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MORTGAGE ARREARS AND REPOSSESSIONS IN SCOTLAND

Chapter Six: Follow-up Interviews

Objectives

6.1 The objective of the follow-up interviews with lenders was to obtain more detail on lending criteria, lenders' policies, provisions, monitoring procedures, and level and style of decision-making. Although this was a general data-gathering exercise, a specific aim was to explore the extent to which repossession levels might be a function of lenders' policies.

lenders' policies

6.2 CML publish general consumer information that sets out their policies for handling arrears and possessions. This stresses that it commits lenders to:

• positive handling of arrears
• keeping in contact with the borrower
• resorting to repossession only as a last resort and
• when repossession occurs, achieving the best possible price for the property.

Methodology

6.3 Ten follow-up interviews were conducted. Nine were conducted face-to-face, and one by telephone. The interviews were conducted with a selection of lenders, covering large and small lenders, CML members and non-CML members, those dealing in the mainstream as well as the non-prime market (lenders in this market lend to people who have bad credit histories and so on), those who had completed our questionnaire and those who had not.

6.4 One of the lenders who was interviewed dealt primarily in second charges, and never took on first charges. They would take on a third charge if the first two charges were with the same lender. They were not a member of the CML. However, they subscribed to the Banking Code and the Finance & Leasing Association (FLA) as they dealt primarily in secondary secured loans and not mortgages as such.

6.5 The interview agenda was structured around six broad topics:

• pre house purchase: advice and affordability checks
• profile of households in arrears/repossessed
• measures for dealing with arrears/repossession
• making the decision to repossess
• repossession, sale of property and shortfall
• general policy issues

6.6 The presentation below follows these topics. The findings relate only to the ten lenders sampled unless otherwise stated.

PRE HOUSE PURCHASE: ADVICE AND AFFORDABILITY CHECKS

6.7 All lenders made credit checks on potential borrowers, mostly using some means of credit scoring. It was pointed out these credit checks were very detailed. For example, they could include the number of times people had been late paying their credit cards as well as more significant elements such as whether borrowers had other loans at the time of house purchase.

6.8 One non-prime lender used a third party company to carry out these checks and package the mortgage i.e. to prepare the valuation report, obtain references and do the credit search.

6.9 Checks were generally made on net disposable income. Some lenders relied on white data only, some on a combination of white ²⁶ and black ²⁷ data.

6.10 Not all lenders included child support commitments in their checks on outgoings, although all asked for a detailed statement of regular income and outgoings.

6.11 No lenders made checks on people's health pre-purchase.

6.12 Most made checks on employment status, some obtaining either P60s, payslips or employee references.

6.13 It was pointed out that questions about debt and other matters were asked on application forms and to some degree the lender had to rely on the honesty of the customer. The application form forms a binding contract and if the person has lied then the contract has been broken.

6.14 All lenders said that it was possible for post-purchase secured borrowing plus the original mortgage to amount to more than the value of the home. Some pointed out that they wouldn't lend when this would be the outcome, but when another lender approached them for a second or third charge on the property, they would not object if the mortgage account was being paid. Presumably, the willingness to grant subsequent securities is a result of the first lender having first charge. However, one lender said that if the mortgage account was in arrears then they would not grant the additional charge on the property.

6.15 One lender pointed out that, in Scotland, it is not against the law to register a second charge without consulting the first charge lender. However, it may break the conditions of the mortgage the borrower has with the first charge holder.

6.16 Most lenders said they had no need to object to the second and third charges secured on their properties because, as first charge holder, they would be given first call. Interestingly, one lender said that if a borrower took on a large secured loan then it would trigger a report within their systems, not with regard to risk but with regard to marketing. They would try to sell the additional borrowing from their own organisation and not someone else's.

6.17 It was generally agreed that the 100% LTV loans carry more risk. However, policy reactions to this varied. One lender did not provide any 100% loans, while another actively targeted this market with this accounting for approximately 30% of their lending book. Some lenders used stricter criteria for 100% LTV. For instance, they could reduce the permitted multiplier on the borrower's income when agreeing the value of the loan.

Pre-Purchase Advice

6.18 Lenders were questioned about the advice borrowers were given at the time of house purchase. Sometimes, it was the lenders' own staff who dealt with borrowers before house purchase. At other times this was done by brokers. All the lenders used brokers to a varying extent. Most of the front-end lending was undertaken by sales staff who were registered mortgage advisers. The interviews did not focus on arrears and repossessions, although the interviewers would be able to respond to questions on the topic. However, lenders pointed out that customers were very unlikely to ask such questions at a mortgage interview, especially first-time buyers asking for high LTV as this might jeopardise their chances of being offered a mortgage.

6.19 Most customers are passed standard leaflets containing the wording - "Your home is at risk …". The new Financial Services Act (2002) will change the wording to an even clearer 'You'll lose your home…'.

