The Treasury should draw a line under the ‘mortgage-prisoner problem’, which was born out of the financial crisis more than a decade ago, says a new report from the research unit LSE London.
Mortgage prisoners are trapped paying relatively high interest rates but are unable to remortgage(1). They borrowed from lenders who are no longer active – such as Northern Rock or Bradford & Bingley—and these ‘closed book’ loans were sold to investors after the global financial crisis.
As many of these investors are not mortgage lenders and do not offer new mortgages, borrowers are stuck with their existing product which may be more expensive than the rest of the market. Many of the prisoners also find it difficult or impossible to take out new loans with active lenders because they do not meet current, tighter lending criteria.
Over the past few years, the Financial Conduct Authority (FCA) has looked closely at the problems facing mortgage prisoners and introduced several steps to help some to refinance on better terms. Even before the COVID-19 pandemic struck, the regulator acknowledged that relatively few mortgage prisoners would benefit from its measures, and that the time has now come to put in place a wider set of support arrangements.
Releasing the mortgage prisoners , which was funded by Martin Lewis of MoneySavingExpert.com (MSE), sets out the range of circumstances facing mortgage prisoners and identifies solutions so more of them can reduce their payments and/or restructure their mortgage arrangements and keep their homes.
The need for action is underscored by the impact that the situation is having on the physical and mental health of prisoners. This was reflected in responses to a MSE survey of 834 prisoners, conducted in June 2019.
One said: “I’ve been diagnosed with depression and anxiety, for which I've been medicated as well as undergoing CBT. Ditto for my husband”.
Kath Scanlon, Distinguished Policy Fellow at LSE London, said: “The Government took measures after the global financial crisis to make mortgage lending less risky, but these policies also contributed to locking some borrowers in to their existing lenders. The situation has caused real harm for many affected borrowers, yet UKAR and FCA policies to address the problem help only a small minority. And now coronavirus is making the situation much worse.
“Our research aimed to understand the range of circumstances facing mortgage prisoners and identify solutions so more of them can reduce their payments and/or restructure their mortgage arrangements and keep their home, and we found a strong case for fully investigating a wider variety of solutions. We hope our work contributes to a long-lasting solution for these borrowers.”
Martin Lewis, founder of MoneySavingExpert.com and founder and Chair of the Money & Mental Health Policy Institute, said: “Mortgage prisoners are the forgotten victims of the 2008 financial crash. The Government at the time chose to bail out the banks, but unfairly – immorally – hundreds of thousands of their victims were left without adequate help, trapped in their mortgages and the financial misery caused by it. And they have been forgotten ever since.
“The Prime Minister has touted the idea of subsidising 5% deposit mortgages for first-time buyers. Alongside that, there is a moral responsibility to release money to free mortgage prisoners from their penury. I was delighted when Treasury Minister John Glen agreed in advance to review any policy proposals the LSE came up with. The independent, practical solutions in this report leave no excuse for not tackling this, though as an urgent first step, the Government must agree to do the remedial work, using critical data it has access to, to cost the solutions up fully.
“Speed is necessary now, as coronavirus has torn through people’s livelihoods. But for people whose finances and freedom have already been destroyed for more than a decade, they had already met breaking point – they are now defeated. Nobody should underestimate the detriment to people’s lives.” and wellbeing if the Treasury doesn’t act, and act soon. Intervention can and will save lives.
The report recommends that mortgage prisoners should receive better information about who owns their mortgages, the regulatory status of those owners and consumer protections available to the prisoners.
The government should also fund independent debt debt-counselling organisations to provide holistic financial advice (rather than just mortgage advice) and signpost the services of such organisations to prisoners.
It also sets out other potential measures that now need to be fully explored. The proposed measures need a proper in-depth assessment by the government using the comprehensive data about the prisoner population and their loans which is held by regulators and others.
Measures to be explored
1. Government equity loans
Some prisoners, particularly those with interest-only mortgages, do not have enough equity in their homes to meet current deposit requirements and pass mortgage stress tests, so cannot remortgage to a new lender. A government equity loan would bring Loan-to-Values down, allowing some to secure new mortgages in the open market. The equity loan could be interest-free for an initial period as with the current Help to Buy scheme.
2. Remove ‘Together loans’ as an obstacle
Barriers to remortgaging appear to be particularly high for borrowers with Northern Rock’s Together mortgage product. With this product, customers could borrow up to 95% of the value of their home on a secured basis, plus take out a fixed-sum unsecured loan of up to 30% of the value of the property, capped at £30,000. The secured and unsecured loans bore the same interest rate and tended to be for the same term (25 to 35 years). In the Terms & Conditions the two elements of the loan are contractually linked and if the borrower cuts the link – say by switching the secured element to another lender – it could trigger a sharp rise in interest on the unsecured element.
Government could take the lead in negotiating the decoupling of the two loan elements or provide an equity loan to repay the unsecured element of Together loans.
3. Partial loan write-offs by investors plus government equity loans
Refinancing is impossible for prisoners who are in arrears and/or negative equity. A combination of a partial loan write-off by investors (possibly with government incentives) followed by a government equity loan could reduce payments significantly and also allow some borrowers to remortgage with an active lender.
4. Mortgage rescue
Prisoners for whom mortgages are financially unsustainable could be enabled to remain in their homes as tenants, with the homes sold to housing associations. They could have the option to buy their homes back in future as their circumstances allowed.
5. Bringing all owners of closed books within the FCA’s regulatory perimeter
Currently there is no requirement for the owners of ‘closed book’ loans to be authorised to lend and most of these firms are not directly regulated by the Financial Conduct Authority (FCA). Changing this would enable the FCA to exercise greater oversight over those closed-book owners whose practices are seen as most detrimental to consumers and would reassure prisoners that their concerns are taken seriously.
6. Cap very high Standard Variable Rates (SVRs) on closed book loans
Current closed-book SVRs are higher than the best rates for new loans and many commentators therefore advocate a cap. This is a simple and superficially attractive solution. However, the relevant comparator is not the best rate for new loans but SVRs for higher-risk loans in the wider market--and here the difference is small. Capping SVRs at a level close to the best rate for new loans could create harm in other parts of the market, and we do not recommend it. Capping at a high level would protect prisoners from paying SVRs significantly above market rates, but the evidence suggests that relatively few prisoners are in this situation. The role of SVR caps is thus likely to be limited.