Each month we summarise the latest news and developments in retail mortgage lending and regulation.
This month in summary:
Focus on Scotland
Focus on Northern Ireland
According to Financial Times’ sources, there are now active discussions between the Treasury and the FCA following queries raised as to whether a joined up policy would be worthwhile if the Post Office network is important to banking.
This has led to lenders asking for guarantees from the Treasury that they will not have to subsidise Post Office branches. The Post Office on the other hand supports the idea and has made a request to the regulators for a 'more regulated service'.
Whilst banks are questioning the viability of subsidising the Post Office branch network, Richard Piggin, Head of External Affairs at Which?, commented “the Post Office network is not a substitute for lost branches or ATMs, and a sustainable, long-term solution to the access to cash crisis is desperately needed”.
New rules for the Post Office’s role in the banking industry are still at the very early stages and will depend on the result of the next election.
The complaints about regulated firms reported to the FCA has increased by 380,000 from the second half of 2018 to 4.29 million in the first half of 2019.
Half of the total complaints received relate to PPI. The final push for complaints to be received before the August 2019 cut off increased PPI complaints by 34%. PPI complaints took longer than average to resolve compared to previous periods, but fewer were upheld in 2019 compared to previous years. The volume of PPI complaints is expected to start its decline, although this will probably not be reflected in the statistics until the second half of 2020.
The overall number of non-PPI complaints fell by 6% and is the lowest volume of complaints since the reporting rules began in 2016 (and when the reporting of same or next day resolutions became a requirement). Aside from PPI, the most complained about products remain current accounts, credit cards and motor and transport insurance and the average redress for these complaints rose in the first half of 2019 from £175 to £200.
Over 3,000 firms submit complaints data to the FCA. The FCA records the number of open, closed and upheld complaints, the amount of redress, the product and reason for complaint.
Thousands of leaseholders in England are have been left unable to sell or remortgage their homes due to buyers’ and lenders’ safety fears over flammable cladding.
In December 2018, eighteen months after 72 people lost their lives in the Grenfell Tower fire, the government banned flammable cladding and insulation on new flats more than eighteen metres high. In July this year, the government ordered that high-pressure laminate cladding be removed from high-rise homes. The cost of the removal is not being borne by the government, with the exception of buildings containing the same cladding used on Grenfell Tower.
The result is that a number of leaseholders are being faced with huge bills to remove flammable cladding which has rendered their homes worthless. A number of lenders have tightened up their lending criteria and will only provide mortgages on high rise flats if a nine-metre model of its combustible wall system has passed a fire test.
Last month Fiona Haggett, the head of valuations at Barclays Mortgages, announced that she has been working with RICs and other stakeholders to produce a document which aims to simplify the problem of external cladding. The creation of a single page document aims to consolidate a process which often requires the collation of numerous documents.
Lenders, RICS and stakeholders will need to work together on this issue to ensure movement continues in the property market.
The FCA has announced new rules which will allow lenders to conduct a more proportionate affordability assessment for consumers who meet certain criteria, such as being up-to-date with payments under their existing mortgage and not looking to move house, or borrow more (except to finance certain fees).
In Consultation Paper 19/14 the FCA set out its concern that some consumers could not switch to a more affordable mortgage product despite being up-to-date with their mortgage payments. This included those who couldn't switch because of changes to lending practices during and after the 2008 financial crisis and subsequent regulation that tightened lending standards. In Policy Statement 19/27, the FCA provided its feedback on the consultation and final rules and guidance.
The FCA is largely implementing the changes as consulted on, with the following specific amendments:
New rules allow consumers to finance an intermediary fees and product/arrangements fees.
'More affordable' mortgage test
The FCA has simplified the definition of a 'more affordable' mortgage to one where:
Inactive lenders and administrators of unregulated entities have until 1 May 2020 to put in place a customer communication strategy to notify customers, by 1 September 2020, that the new rules may mean they can switch to a new lender.