6.20 It should be noted that Consumer Association reports have been published that are very critical of the quality of mortgage advice supplied by lenders (Consumer Association, 2001 a), as referred to in Chapter 2.

6.21 There were marked variations in the written information given out at the time of house purchase on arrears and repossession procedures and places to go for help. One lender gave an information leaflet to every customer at the time the mortgage was arranged with a telephone number within their own organisation to ring if difficulties arose. Some lenders' material did not cover the topic. Those who did not give out such information pointed out that they relied on solicitors or brokers to give people advice, and did not consider it was their role. Lenders who got much of their business from brokers tended to leave information provision up to them.

6.22 The mortgage code has guidance on how people should be treated during arrears or repossession action. The main points are summarised in Chapter 2. The Mortgage Code requires that all applicants are given a copy of "You and Your Mortgage" which provides a summary of the Code. Although intended principally for lenders/intermediaries, the full Mortgage Code is available to applicants/borrowers on request.

Prevalence of insurance policies/sales with same lender

6.23 Lenders were asked whether insurance policies were tied either informally or formally into mortgage/loan packages. Although this project did not research insurance, it was interesting to note whether people shopped around for insurance policies or opted for the lender. Most of the lenders spoken to had buildings, contents and some form of Mortgage Payment Protection Insurance polices on offer. All but two said there was no charge if the borrower chose not to take out their own insurance policy. Two charged a 25 administration fee to look at the policy if the insurance was taken elsewhere. The lenders stressed that taking up their polices was optional: however selling techniques made it likely that their polices would be taken.

1). One offered three months free insurance of buildings, contents and MPPI and then the borrower had to decide whether to continue or not.

2). If the borrowers had no proof of insurance elsewhere i.e. a policy document, then they would go on to an in-house policy.

3). Some lenders automatically gave all customers quotes for insurance polices.

6.24 One lender commented that the take up of in-house insurance polices was higher when the mortgage was arranged by the lender's own sales staff rather than an agent.

6.25 The proportion of borrowers taking out buildings and contents insurance from their lender is roughly 40%.

6.26 The percentage of customers who had MPPI ranged from 20% to 65% (although not necessarily the lenders' own polices). One lender commented that the proportion of people taking out MPPI used to be small, but it has risen quite sharply following a recent government push.

6.27 For established banks, the percentage of customers who also had current accounts was high at about 70-80%. Until recently one bank made this a condition of taking out a mortgage, so over 90% of borrowers also had current accounts. For building societies, the proportion of mortgage account holders who also had a current account was only about 3%, although borrowers may have had savings accounts with lenders.

Source of new business

6.28 There was marked variation in how new business came to the lenders interviewed. Three lenders had between 70-80% of their new business coming in from the street, and another three had between 90-100% from brokers. Others had about an even split.

Table 6.1 Source of new business

Note

N/A = Not available.

6.29 The law tries to ensure that customers are advised about mortgage products. There is a requirement that people are advised in writing within seven days from whoever advised them. If they have taken advice from someone other than the lender, they normally have to state this on the application form and sign to confirm that they understood the advice they were given.

6.30 The law is changing in the near future. The new regulations proposed are that intermediaries themselves will be directly authorised by FSA from 1 September 2002 in the new Financial Services Act.

Commission

6.31 Most lenders paid commission to brokers or independent financial advisors. Some paid flat rates and others paid percentages. One lender paid commission depending on the interest rate on the loan. Risky loans, which could include those to less financially secure borrowers, attract higher interest rates. If brokers get the highest commission for riskier products it can be hypothesised that they are likely to target sales at borrowers in high risk categories. Not all lenders supplied this information, but there is an indication that larger lenders pay smaller commissions and smaller lenders, particularly those solely reliant on brokers, tend to pay higher levels of commission. If this were indeed the case, then it might in theory influence brokers to recommend smaller lenders, even though they may not have the best product for the individual. However, intermediaries are subject to the Mortgage Code.

Table 6.2 Levels of commission

6.32 The other five lenders did not disclose the commission rates they paid.

households in arrears/repossessed

When do problems begin?

6.33 Most lenders offered an experienced opinion about when people began to get into arrears. Some collected data on this and some did not, and so some of the opinions were based on recorded fact and others on experience and judgement.

6.34 One of the biggest Scottish lenders said, based on their experience, the difficulty begins in the first two years. Others agreed, one even detailing cases where the first payment had been missed. Other lenders while agreeing in principle, thought that the average length of time was shorter for loans with high loan to value ratios. Despite this picture, some borrowers were affected by unpredictable life events, and these might cause difficulties later in the term of the loan. It was noted that first time buyers often experienced a payment shock after the end of a fixed rate, which can come between 2-4 years into the loan.

6.35 While lenders were in agreement about the stage of the mortgage when arrears tended to begin, it was not so easy for them to say what the typical maturity of the loan was when repossession takes place.

Who's most at risk?

