Lime Legal

Hidden truth

Published 12 May 2023

Far more homeowners are struggling to stave off repossession than lenders admit. Tony Marshall reports

The number of repossessions at county courts in England is far greater than official figures published by the British Bankers' Association (CML).

ROOF has discovered that the CML underestimates the level of repossession orders and ‘forced sales’ – after bailiffs have arrived to evict homeowners and change the locks – by up to 20 per cent.

The CML says that there were 27,100 repossessions last year. Our data shows that the true figure was likely to have been at least 5,000 higher than this – that the accurate number of repossessions was more than 32,000. If this trend continues, it suggests that the country is heading for a far worse housing crisis than even the most pessimistic forecasts.

Our figures also contradict upbeat government reports that the situation cannot be compared with the early 1990s, when repossessions hit their peak. John McFall, chair of the Commons Treasury sub-committee, told Radio 4’s Today programme that repossessions were only a fraction of the numbers during the previous crisis. The figure for last year was only 27,000, he said, whereas it had exceeded 200,000 in the 1990s. The Prime Minister repeated these figures when he also spoke to the BBC.

Heading for disaster?

In fact, at the start of the previous crisis, in 1989, the number of repossessions was only 15,800. It was 43,900 in 1990, and reached 75,000 in 1991 before starting its decline. The CML is predicting that the number will rise to 45,000 this year. But, the true amount is likely to be more than 54,000, close to the 1993 figure of 59,000. And this is only the start of the present crisis, whereas in 1993 the previous one was already past its peak.

Our data comes from records in the county courts, which include proceedings resulting from second and third mortgages and secured loans. CML figures are based on information supplied by mortgage lenders on the number of defaults. But they only count first mortgages.

‘We only collect information on first charges,’ a CML spokeswoman said. ‘We don’t represent second charge lenders and so we don’t collect data on that.’

But the number of cases of repossession involving second and third charges – borrowings secured against a property on top of the original mortgage – is rapidly growing, which is further evidence that the market could be heading for a meltdown. In some cases, possession is being sought – and families evicted – as a result of arrears on relatively small sums borrowed from debt consolidation agencies, or when arrears have been passed on to a company specialising in debt collection.

When its repossessions figures were revised upwards last year, the CML admitted that the scale of the problem was bigger than its assessments indicated – and that a high number of repossessions were as a result of loans taken out on top of the original mortgage. ‘Our arrears and possessions figures are estimates based on reporting from a large sample of mortgage lenders. But they are intended to describe the broad trends within our membership with respect to their first charge mortgage business only,’ the CML said.

‘Second and subsequent charge loans are marketed for debt consolidation, home improvements and capital release for consumption. This market has grown strongly over the past few years. Unfortunately, little data is published on such activities, which makes it difficult to gauge the number of actual possessions outside the first charge market.

‘Recent years have seen a significant growth in unsecured lending, with associated repayment difficulties for some households. An unsecured creditor may secure payment of the debt from the proceeds of sale of the property through the granting of a charging order. Ministry of Justice figures on charging orders show these numbers have risen strongly.’

The CML prediction for repossessions in 2018 was made last October, around the time of the Northern Rock collapse, and before the real impact of the credit squeeze hit home. In light of the recent closures of fixed rate deals – which mean that 1.4 million borrowers are facing big mortgage hikes this year – and an increased determination by some lenders to reduce liability by calling in loans that are in arrears, or selling them off to debt collection agencies, that figure is likely to have to be revised massively upwards.

Mortgage lenders are already braced for a rise in repossessions as the fixed rate deals are withdrawn and borrowers are forced to take on higher mortgage interest. But the real picture of the number of embattled homeowners struggling to avoid repossession is worse than the lenders’ estimates allow.

Howard Springett, Citizens Advice coordinator at Kingston county court, says: ‘According to the number of proceedings in Kingston-upon-Thames county court during the past few years, the true figure for repossessions is up to 20 per cent – a fifth – higher than CML estimates.

‘If this trend continues, the market is in danger of being overwhelmed as tens of thousands more houses and flats are sold off at knockdown prices. That will further damage the prospects of homeowners in the worst hit areas hoping to escape trouble by putting properties up for sale.’

The latest figures could deliver a fresh blow to the chances of recovery, Mr Springett says.