Back in October 2018 it became a criminal offence for a landlord to operate a house in multiple occupancy (HMO) without a license. Penalties include prosecution brought by local councils, with potentially unlimited fines, and repeat offenders may be subject to banning orders and risk being placed on the rogue landlord database. The purpose of these new licensing requirements is to improve minimum living and safety standards.
With local councils determining HMO's, this can create problems where a broker/lender does not consider a property to be one. Landlords may be caught between the definitions and therefore unaware of the different licensing requirements and planning regulations in place for various properties. There is fear that "ambulance chasing" solicitors will now be targeting landlords and action brought.
This raises the question, what should brokers be doing to advise landlords of their duty to obtain a license? The current attitude appears to be, "we just ask them to check if they need one, and that's as far as our involvement goes." It is a regulation that is dealt with directly by the council so there is no need for a third party.
However, there is a role for broker's advising landlords when buying, selling or converting properties categorised as HMO's. It is estimated that 177,000 new properties will require mandatory licensing and due to requirements for fully protected and comprehensive HMO insurance policies, there is a market for brokers to approach, advise and navigate new processes to ensure landlords are compliant. Additionally, helping to seek the funding necessary for large renovations in short timeframes opens the door to investment opportunities.
2019 has shown a rise in property repossessions, though it is unclear whether these figures are attributable to an actual rise in enforcement or simply reflective of a backlog of historic cases.
Data issued by UK Finance has revealed that in the third quarter of 2019, 1330 mortgaged properties were taken into possession. This is 19% higher than the same quarter in 2018.
An additional 800 buy to let properties were taken into possession in that same quarter demonstrating an annual rise of 40%.
These figures show a significant increase but UK Finance believe that the increase is attributable to lenders working through backlogs of cases. They are keen to point out that the overall figures are still below the levels experienced between 2009 and 2014.
Indeed, homeowner mortgages in arears remain at historically low levels with just 0.79% of all residential mortgages in arrears of over 2.5% (9% less than 2018). Of those in arrears, around 32% of the homeowners are in arears of 10% of the outstanding balance (again, this is 8% less than the same period in 2018).
Whilst arrears figures are still low, maintaining these levels is debatable in the future economic uncertainty. Mark Pilling, managing director of Spicerhaart Corporate Sales summarises the positon as follows: "the mortgage possessions figures are concerning… UK Finance are right to point out that this stems in part from historic cases but is nonetheless a significant jump".
The first reading of the Goods Mortgages Bill [HL] 2019-20 has taken place in the House of Lords. The Bill looks to repeal the Bill of Sale Acts 1878 and 1882 and make provision for a new form of non-possessory security that may be created over goods owned by individuals, and which will provide more flexibility in the way in which debts are secured.
Current Bills of Sale are often used to secure amounts between £100 and £3500, for a term between three and six months and secured against a person's goods. The vast majority of Bills of Sale are taken out by borrowers who struggle to secure more mainstream credit.
Currently Bills of Sale allow goods to be repossessed on a single default, with little protection for borrowers, give no protection to purchasers who unsuspectingly buy goods subject to bills of sale, can impose burdensome formalities on lenders and can be inflexible.
A particular problem for lenders is the inability to seize the secured goods upon default without the use of a court order, even if almost all of the loan has been repaid. This is coupled with complex and costly documentation requirements for lenders, who must register Bills of Sale at the High Court. Law Commissioner Stephen Lewis has previously said "The current law doesn't provide adequate consumer protection. Businesses, lenders and consumer groups strongly agreed our reforms would make a vast improvement".
If the Bill becomes statute, a charge can be created by an individual over qualifying goods as security for the discharge of an obligation (other than excluded obligations). Qualifying goods are tangible moveable property other than excluded goods or goods that are outside England and Wales when the charge is created over them. Excluded goods include aircraft registered in the UK and ships as defined by section 313(1) of the Merchant Shipping Act 1995. A written instrument will be required to create the charge, which must contain certain prescribed information. The Law Commission's priority has been the simplification of registration as a key aim of the reform and which is expected to be welcomed by all parties. A register of goods mortgages is also to be kept by the Secretary of State.
The progress of this Bill will now depend on the outcome of Thursday’s election.