6.36 Lenders were asked for their impression of who was most at risk of repossession based on their experiences in the last two years. Although these impressions were not based on hard and fast facts, the consistency of the answers given lent credibility to the responses. The picture is of first-time buyers, those with a high loan to value, and low-value properties (under 30,000 as described by one lender, under 45-50,000 as described by another). It should be noted that those who buy low value homes are likely to be on lower incomes.

6.37 One lender suggested there was a problem with the underwriting criteria, with an income multiplier being less relevant to those on lower incomes. To illustrate this point, someone earning 10,000 is less able to afford a 30,000 home (three times their income) than someone earning 30,000 is able to afford a 90,000 home.

6.38 While agreeing that first-time buyers were most likely to be at risk, one lender additionally pointed out that the younger the buyer, the more vulnerable they were. Of course, the great majority of first-time buyers are young, so youth, as well as financial insecurity, may lie behind the difficulties experienced by this group. One lender spoke about the borrower's attitude to debt being important, with younger customers typically having a more flippant attitude, e.g. by carrying a high level of secondary debt, and making payments for stereo equipment instead of making their mortgage payments. Financial education of borrowers was called for more than once during the interviews.

6.39 There was a risk associated with low-value homes in that they do not increase in value as much as more expensive properties and so there is little equity if things go wrong.

6.40 One lender said they only lent to people with a minimum income of 10,000, and this was not just because low income properties were most likely to be repossessed but also because of the Consumer Credit Act, which dictates that loans of less than 25,000 come under different rules.

6.41 While all the lenders concurred on the main profile of persons most at risk of repossession, one lender suggested that an additional category could be those introduced by brokers. Policy makers seem to be aware of this as an issue and, as was previously highlighted, regulation of disclosure by intermediaries/brokers is due to begin September 2002. With this change, intermediaries themselves will be directly authorised by FSA.

6.42 A solicitor's view was that the value of properties taken into possession is usually under 60,000, and that it is very unusual to come across a high value repossessed property. However, high value repossessions are not always rare and were evident especially in the early nineties when things were at their worst in the UK. Most of the properties repossessed are of poor quality and the main exceptions are those where there was partnership/matrimonial dispute or break-up.

Reasons for repossession

6.43 Most of the lenders interviewed about the reasons for repossession and the type of people who are most likely to be repossessed wanted to categorise borrowers into two groups, those who are genuine cases and those who wish to address their difficulties by 'playing the system'. There is also a category that could fall into either camp, which was identified by their reluctance to talk to lenders about their difficulties. Whatever the trigger for financial difficulty, the people who were most likely to be repossessed were those who do not co-operate with the lender.

6.44 The three principal reasons for repossession which were given for 'genuine' cases were unemployment (most important), relationship breakdown and businesses going under. In addition, one lender said they felt that there was a real lack of understanding of second charges being linked to the house.

6.45 Independent research undertaken for the Government/CML/ABI initiative suggested that around 50% of home buyers needed insurance based cover (because they did not have savings/alternative sources of income). Although lenders have a protocol not to repossess property when an MPPI claim is being made, the lenders interviewed for this study were generally critical of MPPI and though that, in its present form, it is not effective in preventing repossessions.

Management of arrears and repossession

6.46 All except the biggest lender interviewed managed their arrears centrally. The biggest lender managed their arrears in five different centres but followed the same procedures in each, although they admitted that subjective decisions in each of the five were possible. The overall picture was therefore one of centralisation. For many this was a distinct change in procedure as previously arrears management had been dealt with at the local level by individual branch managers.

6.47 Nearly all dealt with arrears in-house. However, one lender interviewed outsourced their arrears and repossession action (although they had their own staff managing this process) to a firm that also did this for 33 different lenders. For the other 32 lenders, no on-site management by the lender's own staff took place, and the whole arrears and repossession process was managed by the third party company.

Arrears management procedures

6.48 Lenders' systems flag up anyone who has missed a payment (in one case less than a month late as it takes in previous under-payments). The borrower usually receives a series of letters explaining a payment has been missed. These letters generally change in tone as the arrears increase. One payment missed could have happened as a result of a genuine error, rather than an inability to pay, so the initial letters are couched in diplomatic wording.

6.49 There were big differences in the charges that the borrower could incur during this period. Some lenders charged for these letters and some did not charge for either letters or calls. For those that charged, the standard fee seemed to be between 10 and 25 a letter, although some lenders did not charge a fee for letters when the borrower was less than 30 days late.

6.50 Borrowers were notified in advance before charges were applied. Charges tended to be added to the overall loan. However, some lenders made sure the money for the fees was repaid first. The reason given for this was so that interest did not accumulate on the fees.

6.51 It could be suggested that lenders choosing to unilaterally attribute monies received to pay off charges rather than the loan are not operating a fair practice, although strictly speaking this is legal. This arrangement, that the charges incurred would be added to the principal, would have had to be agreed explicitly between lender and borrower. Unless such an agreement was in place, then it was supposed that the Office of Fair Trading would be likely to take a very dim view of such an arrangement. This arrangement is not in the borrowers' favour, as a borrower cannot be evicted for not paying charges but can be evicted for not paying their mortgage.

