The row about mortgage prisoners escalated with the publication of the FCA’s Responsible Lending Review of the MMR, drawing an intervention from George Osborne himself. Prompted by a meeting with consumer champion Martin Lewis, the chancellor wrote to lenders applauding them for adapting to the new rules, which are based on a reasonable expectation of borrowers’ ability to repay. But he also reminded them that borrowers should not be denied access to the financial services they need and can afford.
Pointing out that many borrowers have looked to switch products to take advantage of lower-cost deals, the chancellor wrote: “To facilitate this, the FCA allows lenders to waive affordability assessment requirements where an existing customer wants to make a change to their mortgage and is not taking on additional debt. It is vital that consumers who want to access a cheaper deal are able to do so.”
However, critics, including Mr Lewis and the Association of Mortgage Intermediaries (Ami) argue that the letter did not go far enough.
Unintended consequences
The FCA’s review was designed to assess how responsible lending rules affected firms, consumer outcomes and competition in the market. It also considered any unintended consequences, and found no evidence that the rules have prevented creditworthy customers from obtaining affordable loans.
While most lenders use the flexibility available to deal with existing customers, some could be “more proactive and consistent in using exceptions to the responsible lending requirements for existing customers”. The review also found that, on the whole, the rules have not prevented firms from lending responsibly across specific groups such as older borrowers and the self-employed. Ultimately, it concluded, the new rules do not appear to have had a material impact on lending volumes.
However, the row continues. The FCA found that none of the lenders involved in the review took on existing borrowers from other lenders who might need to have their application of the affordability assessment adjusted due to the new rules. Their ability to do that disappeared in March 2016 with the implementation of the Mortgage Credit Directive. While some suggested that alternative transitional arrangements for mortgage prisoners wanting to move should be put in place to make affordability assessments less onerous, the FCA disagreed. On the basis that “evidencing a customer’s income is critical to understanding whether the mortgage is affordable”, it would not change this requirement.
In response, Robert Sinclair, chief executive of Ami, suggested that perhaps there should be some discussion around what constitutes an affordability assessment. Mr Sinclair welcomed the finding that the mortgage market is now lending responsibly, with no issues around mortgage prisoners, but argued that this appeared “at odds with the broker experience and that of Martin Lewis”. He said there remain “underserved groups” in the areas of interest-only lending into retirement, and with the self-employed, contract workers, foreign currency earners and ex-pats.
In April, the Intermediary Mortgage Lenders Association (Imla) conducted a survey among brokers to see how difficult it had been to find mortgage deals for these types of borrowers. While Imla put a positive spin on things, the Table below shows the problem was quite severe in February 2015 and still has some way to go before these borrowers are as well served as the rest of the market.
Table 1: % of brokers unable to source a mortgage for borrowers
| Feb 2015 | July 2015 | Feb 2016 | |
| Type of borrower | % | % | % |
| Standard status | 23 | 25 | 22 |
| Near prime | 26 | 22 | 21 |
| Adverse credit | 54 | 49 | 46 |
| Self-employed/irregular incomes | 46 | 47 | 40 |
| Lending into retirement | 50 | 51 | 43 |
| Interest only | 54 | 51 | 39 |
| First-time buyers | 21 | 20 | 21 |
| First-time buyers | n/a | 22 | 22 |
| No problem in the last six months | 16 | 15 | 26 |
| Source: Imla survey, 27 April 2016. | |||
Evidence
Mr Sinclair admits there is little statistical evidence of the existence of mortgage prisoners. The only tangible evidence is the number of cases on this issue that have been brought before the Financial Ombudsman Service. Otherwise, the evidence is largely anecdotal, which makes it difficult to quantify
The FCA has said it was not in its remit to dictate to lenders. Mr Sinclair was not impressed with such a response, and pointed to principles which lenders are meant to adhere to, such as treating customers fairly and acting with integrity. The policy of encouraging lenders to cater properly for mortgage prisoners appears to be failing: even when there were provisions in place to enable them to move, they appear to have been rarely used.
So what will be the consequence if mortgage prisoners’ plight continues to be ignored? Mr Sinclair says, while these borrowers may not feel disenfranchised at present, things are likely to crystallise when interest rates rise. Then, when they suddenly find themselves unable to move from their existing lender, their mortgage costs will increasingly impact on their ability to meet other commitments.
Perhaps the FCA – and the government – are afraid that if they had to investigate lenders’ treatment of mortgage prisoners thoroughly, they might have to admit that the MMR had not been such a success after all. A great deal of consultation and legislative effort has been invested in changing the mortgage regime, but potentially the outcome is a lot of dissatisfied, poorly served customers.
