediating between clients and lenders. There may also be a need for more detailed guidance to advisers to ensure consistency in how MTR is presented alongside other options.
7.54 There is considerable evidence of 'self denial' by clients about the extent of their financial problems, including communication problems between partners. This leads to some failing to contact their lenders until it is too late to obtain a helpful response, whereas those who approached their lenders early generally got a more sympathetic treatment.
7.55 About a third of cases described lenders as unhelpful. A fifth of cases had no arrears on the main mortgage, with the threat arising from secondary loans. The debt retrieval practices of secondary lenders tended to be far more aggressive. Much of the role of advisers is then to act as mediators.
7.56 Sub-prime lenders are not uniformly a problem for MTR applicants; in some instances offering re-mortgage options unavailable from High Street banks, which allow owners to maintain owning. It is secondary lenders which appear to be more generally the problem group, although some mainstream lenders also display an unwillingness to be flexible. The evidence from this study suggests that the differential regulatory regime applying to secondary lending may need to be addressed if the kind of problems increasingly presenting to the MTR scheme are to be better prevented, although it is noted that this is subject to recent and prospective change.