6.52 No lender interviewed charged a different interest rate on the arrears than on the loan or different rate of interest on accounts that were in arrears than on accounts which were being paid regularly. One situation would be an exception to this if it arose. This was when a borrower had borrowed an agreed sum on a fixed interest rate, and then had built up arrears/charges that took them over the sum. They would then pay the normal interest rate on the additional part of the loan that was over the original sum agreed.

6.53 Someone has to pay for the cost of handling arrears. Lenders tend to argue that borrowers in default should not be subsidised by borrowers who comply with the terms of their mortgage, and that charges for letters, advice, etc help to ensure that such a subsidy does not occur.

6.54 When the account was in two names, only one lender sent a separate letter to each borrower. All other lenders sent one letter to both parties. In the borrowers survey, a regular occurrence was that one party to the loan, usually the female, had no knowledge of financial problems until it was too late. The relatively simple change of writing to each party could help avoid this situation. All lenders interviewed sent letters by ordinary mail rather than by registered or recorded mail, which would have to be signed for. While this would be excessive in the early stages of any arrears difficulties, it may be effective in eliciting a response from consistent non-payers. Currently, recorded delivery is not used until the case is in the hands of solicitors.

6.55 All lenders attempted to contact the borrower in default by telephone, in conjunction with contact by letter. Most had sophisticated computerised systems that made this easier, such as power diallers which continually dial the numbers and attempt contact at different times of the day, morning, noon and night for three days.

6.56 A typical example of the unit costs involved in arrears where the borrower did not communicate at all with the lender is shown in Table 6.3.

Table 6.3 Examples of borrower charges

Note

Less than half of the lenders had maximum overall amounts.

6.57 Lenders all tried their utmost to contact borrowers in arrears by letter and telephone on whatever numbers they had available: work, office or mobile numbers.

6.58 One lender described themselves as especially proactive in getting borrowers in arrears back on track. Their percentage of accounts in arrears was lower than the industry standard, being 0.62%. This lender sent out one automated letter only, which was the first one, and after that all cases were dealt with manually. Each borrower in difficulty would be given four telephone numbers where they could get help in their local areas, for instance CABs or any local authority debt advice facilities. They would also try to telephone before they wrote out.

6.59 After a telephone call, when the lender would try to negotiate a new payment arrangement, a home visit would take place. This lender operated a combination of their own counsellors with some outsourcing. Unusually, with this lender, borrowers generally had three home visits before solicitors were instructed, then they would try another visit before the court action began and a 'last chance' visit before the actual repossession took place. If someone chose to remortgage, change package, lengthen their mortgage and so on, this lender would not charge any fees, not even an administration fee.

6.60 All lenders stressed that they looked at each individual case on its merits and did not necessarily follow their standard rules inflexibly.

6.61 Some lenders used debt counsellors routinely. Counsellors generally gave advice on prioritising debt, completing detailed income and expenditure forms as well as giving advice on benefit entitlements. Some lenders did not charge the borrowers for this, some did charge and some did not use debt counsellors at all. One bank instructed debt counsellors after two payments had been missed. When lenders charged for debt counsellors to visit people in their homes, the charges varied from around 70 plus VAT to 88.13 plus VAT where the counsellor speaks to the person and 58.75 plus VAT where only a property visit is made. Even if the counsellor is not able to speak to the borrower then the visit was not wasted as they were able to give the lender a report on the property assessing its condition, which could be valuable in itself. They could also let the lender know if the property appeared to have been abandoned. One lender charged around 25 if one of their internal counsellors spoke to the borrower on the telephone.

6.62 Two lenders did not charge the borrower for debt counselling. One said that, although the cost of home visits was a substantial one, they thought they got value for money. They had only been providing this free service for all their customers for 18 months. Another said that this service, while very expensive for the whole of the UK, was self-funding as it had a better success rate in contacting customers, and prevented more serious arrears, or identified a vacated property earlier.

6.63 Only one lender arranged multiple visits from debt counsellors. Most had only one visit during an arrears cycle.

6.64 Another lender, whose mortgages were nearly all arranged by brokers, and who lent to the higher risk sector was proactive and its arrears management began before debt problems had started. After a loan was completed, a telephone call was made on the first day. The purpose was to check that people had the money to pay, their direct debit was all set up, and so on. Another lender, lending to the same sector, went further and visited every 'high' risk customer, which included self-certified, and 90% or more LTV. This visit was free of charge, and checked what the brokers and solicitors did and what should have been done. Eighty per cent of customers were eligible for this visit. Although it was not compulsory most customers agreed to take part. This lender also sent out information in month two on where people could get independent advice.

