Welcome to TLT's busy lenders' monthly round-up. Each month we summarise the latest news and developments in mortgage litigation and regulation.
A 1% rise in interest rates could equal an 11% increase in monthly mortgage costs for repayment mortgages and a 25% increase for interest only mortgages, according to Aviva.
Property owners in London would see the largest costs increase with average annual payments increasing from £12,700 to £15,900.
Last month, the Bank of England (BoE) held interest rates at the record low 0.5% for the 85th consecutive month. Whilst the Chancellor has warned that a potential Brexit could force an increase in interest rates (owing to a falling pound, increasingly expensive imports and the resulting inflationary spiral), commentators have suggested that the BoE would intervene to control the impact of Brexit, rather than abandoning the economy to unpredictable consequences.
With a large proportion of the market unfamiliar with rising rates, increasing complacency around mortgage costs, and uncertainly around the impact of the Brexit vote, the Building Society Association (BSA) speculate that some 52% of their borrowers would face financial difficulties if rates increased.
Whilst the BSA's figures are based on a sequence of 'what ifs' and must represent a worst case scenario, post-recession, first time buyers will inevitably be shocked if rates increase, testing lenders' forbearance.
Despite the 17,000 plus mortgage products currently on offer, brokers consider that the market does not cater sufficiently for changing regulations, taxation and borrower demographics. Four key areas are:
There are now 4.63 million self-employed people in the UK who struggle to satisfying lending criteria.
Some brokers have complained that underwriting processes are too inflexible to accommodate self-employed borrowers, especially those who have been in business for shorter periods. They have therefore called for increased underwriter discretion..
Given the criticisms aimed at self-certified mortgages, and similar products post-recession, it seems unlikely that lenders will have the appetite to return to pre-2008 underwriting practices let alone regulation of such practice.
Given the UK's aging population, the financial services sector has increased its attention towards older borrowers over the last six months. The FCA's goal is to diversify the options available to older borrowers.
Lenders such as Halifax, Hodge Lifetime, Scottish Widows and Nationwide have all recently announced similar increases in age limits.
Multi-generational lending represents a potential solution; joint borrowing made available to multiple people of different ages, living together. This represents an opportunity to keep families together and take advantage of each household member's income.
Affordability caps have not increased significantly across the market as a whole since the economic crisis.
Whilst the government's Help to Buy scheme has improved the position, brokers have called for more lender buy-in to assist borrowers who fit affordability profiles but do not have the required equity, especially in the interest only market.
Buy to let
The buy to let market is growing rapidly but brokers do not consider the sector is keeping up, especially when it comes to niche lending for student accommodation and houses in multiple occupation.
Brokers have called for greater flexibility around sub-letting, off-set mortgages and genuine refurbishment products, to ensure that the sector continues to grow. They would also welcome more innovative calculations around income/debt ratios which take entire portfolios into account.
A surprising report from Equifax Touchstone confirmed that buy to let mortgage sales fell by £1.04 billion in March, representing a decrease of 26.2% month-on-month, despite the expected rush ahead of stamp duty rate increases (which took effect on 1 April 2016).
Residential sales were up 1.4% to £12.95 billion in February, the highest monthly sales figures since the economic crisis. Together, residential and buy to let sales for the intermediated market declined by 5.1% per cent (-£855.7 million) on the previous month.
Meanwhile, Scotland saw an increase of over 8% in its mortgage sales in March, while sales in Northern Ireland fell by nearly 20%, the highest decline. The second highest decline for sales occurred in London which saw a drop of almost 10%.
The data from Equifax, which covers 92% of the intermediated lending market, also showed the average value of a residential mortgage in March was £190,091 (up from £179,187 in 2015) and £157,819 for buy to let, up from £151,753 a year ago.
It appears borrowers initiated transactions in good time to avoid a last-minute panic in March. It will be interesting to see how the market responds to the increased stamp duty rates and whether investors will be discouraged from entering into new deals, a view shared by Iain Hill of Equifax.
The Grosvenor Group, the Duke of Westminster's property group, predicts that the UK property market may decline sharply as a result of global economic issues, following a 22% fall in its annual pre-tax profits.
Commercial property transactions fell by 40% in the first quarter of 2016 (and by as much as 60% in London).
Grosvenor cites the Bank of England's report that foreign investment in UK commercial property had slowed due to uncertainty surrounding Britain's future in Europe, in support of its prediction.
Coupled with this, Grosvenor considers increased stamp duty and affordability levels for foreign buyers have impacted on overseas property investment.
Grosvenor has recently invested in residential developments in Mayfair, Belgravia, Bermondsey, Cambridge and Edinburgh, evidencing a shift away from what may prove to be a declining commercial property sector. However, the investments show continued confidence in the UK housing market.
