Mark Davies (pictured) is managing director of Link Mortgage Services
It seems the FCA want to encourage innovation, such as the evolution of tech-led, execution-only propositions. Like it or not, one size fits all will not help mortgage prisoners.
Mortgage prisoners are a very topical subject – but a vexing one too. The government recently acknowledged that the proposed changes to the Financial Conduct Authority’s responsible lending rules will not help all ‘mortgage prisoners’.
The regulator’s letter to the Chair of the Treasury Select Committee, Nicky Morgan MP, stated that its changes to mortgage lending rules would include modifications to current affordability rules. But, in the letter, it also conceded that the removing regulatory barriers would not help all mortgage prisoners, as the decision to offer remortgage opportunities would remain a commercial one.
This will ultimately come down to a commercial decision for individual lenders based on their risk appetite and the individual circumstances of the customers looking to switch to a cheaper deal. It highlights why debt, although often talked about as a consumer product, does not in reality behave like one. It is an undertaking and not something you can just hand back or walk away from if it isn’t working out for you.
But with lending comes responsibility and when problems arise there is a duty of care to try and help. Debt is a liability and obviously as such is not desirable to all lenders at any one point in time in equal measure. We should not presupposes that all lenders are lending with the same agenda. This is clearly not the case.
Investment banks are not operating with the same motives as building societies or, for that matter, insurance companies. The need for returns, over a year as opposed to 25 years drives very different organizational behaviour.
Investment bank or new lender investor backed participation in the mortgage market is crucial as they innovate and engage with often less attractive borrowers – many of whom achieve home ownership that is impossible through conventional process driven, rules driven, increasingly automated, high-street lending routes. Their presence expands supply and opportunity to many who might otherwise miss out completely. But it will never work out for everyone – the task is what can we do when it does go wrong?
It’s estimated that there are as many as 120,000 mortgage prisoners still trapped on a higher interest rate with unauthorised firms and 20,000 mortgage prisoners are stuck with inactive lenders. But unless the affordability rules are imposed on lenders (which would see an innovative take on the notion of responsible lending and capital adequacy and risk weighting) then not much is likely to change.
Some mortgage prisoners will have circumstances that do not appeal to the risk appetite of many lenders, including if they have arrears or other considerable debts, have a very high loan-to-value mortgage or have mortgages in negative equity. In an environment of rising rates the appeal of a mortgage prisoner may not be attractive to a new lender at any price.
It’s clear that this problem needs more than a ‘one size fits all’ response. Borrowers’ circumstances, their lenders commercial objectives and the impact of external economic factors upon them both vary greatly.
We need a more forensic approach that enables us to put the individual customer at the centre of the rehabilitation process but delivers an acceptable outcome for all concerned.