6.65 In nearly all cases, customers were given a detailed financial breakdown with the total amount of the arrears and the balance of the mortgage in the letter following agreement of the loan. Again, the law is shortly going to change to make this a requirement.

6.66 Lenders were asked whether people in financial difficulty were told of independent sources of free advice. All lenders did this, usually referring to the CAB. Some lenders provided this information in an early letter and some waited until much later. One lender provided information on where to get debt counselling in their branches, where it had to be picked up.

6.67 There was a clear difference in how active lenders were in promoting independent debt advice. Some of the lenders interviewed said they had put funding into the national debt helpline and stressed their commitment to external debt advisors. The new Financial Services Act has already picked up on this non-standardisation and will require lenders to provide details of the Citizens Advice Bureau within five days of someone becoming two months in arrears.

Action allowed to correct arrears

6.68 For lenders, the first goal of financial settlement was something that would get the arrears paid off.

6.69 Lenders stressed they allow virtually any action to correct arrears and get the borrower back on track with their payments. However, people are not routinely allowed payment holidays unless they are on a flexible choice product. Even then, interest is not suspended. Payment holidays would have to be agreed in advance, and they are designed more for maternity leave. One lender said that if it was clear that a breathing space would help i.e. if there was evidence, then a holiday could be arranged, although interest would still be charged during the period. The borrower would continue to receive monthly statements to show his debt.

6.70 Some lenders did allow people to change their mortgage terms, lengthen the term of the loan (if capital and interest) and so on. One lender would hesitate to recommend changes, instead recommending independent financial advice. Although extending mortgage periods would be considered, they would try to encourage people to keep within the term as it would be more expensive for the customer in the long run. These sort of choices would not be offered without referring the customer to seek financial advice, as most would have long term cost implications.

6.71 Lender were also asked whether they would withhold redemption costs if someone moved their mortgage to another lender with more competitive rates. None said they would not do this, although it would not happen automatically. It was stressed that there was a cost to the lender if early redemption occurred, especially if it was a mortgage on a fixed rate. However, it would be unlikely that a new lender would want to take on a mortgage in arrears. One lender said they would not extend the term and would not offer payment holidays. One lender concurred with the redemption fee if the customer was on a fixed rate product, and there would be an additional 50 fee if the mortgage were repaid in full. They pointed out that this was standard and was applied by all lenders.

6.72 Some lenders capitalised the arrears²⁸ i.e. added the amount outstanding on to the capital of the loan. This does succeed in taking the arrears off their books and these would disappear from in-house and CML statistics. However, this may not be best for the borrowers in every case, as it adds to their debt and would increase their repayments in the long term. One lender did say that capitalising arrears would be a last resort but they would consider anything to get the lender back on track. One lender pointed out that in the 'old days' mortgage arrears were in a separate account, however now it is all kept in the same account, so effectively arrears are capitalised, and the account could just be changed to 'regular'. A different lender said that they would never capitalise arrears, precisely because this would just mask an underlying problem, and only serve to clean up the arrears book. It would actually make no financial difference to a borrower, as they would still be liable for the same total amount.

6.73 Lenders were asked if voluntary sale was allowed or encouraged. While most did accept that more money could usually be got from a borrower selling their home themselves, many had serious reservations about allowing this, although most would consider it depending on the customer. The reason why lenders were not keen on promoting voluntary sale was that, if the borrower was not 100% on side, then they would not try to sell the home very actively. One lender had had 'mystery shoppers' trying to buy homes and being put off by the borrowers apparently trying to delay the sale. Cases were also quoted of people trying to sell at a reduced price to a family member. The consequence of bad experiences with voluntary sales was that many lenders would not consider them without having court decrees to fall back on. One lender said that they would stop a sale if there was going to be a big shortfall and they could do so as they were the first charge holders. Another lender concurred with this and said, if it was a shortfall sale, then the lender could stop the customer from selling. However, they would look at each case on its merits.

6.74 Lenders stressed they did not want to encourage under-selling and have borrowers simply walking away from their debt. There was some confusion though, as to whether a lender could actually stop someone selling his or her home. Although a couple of lenders said they would, and had, done so in a shortfall sale situation, another lender said that they couldn't ever stop someone selling and the most they could do was to get a valuer to see if they could get a fair price. If the borrower found a buyer that would result in a shortfall, then the lender could insist on a promissory note to say that the shortfall would be paid. Time limits would be put on voluntary sale and an example was given of where six weeks would be allowed to complete the sale. However, one lender actively encouraged voluntary sales.

6.75 Some lenders had given people help with selling costs. One said they would pay the estate agent fee if it was the only way to allow the sale to complete. Another lender said he would not be prepared to help unless solicitors and estate agents would also be prepared to take a reduced fee, so they weren't the only ones making a loss. Another suggested that borrowers should be given time to sell but would put conditions on selling, such as that they must get an offer within 3-6 months. They might also be given help managing their sale.