The Bank of England (BoE) Governor Mark Carney has given his views to Parliament on Brexit and the outlook for the economy. The BoE will not make an overall assessment of the economics of the UK’s membership of the EU, but says that a vote to leave might result in a period of uncertainty about the economic outlook, including the prospects for export growth. The BoE core objective is to maintain monetary and financial stability including, if necessary, implementing contingency plans.
The BoE made some key points:
In July 2015 the Financial Conduct Authority (FCA) issued their policy statement PS15/19 – Improving complaint handling, feedback on CP14/30 and final rules. Final changes are effective from 30 June.
Currently, complaints resolved by close of business on the day following receipt can be handled less formally. The respondent can send a ‘summary resolution communication’ (SRC), which is a much more generic template message, the following day. Many lenders have not made use of this because systems, procedures, and sheer volumes can dictate timescales.
This ‘next business day’ rule will therefore be extended to three business days which the FCA thinks strikes the right balance between allowing firms longer to handle a complaint and ensuring a prompt response.
Where complaints are resolved under the ‘three day rule’ the SRC will acknowledge the complaint and that the respondent considers it resolved. It will also give the customer information about what to do if they decide they are not satisfied and details for the Financial Ombudsman Service (FOS). Details of FOS leaflet ‘Your complaint and the ombudsman’ will also be given.
If you would like more information on these changes, please get in touch with Julian Wintle.
Tesco Bank, originally a joint venture with RBS, is now one of the UK's largest financial institutions.
It recently announced that it will be offering mortgage loans through independent mortgage brokers London & Country for the first time.
The initial pool of brokers who will be able to offer Tesco Bank mortgage products will be known as Tesco Mortgage Intermediaries, although plans are afoot to improve availability to other groups through Legal & General shortly.
Following the Mortgage Market Review regulations (which came into force in 2014), the mortgage broker market has seen consistent growth. This is to the extent that more than 75% of mortgages in the UK are now obtained through brokers, rather than directly through lenders.
With no speculation as to why, HSBC (having entered the mortgage broking sector in 2014) has also recently struck a deal with three intermediaries in an effort to expand its market stake, whilst TSB moved into the mortgage broker market for the first time in January 2015.
Tesco Bank is clearly positioning itself as a genuine challenger bank in the face of increasing competition within the UK mortgage market.
The first quarter of 2016 has proved to be a record start for the equity release sector with the highest Q1 on record and up 21% from last year.
Homeowners over the age of 55 unlocked a record amount of housing wealth via drawdown lifetime mortgages, a total of £393.9 million over the first three months of the year. Over the course of the first quarter, 5,175 new equity release plans were taken out - an increase of 6% from 4,880 in Q1 2015. This was also the first time the number of new plans topped the 5,000 mark in a Q1 since 2009.
The Equity Release Council confirmed the results, which show the strongest rate of growth since the economic crisis, just as it prepares to celebrate the 25th anniversary of the first industry standards for equity release, developed in 1991. More than 22,500 deals were agreed in 2015, the highest number since 2008. The market has doubled in size since 2011, and exceeds its pre-recession peak (£1.21 billion in 2007) by 33%.
The booming market demonstrates a growing reliance on housing wealth as a key pillar of later-life financial planning, helping customers meet a range of financial needs before, during and after retirement.
The recent decision by the FCA to reduce affordability assessments for lifetime mortgages and the growing housing market are indicators that the market will continue to build in 2016. The challenge for the industry and regulators is to ensure product innovation is combined with consumer protection and long-term sustainability.
The Court of Appeal has limited the duty of care a bank will owe to their customers following the case of Delaney v AIB .
Mr Delaney (Mr D) tried to claim that the bank owed him a duty of care to provide guidance on a commercial transaction. He had lent money to a Mr Killaly (Mr K). Both men were customers of the defendant bank, AIB.
Mr D argued that as AIB had financial information about Mr K (and knew of the loan Mr D was making) it should have provided advice to Mr D not to lend the money and to let him know Mr K's financial position.
The High Court had rejected the claim, deciding that the duty to advise customers on the financial position of another customer would be a step too far, and because such a duty of care could not be "fairly and reasonably imposed upon a bank". It would be difficult for this type of duty to work effectively, particularly where a customer could be in overdraft with one bank and in credit at another bank.
The High Court relied upon the overriding duty of confidentiality a bank has to its customers and so could not see how AIB could become involved with warning or advising customers on another customer's financial position. The Court of Appeal agreed and dismissed the claim.
New housing initiatives to offer improved security of tenure for tenants, bring stability in the private rented sector and create a modern tenancy in Scotland will be implemented through the Private Housing (Tenancies) (Scotland) Act.