The Central Bank of Ireland is due to finalise its annual review of the mortgage rules in early December. These rules limit what banks are able to lend in relation to borrower's incomes and the size of initial deposits they require in order buy a property.
The Chief Executive of AIB said in a recent interview that the time had come for a relaxation of the mortgage lending restrictions introduced in 2015. Others have called for the limits to be loosened in order to help young couples who are struggling to build up the deposits necessary and who are getting caught in a 'rent trap'.
The Central Bank has stated it has a preference for sustainably reducing non-performing loans (NPL's) with banks not giving enough prominence to the benefits of long-term capital relief from removing old debt from their books. Ed Sibley, the Deputy Governor of the Central Bank suggested that this calls into question about how the banks truly value customer relationships. Mr Sibley stated that "On too many serious issues – such as tracker mortgages, non-performing loans, some Brexit preparedness issues – the Central Bank has had to push too many retail banks too hard over too long to actually put customers first,"
Mr Sibley, when speaking at the Banking & Payments Federation Ireland, warned that there is pressure from bank chiefs lobbying for an easing of mortgage rules and warned against any drastic relaxation of the rules at this time.
A new type of retirement interest-only mortgage was introduced last year, designed to aid older homeowners re-mortgage in order to clear home loan debts that they were burdened with post retirement. This type of mortgage allows homeowners aged over 55 to borrow on an interest only basis without a repayment plan and was thought to be an alternative option to equity release.
It was introduced to the market amidst fears that many interest-only mortgages were set to mature with no repayment plan in place.
However, This is Money has revealed that the introduction of the retirement mortgage has completely failed as only 660 have been sold since its launch in July 2018 and only 12% of retirees claiming they would even consider it.
In addition to this, over the same period in which the retirement mortgages were taken out, £1.8billion in housing wealth was unlocked via equity release, according to the Equity Release Council.
Research undertaken by the retirement specialist Saga suggests that equity release will continue to be the favourable option for older homeowners.
Why is equity release the more favourable option?
Although the retirement mortgage is the cheaper option, it must be affordable on what is called an individual 'sole survivor basis'. This criteria could potentially make this product unavailable to the borrowers that need it the most.
In contrast, equity release allows one to borrow against their home and choose not to make any payments so that interest is charged on the loan instead. Although this could see the debt rise substantially, it is a more affordable option for borrowers.
Finally, experts have also highlighted that commission bias could be pushing advisors to recommend equity release as equity release brokers are paid higher commission than mortgage brokers.
According to the Equity Release Council (ERC), during July to September 2019 the UK mortgage market saw an 8% increase in homeowners aged 55 and over releasing equity from their properties.
There has since been speculation as to the cause of the rise, which are 1) the UK population is living longer, and 2) shortfall in pensions. This subsequently has led to an increase in targeted lending for the ageing population and therefore equity release products becoming more accessible and competitive with interest rates being priced at 4% or lower.
The question that now arises is whether the products are adequately serving customer’s needs and therefore the ERC has created the updated Certificate in Equity Release (CER) ensuring advisors adequately meet customer’s needs.
The changes to the CER provides more in depth training on vulnerable customers, power of attorney and complaints training - alongside virtual learning content. It has also increased the number of topics to be covered from three to six with new content including coverage of lifetime mortgages.
The Financial Conduct Authority (FCA) is highly focused on the element of over forbearance in the financial industry. Forbearance refers to a grace period offered by lenders to customers who may be in temporary financial difficulty, to regain their stability financially before resuming payments towards their liabilities. The FCA cautions lenders not to delay enforcement where it is clear that the customer's financial circumstances are unlikely to change.
Over forbearance can lead to the accumulation of interest and legal costs to a level that is realistically impossible for the customer to reconcile their debts with the lender. Enforcement may be more beneficial than detrimental to the customer. It may lead to the preservation of whatever equity may still be in the property and put an end to the increasing debt against the customer.