6.76 Other help provided by lenders during arrears was to get the home counsellor to set up an incoming and outgoings form to help the borrower prioritise debt. If they couldn't afford the payments after this, then the lender would proceed quickly to repossession action and would not rack up interest on a debt which could not be paid off. Other lenders also said that to delay repossession action was not necessarily to the borrower's advantage, as it would only add charges and interest.

6.77 Whatever the arrangement made with borrowers, most stuck to this and eventually get back on track. One lender produced a 'stickability' report that showed that 65% of borrowers in arrears stuck to the new repayment arrangement. This shows that a re-negotiation of payment works in the majority of cases, and protects borrowers from more serious mortgage arrears.

Making the decision to repossess

6.78 For a lender to decide not to begin repossession action, they would need resumption of the full monthly payment again and something on top of this if possible.

6.79 Typically, an early problem management team would liase with borrowers until they had missed three payments. If there had been no contacts or new arrangements in place with the borrower, then the case would be passed over to a team that would take action for repossession.

6.80 There were different opinions on whether the costs of the repossession decree could be more than the arrears themselves. Some lenders readily agreed that this could happen. One explained that the borrower might only be 6-12 months in arrears by the time of repossession and so it was likely that the fees could exceed the total arrears. While another lender agreed that this could happen, they believed it was very unlikely.

6.81 One lender would not move for repossession if the total arrears were less than 400. Another used 300 as the benchmark, and had never acted when the arrears were less than the cost of repossession. All lenders pointed out that it was not the amount of the arrears which was important, it was the amount of the outstanding loan, and that the costs would never be greater than the balance of the mortgage. Some lenders would examine how much would have to be spent on repossession action at an early date and weigh this against what they could gain. They would compare the cost of the repossession, not against the outstanding arrears, but against the larger amount of the total loan. One lender worked to a slightly different rule of thumb which was that they didn't take action on low balance accounts i.e. if the borrower owed less than 5,000, no action on any arrears would be taken, and they would try to come to an agreement with the borrower. Another lender said they would not take someone to court if they were only 2-3 months in arrears.

6.82 Although these rules of thumb existed, lenders told us they could easily be ignored. For instance, in a case where the customer was known only to pay up when a court decree was obtained.

6.83 Lenders stressed that making the decision to repossess was not an easy one and that they would do virtually anything to turn the situation around. One decision-maker had a mandate that allowed them to write off 5,000 of interest rather than take possession. This lender stressed that they could be flexible, indeed had to be sensible, and that they took a common sense approach.

6.84 On a second charge loan, one lender had a minimum of 500 in arrears before which they would not seek possession, unless the person was a wilful non-payer.

6.85 Nearly all of the lenders interviewed said that repossession proceedings would begin following 3-6 months of arrears. Most qualified this by saying that each case was decided on its merits, with LTV (timescales would be tighter if there was inadequate equity) and the customer's willingness to pay being big factors. One lender said that, when no payments had been made and the customer was not communicating, then the case would be in the hands of the solicitors within 3-4 months. If the customer had been attempting to pay, then it would be six months or more and if there were a regular commitment then it would be far longer. One of the non-conforming lenders said that after three months of arrears it must be in the hands of solicitors unless there is a buyer or a death has occurred in the household. However, a fast move to legal action did not necessarily mean a quick repossession. One lender said that once they got the decree, then they were more in control and could decide what to do then. They said they did not move directly from getting the decree to evicting the borrowers but always tried to negotiate further.

6.86 Only one lender said they would treat arrears on an endowment mortgage differently from a repayment mortgage. This lender said that for an endowment (interest only) mortgage, they would move much faster. Since only interest has been paid on the mortgage and none of the capital, it was in the same state as day one. There could only be equity in a home in a repayment mortgage, and a certain level of equity gives room for manoeuvre for the borrower.

6.87 Lenders were all asked if the length of the arrears permitted was conditional on the outstanding amount. Most said that they would try to treat people the same, no matter what the amount of the loan was or how far they were through their mortgage. If the person did not communicate at all then lenders were more likely to go for early action, no matter how long someone had been paying. If there had been contact, then action was likely to be delayed. Other than the amount of contact from the borrower, factors that would affect the amount of lender flexibility included:

• type of loan - more flexibility would be allowed in a capital and interest mortgage
• LTV - if there were a high LTV then action would move faster.

Ensuring decisions to repossess are consistent

6.88 Ensuring decisions to repossess are made in a consistent way is obviously important. Nearly all the lenders interviewed said the decisions were made centrally at a high level by a very small number of people. When more than one person made the decision, the cases were usually reviewed by the head of the collections section or equivalent, thereby ensuring consistency. If they were not systematically reviewed by a person in charge, which was the most common procedure, then they were spot-checked. Some lenders mentioned an appeals procedure where borrowers had a right to complain, but this seemed to be rarely used.

