Seconds out

Sub-prime lenders, credit card companies, debt collection agencies and even some local authorities with council tax outstanding are threatening to evict homeowners as a result of debts as little as £1,000.

It’s a crisis that’s happening daily in courts around the country but has gone relatively undetected at a national level. High on the list of victims are shared owners and former council tenants who exercised the right to buy.

Although the number of repossession claims by high street lenders at county and district courts has fallen in the past few months, sub-prime lenders and loan companies have not let up in their pursuit of people who have got into arrears, often as a result of unemployment or long-term sickness.

Case workers are expecting a deluge of repossession cases in the coming months as a result of second charges as unemployment begins to bite.

Borrowers usually understand that they put their homes in jeopardy if they fail to keep up payments on their mortgage. But caseworkers say they are often unaware that they can suffer the same fate if they fall behind with payments on a second loan secured against their property.

Borrowers have been threatened with eviction for arrears on loans for what are small sums compared to the main mortgage – and, in some cases, when arrears have amounted to less than £1,000.

‘Possession claims from mainstream lenders have been going down,’ says Olga Bond, a Citizens Advice housing caseworker in Halifax, Yorkshire. ‘But we haven’t seen a similar fall in cases involving sub-prime lenders.

‘Sub-prime lenders, loan consolidation companies and so on aren’t being as helpful as the bigger lenders. They are not interested in giving people time to sort themselves out or negotiating to get repayments spread over a longer period.

‘As far as second loans are concerned, part of the problem is that borrowers don’t take second charges as seriously as first charges. They keep up payments with the main mortgage because they clearly understand the implication of not doing so. But they don’t realise the risks they run – the real danger they could lose their home – by getting behind with payments under a secured loan.’

When people take out a second charge it is often because they are experiencing difficulty managing their finances, including their main mortgage payments. But the extra burden of a second charge – sometimes from the same sub-prime lender who lent them the first mortgage – can tip them over the edge.

If the amount of debt is too great, it becomes almost impossible for them to avoid ending up in the courts and being threatened with losing their home. The financial crisis is made worse if the household’s main earner is out of work or on long-term sick leave.

Stuart Freeman, director of advice services at CHAS central London, says measures aimed at halting a big rise in repossessions – such as the introduction of the pre-action protocol and government pressure on state-owned banks to give more leeway to borrowers who fall into arrears – have done little to turn the tide.

‘The measures have not improved things for the most vulnerable,’ he says. ‘The majority of possession actions are by sub-prime lenders. Our work with shared ownership leaseholders indicates that a number of them not only have mortgages with sub-prime lenders, but have also taken out second mortgages with them. They are the ones who are pushing for repossession.’

Stuart Freeman says he believes things have got much worse for the most vulnerable borrowers. ‘In the last quarter we’ve noticed an increase of about 62 per cent in the number of possession proceedings being issued by sub-prime lenders.’

Threatened evictions as a result of second or third or even sometimes fourth charges on a property are a growing problem. ‘Where a creditor has got a county court judgment and where there is equity in the property, they’re immediately going for an order to repossess.’

It is not just sub-prime lenders and loan companies who are taking a tough stance. ‘There is also considerable pressure from credit card companies, debt collection agencies and even some local authorities with council tax outstanding are threatening bankruptcy proceedings.

‘These are all second charge claims where the property was owned outright and subject to a first mortgage, or where they are shared owners who have taken out a second mortgage with a sub-prime lender, often without permission of the first mortgage lender or the housing association they have the shared ownership with.’

A high percentage of cases – more than half – involved shared owners, who were low earners or on benefits.  They had been persuaded to participate in schemes that allowed tenants to buy a share of the property’s leasehold with a mortgage. The association keeps the remaining share of the leasehold and the buyer pays rent on this part to the association.

The schemes – which are also now being promoted by private developers – were meant to tempt low earners into home ownership, but many got into difficulty right from the word go. People on low incomes may not be able to pay a mortgage and rent and service other debt. A recent Citizens Advice survey found that the majority of their clients threatened with repossession had a mortgage less than three years old.

Stuart Freeman fears that it is becoming increasingly difficult to protect shared owners from eviction. ‘The majority we have managed for the moment to keep in their homes. Even so, between 10 and 13 per cent have lost and been evicted. It’s an increasing battle and it’s getting harder with creditors pushing all the time.’

