CML news & views

We are now approaching the first anniversary of the “events of the late summer” – as the combination of the credit crunch and the run on Northern Rock were euphemistically referred to. For lenders and borrowers alike, much of the last year has been dominated by their effect on mortgage and housing markets. Almost 12 months on, there are still few signs of improved liquidity in financial markets, wider availability of mortgage funding or cheaper borrowing costs.

So, while we are engaged in work across a broad and challenging range of policy issues on behalf of members, it is developments in funding and mortgage markets that remain at the top of the agenda. On behalf of the industry, therefore, we have been pursuing in private discussions with the Bank of England and the Treasury our proposals for addressing the current market disruption. We are also liaising with Sir James Crosby and his Treasury team as they work on measures to restore the health of wholesale mortgage funding markets. It is the current paralysis of these markets that is driving up borrowing costs, and is in danger of making the housing downturn more severe and protracted than the market fundamentals should imply.

Fees, rates and fair treatment 

The impact of higher mortgage costs is clearly a major concern, and remains high on the political agenda. That may explain the chancellor’s recent comments about arrangement fees. The key point, however, is that recent decisions by some lenders to raise fees are not the cause, but a symptom, of current problems in the mortgage market. 

In response to the chancellor’s comments, we pointed out that no borrower has to pay an arrangement fee. A range of mortgage products is available from a range of different lending institutions, with or without arrangement fees. The reality is that higher borrowing costs mean that customers coming to the end of their current deal may have to pay a higher rate. But they need not pay a fee, unless choosing to remortgage to a product where there is such a charge.

Arrangement fees continue to vary between lenders and products. In many instances, mortgages with higher rates have lower arrangement fees, while higher fees are often associated with lower rates. That presents customers with a helpful choice of products to suit their circumstances. A borrower with a large mortgage may find, for example, that a product with higher upfront fees and a lower monthly rate is a cheaper option overall. For others, the attraction of a fixed rate mortgage, which may have an arrangement fee, is that they have certainty over their mortgage payments.

What is important is that borrowers are able to understand the overall cost of a mortgage – and the ‘key facts’ document presented at the outset contains all the information to enable them to do this. Choice would be constrained – and some consumers potentially denied access to deals that offer them a better, cheaper option – by attempts to intervene in the market in favour of any particular pricing structure.

But while we disagreed with the chancellor’s comments about arrangement fees, our response also reinforced some more re-assuring messages for him and his colleagues in government. We re-iterated a point we discussed with the chancellor earlier this year – namely, that lenders remain committed to fair treatment for people facing higher borrowing costs. And there are reassuring signs that the overwhelming majority of customers are managing higher costs. 

Lenders have committed to ensuring that, as borrowers come to the end of their existing deals, they get adequate notice of their new payments to help them budget for rising costs. Lenders also encourage borrowers to talk to them as soon as possible if they are worried that they will not be able to meet their new level of payments.

Wider issues 

While the dominant theme of much of the last year has been the worsening market environment, we recently calculated that we are working on almost 100 different policy areas. And we are pursuing this broad agenda with around 60 different government departments, trade associations and other stakeholders in the mortgage industry.

One consequence of the credit crunch, for example, is that higher borrowing costs will result in an increase in mortgage arrears and possessions. We have therefore intensified our lobbying of the Department for Work and Pensions (DWP) for reform of income support for mortgage interest so that it provides more – and better targeted – help for borrowers in difficulty. We are currently awaiting an announcement from the DWP.

However, the impact of rising mortgage arrears extends beyond lenders, borrowers and the government. We are therefore also working with debt advice agencies on what can be done to help borrowers manage their way through any period of difficulty. As upward pressure on borrowing rates persists, it is important for all stakeholders to work together to help borrowers to manage higher costs.

We are also reinforcing the message that taking possession of a property remains the last resort. We have therefore been working with the Civil Justice Council and the Ministry of Justice on a “pre-action protocol” – essentially a checklist of actions that lenders will apply to every case of mortgage arrears before seeking possession through the courts.

Better protection 

Of course, lenders already have arrears management processes in place, but agreement on a protocol will help to reinforce a wider understanding of them. We believe this can help protect lenders’ security, while also benefiting consumers by streamlining court proceedings and avoiding unnecessary legal costs.

There are other aspects of the market on which we have been taking an active lobbying role. In recent months, for example, we have been pressing hard for the regulation of sale-and-leaseback companies. The requirement to treat customers fairly is at the heart of the regulatory regime overseen by Financial Services Authority (FSA). But with the number of home-owners experiencing payment difficulty increasing, we want to see fair treatment extended to all those in similar circumstances, irrespective of the choices they make to try to solve their problems and the types of firms they are dealing with. 

Regulation of sale-and-leaseback would help prevent consumer detriment and ensure that borrowers choosing this option – who may be in a vulnerable position – are treated fairly and consistently. And as a result of our lobbying, the Office of Fair Trading has launched a study of this market. We hope that the study will be completed quickly, and that it will be followed by prompt action to reinforce consumer protection.

Another option that we have been exploring for borrowers in difficulty is the potential development of a national mortgage rescue scheme, delivered through housing associations. This could provide a welcome alternative to sale-and-leaseback for people who are unable to stay in their homes as owner-occupiers.

While sustaining home-ownership for existing home-owners is a key theme, lenders are also mindful of the challenges aspiring first-time buyers. We have therefore been working with the Department for Communities and Local Government and the Housing Corporation on shared equity and shared ownership schemes. Although these will be a niche product in current market conditions, they can provide an option for buyers attracted by the long-term benefits of home-ownership.

Europe – and devolved governments

It is not just the government in Westminster, of course, that shapes the operation of UK mortgage and housing markets. Developments in Europe can also be important, although we have persuaded the European Commission to put on hold any plans for mortgage legislation while current market uncertainty persists. Earlier, we helped shape the final draft of the European white paper on mortgages to minimise threats for UK lenders.

Devolved governments also shape the operating environment in different national markets within the UK. In Northern Ireland, we have been working with the Department for Social Development on shared ownership and mortgage rescue proposals. 

We have also been representing lenders’ interest as the Scottish government develops its plans for reforming home-buying and selling, and in particular the proposed introduction of the new home report in December. We urged the government to avoid some of the mistakes made in the implementation of home information packs in England and Wales, and the result has been more widespread industry support for the Scottish proposals.

Mortgage regulation

Outside the various arms of government, the FSA is perhaps the most influential stakeholder for UK borrowers and lenders. A single regulator for the industry is helpful, but we work with a variety of teams across the FSA on a broad range of issues. Recently, we have been helping the regulator as it prepares to announce later this summer the results of thematic work on a wide range of topics, including responsible lending, interest-only mortgages, borrowing into retirement, arrears and possessions, sub-prime lending and the quality of mortgage advice.

Aside from these forthcoming announcements, we have also been focusing on the FSA’s approach to liquidity following the credit crunch and the run on Northern Rock. We have been contributing to its work on the treating customers fairly agenda, as well, and pressing to ensure that its implementation of the Basel 2 requirements does not put UK lenders at a disadvantage.

So, despite the focus on market developments – the most pressing issue for members at the moment – we are also continuing to represent lenders’ interests across a wide range of other issues. As the year progresses, we will continue to work across the spectrum of the most challenging conditions the modern mortgage market has ever seen.