Repossession, sale of property and shortfall

6.89 Court costs for repossession were given as varying amounts between 400-600.

6.90 Very few of the cases in which a solicitor was instructed actually got as far as repossession. One lender indicated that, for every 100 cases which got a calling-up notice, 60 went into the hands of solicitors, and 20 went on to repossession.

Table 6.4 Typical costs during the repossession process

Note These costs will vary between cases.

Sale of property

6.91 A description of what typically happens once a decree has been obtained follows.

6.92 If necessary, the eviction takes place. However, quite often properties have been abandoned. The property is secured and locks changed, personal effects are cleared out and the property is cleaned to ensure that it is presented to the buyer in the best way. Even at this stage, the borrower could be let back into the house if they cleared their arrears and showed that they had an ability to pay.

6.93 Then the properties are valued. There was a difference between lenders in how many valuations were obtained. The most was three, and this was obtained routinely. A lender that specialised in holding second charges said it was particularly important to them to obtain the best price for the property, as well as having a duty of care to get the best price for the borrower ²⁹. Some lenders who obtained two valuations said that if there was a marked difference between the two (over 10%), then another would be obtained. The least number of valuations obtained was one ³⁰.

6.94 Only one lender marketed the properties over the valuation price. Their marketing strategy was to price the house at 125% of the valuation and, on average, they obtained 110-115% of the price. However, it is likely that there would still be a shortfall between the original valuation and the valuation at the time of repossession. The home would be likely to have been nicely furnished and lived in at the time of the original valuation, but in a worse state and empty at the time of the repossession. Some lenders pursued valuers if the original value was too high and often the lender obtained an out-of-court settlement.

6.95 No lender objected to the borrower being told the value of the house, and said they would tell them if they asked. However, many lenders said that they normally did not know where the borrower was at this stage. Most lenders endeavoured to keep in touch with the customer throughout the process, but it was commonly reported as being very difficult. One lender told us that the borrower would have to take court action to object to the sale price. This would be unlikely, given the financial situations of the borrowers. This same lender said that they could get a third valuation to sort out any objections. A different lender said the borrower had no comeback if the lender could show they had done everything to get the best price. Lenders have a statutory obligation to get the best price. Some lenders required the selling agent to give them a certificate that testified to the effect that the price obtained was the best one. This was designed to protect them from a potential claim from a borrower. Some lenders directly instructed their agents not to say the property had been repossessed, but it was very difficult to control this. Buyers would probably find out from neighbours.

6.96 From the borrowers interviewed, there seemed to be little awareness of their entitlement to ask their lender for this information. No one interviewed knew what their homes had been sold for, unless they had found out from their previous neighbours or another informal route. From the lenders' point of view, they just didn't know where these borrowers were. One lender illustrated how hard it was to get in touch with their borrowers at this stage of proceedings by describing how they had to put their notice of intent to sell in the local paper to try to prompt the borrower into getting in touch.

6.97 Typically, the lender wants to make a quick sale. Most do not routinely put the properties into auction, they try to market first in the normal way. The average time they expect to sell properties within is 20 weeks. However, for a property that would not sell, they would use auctions as a last resort with a reserve price. One lender said that they had 61 Scottish repossessions and only one had been auctioned. Another lender said they would use auctions in a deprived area, as they would sell the property quicker this way. Another lender said that under 10% of properties went to auction, but that auctions had become more prevalent over the previous four years. There was a common policy that, if a property had been on the market without selling for a long time, then it would go to auction.

6.98 A best price certificate is not needed at an auction, as the auction process is held to demonstrate that the market price has been achieved.

Shortfall Debt

6.99 CML members had recently adopted a policy on shortfall debt which had been discussed with the National Association of Citizens Advice Bureaux and the Federation of Independent Advice Centres, who had both asked the CML to consider the change. The new policy is described in Annex 7. CML lenders will not initiate action for repayment of shortfall debt more than 6 years after repossession.

6.100 One lender said that they would lose typically 20-25% on a house if it were repossessed.

6.101 Not all lenders had mortgage indemnity insurance. Some interviewed did have this on high value lending. If a shortfall arose after the sale of a repossessed property, then the lender would make a claim. However, they would still pursue the customer for the full debt and then might give some of the amount back to the insurance company. However, other lenders no longer had this insurance.

6.102 Most lenders tried to track down borrowers after a sale, either to reimburse them with a surplus or to advise them about any shortfall. Tracing agents and even private detectives were used. One lender had a minimum of two attempts at tracing.

6.103 The amount lenders thought worth pursuing differed. One would pursue any amount while others would not pursue under 5,000 as the time and effort involved would not be worth it. It was difficult for lenders to identify how long it took to pursue shortfall as it varied with the amount. Quite a few of the lenders interviewed did not write off the shortfall debt because, if circumstances changed the borrower might be able to start paying again. When they did write off debt, the borrowers would probably be in one of the following circumstances; disabled, living on benefits, or unlikely to return to employment. Another said they would not pursue it if the amount were in terms of hundreds of pounds only. There was no cost to a lender to outsource chasing the debt as the chasing companies would only take a percentage of anything they recover.

