CML news & views

When the Ministry of Justice (MoJ) published information earlier this month on the number of court actions to take possession of homes in cases where borrowers were struggling to pay their mortgages, the government announced a package of measures designed to offer support. We endorsed the government’s proposals, and re-iterated our own message that borrowers should continue to plan ahead for higher mortgage costs and talk to their lender if they anticipate having any problems, preferably before they miss even a single payment. If they do so, they will find their lender has the widest possible range of options to help, depending on the borrower’s individual circumstances.

The package of measures announced by the government will provide financial advice and support for borrowers in difficulty. The government said it intended to put in £9 million in extra funding to ensure:

• expanded access to free legal representation in county courts throughout England for households at risk of possession;
• a stronger National Housing Advice Service to provide more comprehensive debt advice; and
• more specialist training for staff providing debt advice at Citizens Advice Bureaux and local authorities.

The figures released earlier this month by the MoJ related to actions by lenders and landlords seeking possession of property in county courts in England and Wales in the first three months of the year. They showed that, on a seasonally adjusted basis, almost 39,000 mortgage possession claims were issued in the first quarter, 7% more than in the preceding quarter and 16% more than in the first three months of 2007.

The number of mortgage possession orders made was lower, at almost 28,000. That was 9% more than in the previous three months, and 17% higher year-on-year.

What our data shows

Twice a year, we release statistics on the number of properties actually taken into possession by lenders. We publish our data in February and August each year, coinciding with the MoJ quarterly data in those months. 

However, we do know from historical comparisons that the total number of the properties taken into possession is significantly lower than both the number of claims issued and orders made in court. In 2007, for example, almost 138,000 claims were issued and 95,000 orders were made, but the number of properties taken into possession was much lower that that, at 27,100. 

There are several reasons why the number of properties taken into possession by lenders is much lower than the number of claims or court orders:

• Lenders will not enforce a court order if they can agree a satisfactory payment plan with the borrower. Possession proceedings can, and will, be abandoned right up to the last minute.
• The court may suspend the order. Almost half of actions (47%) were suspended in the first quarter of this year, the same proportion as in the preceding three months and in the first quarter of 2007. Orders may be suspended if the borrower agrees to a plan to re-pay the current mortgage, plus some of the arrears.
• Lenders sometimes use court action as a way of reinforcing that borrowers in arrears must make a firm commitment to any payment plan designed to get them back on track. They are also more likely to be forced to resort to court action when dealing with borrowers who ignore – or otherwise fail to engage with – a lender’s attempt to communicate with them about mortgage arrears.  But they may not pursue it if the borrower responds by agreeing to a reasonable payment plan.
• A lender may seek a new order, even if it has already obtained one at an earlier hearing. In particular, this may happen if time has elapsed since the first order was made and new problems have emerged.

The last resort

The reality is that lenders use possession only as a last resort. The government’s commitment to putting more resources into debt advice should therefore help borrowers work more effectively with lenders to devise appropriate and realistic solutions to mortgage arrears problems. 

Over and above increased government funding for debt advice, lenders are seeking to make further improvements by ensuring that borrowers affected by the credit crunch or a fall in income get early information and fair treatment to help them plan ahead and manage their way through periods of financial difficulty.

The increase in court actions and orders reported by the MoJ are not welcome, but they are in line with our own expectations of an increase in mortgage arrears and possessions in 2008. We are predicting that the number of possessions will rise to 45,000 this year. But given that there are 11.8 million mortgages outstanding, that still means that only around one in 300 households will be affected.   

Some households faced with changing circumstances may be unable to get back on their feet, but the reality is that most can work their way out of trouble by taking good advice, prioritising their debts and communicating early with their lenders. Lenders are seeking to help borrowers plan ahead by trying to contact those who may be at risk of seeing their payments go up.