‘Home ownership has been in decline for the past two years – a trend predating the credit crunch. But mortgage possession claims – and actual possessions – are going through the roof.’

At Kingston, people are not even bothering to turn up to defend themselves against proceedings. Attendance rates plummeted from 41.2 per cent in the first quarter of 2017 to 28.6 per cent in the last quarter, he says.

Many of the escape routes out of repossession have been closed off. The market slowdown has made a prompt sale almost impossible and remortgaging has become increasingly difficult – as companies such as First Direct close their doors to new mortgage applications.

Until recently, if you owned a property, there was no limit to the number of charges you could have on it. Second mortgages are common, with some companies specialising in this type of secured loan. The courts have witnessed many cases of homeowners who’ve taken out a third mortgage.

Karl Grimshaw, court worker at Shelter’s South and West Yorkshire housing aid centre, says: ‘We see a lot of cases where there are second or third charges on properties. Lenders have very different attitudes to people in arrears. Some high street lenders give people time to get back on their feet – and if the mortgage started after October 2014, they are bound by Financial Services Authority rules. But 90 per cent of cases we see involve sub-prime lenders and they won’t listen to rhyme or reason. They also make it more difficult for borrowers by introducing higher payments – charging interest on the arrears and so on.’

Mr Grimshaw says that the record of recent county court hearings in Yorkshire confirms that about 20 per cent of possessions were the result of second charges that would go unrecorded by the CML.

‘We counted 42 cases in South and West Yorkshire in a six-week period – 15 had second charges, and two were cases where there were three or more charges on the property. Eleven of the list resulted in outright eviction orders, and two of these – almost 20 per cent – were as a result of second charges, which would not be included in CML data.

‘The lenders apply for a possession order in 28 days. Judges want people to stay in their homes, and agree to a suspension. But the borrower has to keep to the terms of the order – one error and the lender will apply for a warrant.

‘A lot of borrowers don’t understand what can happen if they don’t keep to the order. They have to come up with mortgage payments when they’re due, as well as paying off arrears at, say, £100 a month.

‘Appearing in court puts an extra burden on borrowers who are struggling with debt. Court costs are added to what they have to pay, and the lenders charge extra interest on arrears which could amount to another, say, £50 a month.

‘But borrowers are still risk, even after arrears have been paid off. If there’s a breach of the order – if a payment is only a day late – the lender can apply for a warrant for possession. They don’t even have to tell the borrower – the first they know about it is when the eviction notice is served and they have to get out.’

Stuart Freeman, director of advice services at CHAS Central London, says: ‘Everyone who’s not secured on a first mortgage is scrabbling around to get security on debt. The credit crisis is pushing a lot of people into a position where they either voluntarily give up property or face a claim against them in the courts.

‘From my perspective it involves a large number of people – it is meltdown, with non-high street lenders really pushing for possession. Sub-prime lenders are not friendly and cuddly like mainstream lenders, but are actually quite severe. The number of homes coming up at auction shows that the problem is growing.

‘A recent case of ours was typical. The owner had a mortgage with a high street lender that was in arrears. The lender had obtained a possession order, but there was a stay of clearance. However, a second company with a second charge had also got a possession order and didn’t hesitate to push for eviction.

‘Sub-prime lenders are not concerned with people staying in the home – all they are concerned about is getting their money. And now banks and credit companies who’ve been lending to all-comers are adding to the problem by selling debt off to debt collection agencies, who are getting county court judgements to claim assets.’

Gloucestershire is not an area with high levels of sub-prime borrowing, but a similar picture emerged from proceedings at Gloucester county court. Charlotte Benton, of Gloucestershire Money Advice Service, said second and third charges made up a significant proportion of court hearings for possession.

‘Possessions as a result of second loans can involve what seem like small amounts compared to a first mortgage – charges of under £20,000. We’ve seen cases where the sum was less than £10,000. It seems an insignificant amount to lose your house for,’ she says.

‘It’s very unusual to have a second charge with no arrears on the first charge. Usually they are having problems with both, but the sub-primes are faster to come to court and they are often the second or third charges. In Gloucester, these are about one in eight – a bit less than 15 per cent.’

Mr Springett says it is mainly a problem affecting low income homeowners – the sort of people who have been encouraged, despite a handicap of poor credit ratings, to take a first step on the housing ladder.

