‘Onus and ethical responsibility on government’ to rescue mortgage prisoners
The authors emphasised that a succession of governments contributed to creating the problem and that prioritising profit over consumer protection when selling off loan books had led to significant harm.
“There is an ethical case therefore that government should bear proportionate responsibility for resolving the situation, especially given that UK Asset Resolution (UKAR) has now repaid its government loans in full,” they wrote.
The report also revealed the significant mental and physical toll on the borrowers in their precarious state and warned the proposed measures would likely be necessary to help when more people hardest hit by the coronavirus pandemic were dragged into similar situations.
The solutions are: government provided equity loans, partial loan write-offs, mortgage rescue, bringing lenders under the FCA oversight, capping very high standard variable rates on closed books, provide better information, and fund and signpost debt counselling and advice.
The authors estimate the upfront cost of the equity loan just for one portfolio of loans would be around £800m, however the government would likely recoup much if not all of this initial outlay.
So far HM Treasury has refused to act on pleas from the mortgage prisoners themselves and the All Party Parliamentary Group on Mortgage Prisoners to ease the burden and tackle the situation.
It has even ignored calls from the Financial Conduct Authority (FCA) to widen the regulator’s oversight to include the closed book and inactive lenders which hold the loans.
And seven years ago, then-economic secretary to the Treasury Sajid Javid torpedoed proposed regulation that could have saved trapped borrowers thousands of pounds each along with the resulting years of distress.
Current economic secretary to the Treasury John Glen has agreed to review the findings, but he has been one of the key protagonists in recent years to ignore the mortgage prisoners calls for help despite several meetings.
Government must act ‘at speed’
The report authors noted the solutions used so far “have had limited impact”, adding the FCA had largely extended itself as far as it could without greater powers and that its changes only helped a small minority of the mortgage prisoners.
“There is no immediately obvious silver bullet that could solve this longstanding problem,” they said.
“The next steps, which need to be taken at speed, are for government to calculate the benefits and costs of remediating the situation more accurately — and then to take action.
“Any new solutions devised to address the mortgage-prisoner problem will almost certainly have wider applicability in coming months and years, as the economic damage caused by coronavirus affects more borrowers and puts them in similar positions,” they added.
Prisoners ‘not to blame’
The borrowers themselves were not to blame, the report said.
They took out widely available mortgages with features such as high loan to values (LTVs) and interest-only with no repayment vehicle that were seen at the time as positive innovations enabling wider home ownership, it noted.
“No one who borrowed in 2005 with Northern Rock or Bradford & Bingley, both household names, could have been expected to foresee what happened to those lenders a few years later,” it added.
As banks collapsed as a result of the financial crisis in 2008 the UK government took over ownership of thousands of loans.
In 2010 the newly elected Conservative-led coalition then created UKAR and transferred the loans to it to manage and sell off.
The report noted that “UKAR’s primary focus was on financial return to the government, rather than impact on customers”.
The scale of the impact on health and wellbeing of the mortgage prisoners over the last ten years was another key finding from the report.
Many prisoners said their situation affected their physical and mental health and undermined their general wellbeing, which has costs for them, their families, the NHS and the wider economy.
They were also more likely than the average borrower to have general debt problems or be in arrears.
And the economic impact of the pandemic has deepened the crisis with LSE’s modelling showing under the Brexit planning scenario that some borrowers could be almost 40 per cent more likely to default on mortgage payments.
However, while three of the country’s biggest lenders have offered products using the FCA’s relaxed rules, lenders across the market are becoming more risk-averse in the pandemic.
Eight suggested remedies
The authors said there was a strong case for a wider variety of solutions, with the choice depending on the policy goal.
While this is typically to reduce mortgage payments, they argued in this situation the overall goal should be reducing harm by preventing defaults, keeping people in their homes and mitigating overall debt problems including other types of debt.
They added lessons could be learned from countries that have seen millions of borrowers affected by mortgage debt difficulties and explained while some could help all mortgage prisoners; others would benefit specific groups.
The report was funded by MoneySavingExpert and written by five authors: Kath Scanlon, distinguished policy fellow and deputy director of LSE London; Bob Pannell, economic adviser to the Intermediary Mortgage Lenders Association (IMLA); Peter Williams, departmental fellow at the department of land economy at the University of Cambridge; Andrew Longbottom a consultant on risk and economic issues; and Prof Christine Whitehead, professor emeritus in housing economics at the LSE.
‘Fair and ethical solution’
Rachel Neale, lead campaigner from the UK Mortgage Prisoners group, thanked MoneySavingExpert founder Martin Lewis for funding the research and the researchers at LSE.
She said it was “abundantly clear that borrowers were not to blame” and that “responsibility lies largely with successive governments”.
“The financial and emotional harm sustained for over a decade has been devastating for mortgage prisoners,” she said.
“These consequences are well known by the government; therefore it is now time to find a fair and ethical solution for all mortgage prisoners.”
Martin Lewis added that mortgage prisoners were 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,” he said.
“The prime minister has touted the idea of subsidising five per cent deposit mortgages for first-time buyers. Alongside that, there is a moral responsibility to release money to free mortgage prisoners from their penury.
“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,” he added.