When dealing with customers in arrears, lenders are, of course, already required to uphold the Financial Services Authority’s mortgage conduct of business rules, as well as its ‘treating customers fairly’ requirements. We are looking at ways in which lenders can demonstrate their commitment to this.

We are also looking at what we can do to improve consumer understanding of how they will be treated if they encounter financial difficulties. And finally we are examining whether we can provide greater clarity about the options lenders will have considered before they begin court action. We are continuing to discuss with a range of consumer organisations what can be done to provide a better safety net for borrowers in financial difficulty.

Court action by landlords

On the same day as it published statistics on the number of possession actions by lenders, the MoJ also produced data about court action by landlords. This showed that landlords were currently around 50% more likely to seek possession of properties than lenders.

According to the MoJ, landlords issued 37,221 claims for possession in the first quarter on a seasonally adjusted basis (broadly similar to the 38,688 claims by lenders). But only around 30% of households, totalling some eight million, currently rent their property, compared with 11.8 million that are buying their home with a mortgage.

The number of claims by landlords in the first quarter was broadly similar to the preceding quarter, and 4% higher than in the first three months of 2007. A total of 28,503 landlord possession orders were made, 2% higher than in the preceding three months and 10% more than in the first quarter of 2007.

In the recent past, however, tenants have been much more likely than mortgage borrowers to face a claim for possession. In the three years from 2000 to 2002, when there were fewer than eight million tenants, there were more than 190,000 claims annually for possession by landlords. Since then, the number has dropped, and totalled 147,000 last year.

By contrast, the proportion of possession claims issued against mortgage borrowers between 2000 and 2004 was around a quarter of the level experienced by tenants. During that five-year period, with more than 11 million households buying their home with a mortgage, borrowers faced an annual total of possession claims ranging between 63,000 and 77,000.

Better state support

An important strand in the safety net of support is help from the state for both tenants and home-owners struggling to meet their housing costs. However, state support for home-owners in difficulty was scaled back dramatically in 1995 by the former Conservative government. Since then, borrowers have not been entitled to any help with their housing costs for the first nine months. Even then, state support is limited to interest payments on a mortgage of no more than £100,000, with the cap on loan size having also remained unchanged since 1995. 

In current market conditions, it is unlikely that a borrower unable to pay their mortgage will be able to remain in their home for as long as nine months without facing a claim for possession.

The scaling back of income support for mortgage interest (ISMI) was heavily criticised by Labour at the time it was implemented by the Conservatives. Since being elected in 1997, however, the Labour government has done nothing to reform a system of state support for households in difficulty that remains biased significantly in favour of tenants and against owner-occupiers.

For many years now, we have worked with other industry representatives, as well as the government, on a partnership steering group seeking to promote sustainable home-ownership. State support for borrowers in financial difficulty has been under review as part of this initiative. We believe that completing the review is now urgent, and that improvements to help for home-owners should be implemented as soon as possible.

Reforming income support for mortgage interest

In our discussions with the government, it has previously argued that reforms should be “cost neutral.” The reality is, however, that more generous payments of ISMI could be offset by lower costs for the government arising from homelessness and an increase in the number of people claiming housing benefit.

Another option would be to introduce more generous payments of ISMI but consider using second charges as a means of recovering higher costs to the government. A similar approach has been taken by local authorities and housing associations to recover the cost of home improvements. This could be a way of providing much more help for home-owners in difficulty at the time of need, without increasing the overall cost of the scheme to the government.

Making ISMI payments available to those in need more quickly – and removing the cap so that they cover interest charges in full – would help reduce a rise in the number of possessions as we enter a more difficult market environment, exacerbated by the credit crunch. 

The gaping holes in the safety net of support for home-owners in difficulty mean that few borrowers will be protected by ISMI, which is therefore failing in its policy objective. That is one factor behind our forecast of an increasing number of possessions by lenders in 2008.  We believe that the government needs urgently to conclude its review of ISMI and introduce more generous support for home-owners in difficulty.