Olga Bond says that one of the difficulties is that the people who are forced to borrow from sub-prime lenders are vulnerable even before they take out a loan, often because they are low wage earners and have a poor credit rating.

‘The people who go to sub-prime lenders are often borrowers who can’t get loans or mortgages from high street lenders. There can be good reasons why – low income, poor credit ratings and so on. The sub-prime lenders take on more risk with their borrowers and some companies’ lending criteria have been very relaxed.

‘But people who couldn’t really afford it have got themselves loans. And loans with sub-prime lenders are more expensive than with high street lenders, so the borrower is already disadvantaged. These lenders are more aggressive in terms of wanting the arrears to be repaid over a shorter period. It’s not surprising that more sub-prime loans end up in the courts.’

Lynda Igoe, housing advice manager at Hartlepool council, says a lot of the people who approach the local authority for help got into difficulty after taking out a mortgage on a former council property under the right to buy scheme. And the most vulnerable are those with second charges.

‘Mortgage protection measures are not going to help these people at all,’ she says. ‘Often their problems are the result of a relationship breakdown – the female partner left with the children so the debt is unsustainable. People are being repossessed over relatively small sums – debts of a few thousand pounds.’

Official figures don’t show the size of the problem, because the statistics compiled by the Council of Mortgage Lenders, on which the government relies, don’t include repossessions as a result of second charges. Last year’s figures suggested that the level of repossession orders and ‘forced sales’ – after bailiffs arrived to evict homeowners and change the locks – could have been up to a fifth (20 per cent) higher than the CML estimated as a result of second charges.

‘The number of repossessions last year was a lot higher than the CML figures – and the detailed reports from the Financial Services Authority don’t include everyone. Those companies that only do second charges completely escape the net,’ says Howard Springett, Citizens Advice coordinator at Kingston County court.

‘And the numbers are rising because the credit squeeze has meant that people who in the past could get out of difficulties by remortgaging are being pushed into the arms of debt consolidation companies, which aren’t slow to threaten repossession if people don’t keep payments up.

‘Even with unsecured loans you can put your home at risk, because the moment a loan company finds out you have a house they’ll go down the route of trying to get a charging order.

‘People who go to companies offering secured loans – and there are plenty at high interest rates – are jumping from the frying pan into the fire. A lot of people who’ve got high street mortgages have a breathing space because they are paying much lower monthly instalments. But people who are really indebted and paying the high interest rates demanded by loan companies and sub-prime lenders are being horribly squeezed.’

Peter Tutton, social policy offer at Citizens Advice, says a national survey of its clients found that about half of people asking for advice about mortgage arrears had second charges as well. Most of the cases that ended up in court were a result of arrears on the main mortgage – but a significant number, about 13 per cent, were solely brought by a second charge lender. However, 23 per cent of cases that resulted in evictions were where the second charge lender had taken action.

If the number of repossessions recorded by the CML hits the 75,000 figure predicted for this year, that could mean almost another 20,000 families are likely to be kicked out of their homes as a result of a second charge. Mounting unemployment and the impossibility of obtaining credit at anything other than a high interest rate means this figure is certain to go on rising.

High street lenders are more tolerant of borrowers who find themselves in arrears. And the courts are being urged to do their utmost to give borrowers a breathing space to pay back their debts.

But second charges companies are involved in a growing number of the repossession cases that end up with families being evicted. ‘More and more of the cases that went to eviction were where there was a second charge loan,’ Peter Tutton says.

And he points out that, as yet, no one knows the likely effect of rising unemployment. ‘The FSA found that unemployment or business failure accounted for only about 20 per cent of repossession claims. There is a lot of room for a big increase if employment continues to deteriorate.

‘We certainly know that we are seeing more people coming for advice about mortgage arrears. We had 95,000 enquiries last year and this year they’re already up by a third.

‘How much schemes like the homeowners mortgage support scheme and greater lender forbearance will affect the figures is hard to tell. Government pressure hasn’t had an impact on second charge lenders. And some judges in the courts are unsympathetic, arguing that when people get into difficulties it’s just a commercial matter.

‘But hang on a minute, it isn’t just that. Over two thirds of families in the country are homeowners – so it’s much more than just a commercial question, it’s about the majority of people’s welfare.’