However, the greater challenge remains for the lender to find a balance between giving the customer enough time to regain financial stability and not allowing them too much time which may be detrimental in the long run. Unfortunately for the lender, there isn't one perfect formula that could help them find or maintain this balance. Nonetheless, it is reasonable to say that every case should be handled individually, only allowing more time to customers where it is evident that their financial position is likely to improve.
UK fintech challenger, Proportunity, is offering an alternative to the Government's help to buy scheme. The Government's scheme currently provides buyers a shared equity loan of up to 20% of the property value, secured as a second charge. The Government's scheme is available only on new build properties and only on properties with a value below £600,000. The Government's scheme is due to end in 2023.
Proportunity offers home buyers a 15% shared equity loan and removes the need for the property to be a new build. New builds are often sold at a premium and this can mean that Proportuntiy could help buyers target more affordable properties. In addition, Proportunity's artificial intelligence driven platform can help its customers locate properties in up and coming areas. This may also help the customers target properties which are better value for money.
To help expand and improve its platform Proportunity has recently raised £2 million in seed investment.
Currently Proportunity only sells the product through FCA authorised financial advisors
The Royal Institution of Chartered Surveyors (RICS) publishes a quarterly UK Commercial Property Market Survey with input from professionals reflecting on the performance of the market. In the report for the third quarter of 2019, 62% of respondents sensed that the market is in the downturn phase of the property cycle.
Tenant demand reportedly continued to fall at the headline level, with the net balance falling to -19%. The significance of this is that 19% more respondents said that investment enquiries fell than said they rose. Demand for office space slightly fell but the retail sector continues to be the major driver in this figure, with a significant net balance of -60%. To the contrary, demand for industrial space continued to rise with a net balance of +9%. However, this is still a decrease from +20% in the previous quarter.
A net +28% of respondents are predicting an increase in prime office rents. Positive growth is also predicted for the industrial sector. However, rents are predicted to fall further in the retail sector with expectations even weaker than the previous quarter.
As for capital value expectations, slow growth is predicted for the industrial sector for the coming year. Prime office values have also seen a modest rise. In the retail sector, projections continue to show a sharp decline over the next 12 months.
11 surveyors commented specifically on the state of the Scottish market. 10 of these surveyors cited political uncertainty (such as Brexit or a potential second independence referendum) as currently having the greatest impact on the market.
Mortgage possession action in Northern Ireland has reached a record high since 2014 according to recent statistics published by the Department of Justice.
During July to September 2019, 490 mortgage cases were received in the Chancery Division of the High Court in Northern Ireland. This is a 127% increase compared to the 216 cases received during the same period in previous year. This represents the highest volume of cases received during this period since 2014 when the number of cases received totalled 724.
Furthermore, there were 209 final Orders made by the Court between July and September 2019 representing the highest volume so far this year. This is a 179% increase compared to the same period in the previous year when the total number of final Orders was 75. This also the highest number of final Orders during this period since 2014 when the total was 450.
It is interesting to note that out of these 209 final Orders, 68% were Possession Orders, 19% were Suspended Possession Orders with the remainder 13% of the actions being struck out or dismissed.
Overall, it appears that 2019 has been a very busy year for mortgage possession action in Northern Ireland with the total numbers of cases received by the Court so far reaching 1,461. This is an increase compared to the total 946 cases received by the Court in 2018 and is the highest total volume of cases since 2014. This is also reflective of the number of final Orders made by the Court to date in 2019 which totals 509 compared to the overall total in 2018 being 458.
The final statistics for 2019 will be published on the 14 February 2020 for the period between October - December. This will then establish the overall increase on mortgage possession action.
The latest NI Residential Property Price Index, has released the third quarter figures which show that house prices in Northern Ireland rose at an annual rate of 4% in the third quarter of 2019, up 2.3% compared to the previous quarter.
This is in contrast to the trend across the wider UK market which has experienced less than 1% growth in the past year and is said to have nearly "ground to a halt".
The report identifies that the average price of a house in Northern Ireland is now just under £140,000 which brings prices back to a level last seen in 2009.
The report is evidence that the housing market in Northern Ireland is stable and affordable and reflects the resilience of the Northern Ireland property market, particularly in light of the current Brexit uncertainty.