Watchdog cracks down on repossessions
Mortgage lenders have been given a deadline to ensure homeowners facing repossession are treated as fairly as possible.
The government recently introduced new rules to protect homeowners in light of evidence that suggested banks and building societies are too heavy handed when dealing with borrowers struggling to meet their repayments. The new rules mean all other options must be explored before lenders can apply to the Court for repossession orders.
Now the Financial Services Authority (FSA) has sent warning letters to the chief executives of all mortgage lenders giving them a deadline of 31 January 2009 to ensure any customers facing arrears are treated fairly. This is the second warning issued by the FSA in recent months following a review by the regulator that found an increasing number of households are at risk of repossession.
The review also found weakenesses in the way lenders deal with customers who struggle to pay their mortgage, often pushing through repossession orders when alternatives (such as payment breaks) could help keep the roof over their heads.
The letter reads: “Conditions in the mortgage market are difficult and it seems likely that these conditions will persist for sometime. In such a challenging operating environment it is particularly important for senior management to ensure the fair treatment of customers, including when they go into arrears.”
It also warns that the FSA will, if necessary, take “enforcement action” against banks to ensure the fair treatment of mortgage borrowers. Lenders will be asked to give examples of how they have dealt with borrowers who have missed payments to assess whether they have been treated fairly or not.
Trade body the Council of Mortgage Lenders (CML) says that its members are already doing their utmost to ensure the fair treatment of borrowers.
Michael Coogan, director general of the CML, says: "Lenders understand that in the current difficult economic environment there is bound to be a high level of scrutiny of their handling of mortgage arrears. Borrowers facing difficulty deserve to know that their lenders have the right measures in place to treat them fairly and try to help them keep their homes wherever this is an achievable outcome.”
Adrian Coles, director general of the Building Society Associaton (BSA), adds that its members already see repossession as a last resort.
“Building societies want their borrowers to remain in their homes if they have repayment difficulties, and genuinely view repossession as a last resort,” he says. “The recent commitment by major lenders not to commence repossession action within three months of an account going into arrears reflects standard building society practice, societies also comply with the new Civil Justice Council pre action protocol on possessions.”
However, Coles says borrowers also have a responsibility to be open and honest with their mortgage lender. “It is vital that borrowers who have, or believe they may be about to have, repayment difficulties contact their building society as soon as possible,” he says.
A homeowner’s worst nightmare; repossession is an action of last resort by mortgage lenders to recover money from borrowers that have failed to keep up with repayments on their mortgage or other loan secured on their home (see secured loan). Repossession is a legal procedure that has to go through several processes before the homeowner is evicted and the property reposed. These are: if a borrower keeps defaulting; the lender applies for a solicitor’s notice; the lender instigates possession proceedings through the court; at the court hearing a possession order is granted and sometimes a possession warrant; a bailiff is appointed and an eviction notice issued at which point the homeowner has two to three weeks to vacate the property.
The Financial Services Authority is an independent non-governmental body, given a wide range of rule-making, investigatory and enforcement powers in order to meet its four statutory objectives: market confidence (maintaining confidence in the UK financial system), financial stability, consumer protection and the reduction of financial crime. The FSA receives no government funding and is funded entirely by the firms it regulates, but is accountable to the Treasury and, ultimately, parliament.
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.
“Arrears” tend to be associated with debt. If you fall behind and miss payments on any outstanding debt, the amount you failed to pay is an arrear – the amount accrued from the date on which the first missed payment was due.