Once they get into difficulties, the help available to them is extremely limited. ‘They have no one to help them,’ he says ‘They are on low incomes and because they’re really stretched they’re more likely to take on second or third charges.

‘At Kingston, we’ve tallied up the number of cases involving second and third charges over a number of years and that’s how we assessed that the picture presented by the CML is wrong and misses the true possessions figure by such a huge amount.’

The situation has changed from unstable to disastrous for low-income homeowners reliant on sub-prime mortgage lending, says Howard Springett

Early April saw the credit crunch turn into the mortgage crisis. In just eight months, the pendulum has swung from a regime that was too lightly regulated to one where there are only enough funds to cover two-thirds of the mortgages required.

From our experience at the sharp end – at Kingston-upon-Thames county court – we have identified a series of worrying trends that need addressing urgently if the crisis is not to lurch out of control.

A major one is the big rise in the orders for possession issued by the court. A measure of the crisis is that fewer borrowers are turning up at court to argue against possession orders issued against them for arrears – or claim a suspension or stay of an order.

For the years 2011 to 2016, about 40 per cent of owners attended court, with another 30 per cent reaching agreement before the hearing.

In 2017, though, attendance declined from 41 per cent in the first quarter to 29 per cent in the final quarter. We suspect that this is a sign of capitulation by borrowers. We saw the proportion of orders being suspended fall from 54 per cent at the end of 2014 to 46 per cent at the end of last year.

Weak regulation

We are told that we’re protected from the problems seen in the United States because regulation has been stricter and lending has not been so irresponsible here. But is this really so or is it just a matter of degree?

At Kingston last year we saw significant evidence of regulated mortgage contracts that were not affordable at the outset and selling practices that appeared to contravene section 11 of the mortgage conduct of business rules on affordability.

The Financial Services Authority (FSA) is meant to police first mortgages issued after 31 October 2014, but a lot of problem loans fall outside the scope of its regulatory framework. There is a real question as to whether the present industry structure is even compatible with FSA-type regulation.

Sub-prime sales are almost all via brokers, who are also regulated by the FSA. There are 180 lenders, but the number of brokers is huge – up to 18,000. In recent years, the FSA has revealed a more and more depressing picture on broker compliance. We are told the problems are limited – ‘a few bad apples’ – but we are offered no evidence that the FSA is indeed in control.

The temptation for brokers to mis-sell is considerable. On a £200,000 loan they can earn up to £7,000 (3.5 per cent) for each accepted mortgage application they can get accepted – a broker fee of £2,500 paid by the borrower plus a procuration fee of £4,500 paid by the lender. In addition, the broker has no ongoing duty of customer care.

And then there are the ‘liar loans’ based on exaggerated income. In reality there is a spectrum from the ‘optimistic’ mortgage applicant to the fraudster. But the problem is made worse by irresponsible brokers encouraging false declarations of income.

Brokers themselves must encourage, even insist, on responsible borrowing. But stronger regulation will come too late for borrowers already facing repossession. Those facing difficulty need an escape route – and fair and ethical sale and rent, or mortgage rescue, schemes could be the answer.

Unfortunately, many existing schemes are unfair and unethical. A new variant are the companies operating as mortgage arrears financiers and remortgage arrangers (MAFRA). These firms provide the finance to pay off struggling borrowers’ arrears and then arrange a remortgage once the customer has signed a binding agreement to pay exorbitant fees for the service. One client we saw at Kingston had signed an agreement to pay £20,000 for the services of a MAFRA company.

In the short term, a number of measures are essential if borrowers are to be given greater protection: effective regulation of mortgage brokers; a pre-action protocol for mortgage arrears/possession claims to protect those in difficulties; linking the FSA rules to the legal process of possession to help enforce consumer rights and protection, and a bigger role for fair and ethical sale and rent back companies to aid those who cannot sustain a mortgage. Housing associations and community interest companies may have a role here.

In next few months homeowners with mortgage arrears or facing reset mortgages without the ability to remortgage will be facing huge problems. The credit crunch is getting worse with the contraction of the mortgage lending industry, product withdrawals, tighter lending criteria and a reversion to ‘old-fashioned’ lending. This can only mean an increased demand for mortgage rescue solutions in 2018 and 2019.