The Act will replace the current system of private tenancies in Scotland, replacing the existing short assured tenancy and assured tenancy with a single new tenancy, called the private residential tenancy (PRT). As part of the strategy, lenders are to work with the newly elected government to prioritise the housing reforms. Under a PRT, the landlord and tenant will be bound for an initial period of at least six months unless the parties agree to a shorter period. The new Act will also limit rent increases to once a year, allow tenants to terminate their tenancy with just 28 days' notice in circumstances where no notice period has been agreed and permit the government to impose a blanket cap on excessive rents in rent Pressure Zones.
In addition to the reforms, landlords acquiring new properties must pay higher rates of Land and Building Transaction Tax. These changes may act as a deterrent for individuals considering entering the rental market as an investment opportunity.Lenders will however be pleased to know that the Act will not materially impact a lender's ability to recover possession when a customer is in arrears on mortgage payments.
There are discussions in the pipeline for lenders to finance more social and affordable housing in Scotland. The impact of these reforms in practice remains to be seen however lenders may wish to consider whether the rent control measures adopted in the new Act propose any additional credit risks to them and if any further steps will be required, such as lending policy revision.
At the end of March the government produced a consultation document detailing plans to privatise the Land Registry. This is not a new topic, as a previous attempt by the coalition government to privatise the Land Registry in 2014 was shelved due to overwhelming criticism of the plans.
The Land Registry is a self-supporting executive agency, meaning that it funds itself purely from the fee income it generates from the services it provides. In fact, due to the buoyancy of the housing market in the year of 2014/2015, the Land Registry had a £36.6 million fee surplus.
Nevertheless, the government believes there is no compelling reason for keeping the organisation in public hands. It argues that a sale will result in a capital receipt which can be used to reduce the national debt and, furthermore, free the Land Registry from its statutory framework, allowing it to become more efficient and offer new services.
The government’s preferred form of privatisation is for the core functions, staff and tangible assets to be transferred to private ownership. The ownership of the registers of title would remain with the government, who would retain a small staff to ensure that the private company meets its objectives. The government would also set the fees for registration services and would have the ability to intervene and take services back under state control if the private company failed to deliver.
Once again there has been severe criticism to the plans. The Labour Shadow Business Secretary commented that short term privatisation will have long term consequences and could jeopardise the service to homebuyers. Similarly, the Homeowners Alliance said it would drive up the cost of buying and selling homes and make an already messy process even more fraught.
Any difficulties or delays caused in the conveyancing process by the privatisation of the Land Registry will be of interest to lenders, as it will affect how quickly a lender can realise its security.
The consultation period will end on 26 May. After that, the government anticipates being able to publish the results within three months. We will provide further updates on this topic in due course.
In the December edition to this newsletter we reported the government’s plans to increase court fees for possession claims by £75. The fee increases were delayed whilst the matter was considered by the Justice Committee as part of a wider enquiry on court fees.
Whilst the Justice Committee has not yet reported on the wider issues, the government has, nevertheless, decided to press ahead with increasing fees for possession claims.
The fees are now:
Given the legislation is in place, and these new fees have been in effect for some weeks, it is unlikely the Justice Committee’s report will now have any bearing on possession claims.
However, the Committee is still examining the government’s proposal to raise the cap on fees for money claims from £10,000 to £20,000. If the cap is raised this will mean a higher initial cost for lenders attempting to recover unsecured debts from their customers.
In the February edition of this newsletter we reported on growing support to consolidate a number of existing trade bodies into a new organisation. This restructuring was driven by a review commissioned by nine of the UK’s largest banks in March last year.
The trade bodies who initially expressed interest in being included in the proposed merger were the Council of Mortgage Lenders (CML), The British Bankers’ Association, Payments UK, the UK Cards Association, the Asset Based Finance Association, the Intermediary Mortgage Lenders Association and Fraud Action UK.
The Intermediary Mortgage Lenders Association has since withdrawn from the proposed merger.
On 7 April 2016, the CML confirmed that their members had voted in favour of the new trade body by a 75% majority. CML has, however, commented that its decision to join the new trade body is subject to approval of the operational aspects of the new organisation.
The other trade bodies have yet to confirm whether they agree in principle to the merger. We will report further once further news becomes available.
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at May 2016. Specific advice should be sought for specific cases. For more information see our terms & conditions.
This round-up is produced by lawyers from our offices across all jurisdictions. This month's contributors are: Graham Walters, Paul Heeley, Duncan Martin, Sam Storey, Ben Hanham, Katie Hill, Catherine Zakarias-Welch, Sarah Ainslie, Amy Difford, Victoria Ryves and Fiona Wan.