6.104 If the lender failed to find the person, or the debt was not thought worth pursuing then they would be likely to sell on the debt, but would make a loss on the sale.

6.105 One lender said they lost about 75% of the value of shortfall debt, another said they wrote off one-sixth of shortfall debt this year, costing around 6 million, another just described the percentage as very high, another said about 12,000 was lost on each home and they would be lucky to get 3-5% of this back. Another lender said all shortfall debt was written off immediately.

6.106 To reiterate, most borrowers had no knowledge of whether shortfall or surplus had been obtained. However, one lender said that the shortfall/surplus split was about 50/50, although others thought surpluses were less likely. They said they would like to pass back surpluses and tie up the cases but couldn't if they couldn't find the borrowers.

6.107 Lenders, in the main, assured us that completion statements were available on request detailing the full breakdown of marketing and conveyancing costs. Full interest calculations were available on request. However, most borrowers did not seem to know they could request this, or maybe didn't want to if they were trying to avoid paying for a shortfall.

6.108 Most lenders did not charge interest on shortfall.

Court action

6.109 There are very different approaches to the legal action that may be taken after the decision has been made to repossess.

6.110 Until the introduction of the Mortgage Rights (Scotland) Act 2001, one lender issued a calling up letter first, and only if there were no response to this would they instruct a solicitor to apply for a writ. This lender was under the mistaken impression that they had to go through the calling-up letter stage first and then wait two months before issuing a writ.

6.111 There was a substantial amount of evidence that lenders considered that calling up notices or repossession decrees functioned as a threat to make their borrowers pay.

"We only take 20% of what is scheduled into possession. We just use the decree as a threat. People generally just pay up…".

"Currently, the lender has no choice but to proceed to decree stage but then communication takes place after that".

Legal procedures

6.112 All lenders were asked whether they had changed any of their legal procedures. It was thought a change of tack might explain the rise in the numbers of court decrees since 1994. The responses are summarised below.

Table 6.5 Varying legal routes taken by lenders

6.113 Generally, most of the lenders went direct to Section 24 by the time of our interview.. However, there was still some use of calling-up notices and notices of default. There does seem to have been a change in procedures for some, with a few lenders moving straight to Section 24 of the Conveyancing and Feudal Reform Scotland Act (1970), and abandoning other methods.

Policy issues

6.114 Only one lender thought the Mortgage Rights (Scotland) Act 2001 was a good thing. However, this lender thought that work was needed on the interpretation of the Act and clear directions needed to be given to judges.

6.115 All other lenders were negative about the act. Comments included

• different decisions from different sheriffs could happen
• the sheriff in Scotland has the power to suspend the decree for an indefinite period, which is a variation to the original contract. In England the contract is not allowed to be varied, and that is a better system. This will mean that lenders have to go back to court as it isn't a suspended decree in the new Scottish system
• decisions may depend on the political leanings of the Sheriff
• if it becomes unmanageable lenders would pull out of lending in Scotland
• act needs more clarification and amendment
• hope that judges wouldn't become social workers, and grant a suspension even if there is a long history of broken promises and non-payment
• a better response would have been to give people an equivalent of housing benefit if they were unemployed which would cover their mortgage from almost as soon as they lost their jobs
• difficult for lender to know if tenants/lodgers and children were in household
• lenders would tighten up their lending policy so as not to lend to higher risk individuals
• lenders would start repossession proceedings a couple of months earlier, to allow for the anticipated additional delays from suspensions.

6.116 There was concern that court costs, now typically around 500, would spiral out of control. The only winner in the new system would be solicitors who will earn higher fees. One thought this was a backward step as the previous system was quick and efficient.

6.117 Lenders said they already documented all contacts with borrowers etc, because of the need of this in England and so they would not have to change anything to produce this for Scotland.

6.118 Some lenders were changing their procedures in light of the Mortgage Rights (Scotland) Act 2001. For instance, a couple would no longer do the Notice to Quit/calling up notice in Scotland.

6.119 One lender predicted that, whereas the last housing market recession involved secured lending, easy credit would cause the next one to be led by unsecured lending. A number of lenders felt what was needed was education of borrowers on financial dealings.

implications

6.120 The implications of the findings presented in this chapter will be brought together in the synthesis presented in Chapter 8. The principal points to be taken forward there are:

• lenders with higher than average levels of repossession had a customer base with a high proportion of customers with 100% LTV or borrowers in high risk categories
• arrears usually occur in the first few years of a loan
• lenders described the profile of those most at risk of repossession as first-time buyers, those with a high loan to value ratio, younger people, and those in low value properties
• those who did not communicate with their lenders were also placing themselves at a higher risk than would otherwise be the case
• most decisions and all policies are made centrally. There is little likelihood of geographic variation in the propensity of lenders to repossess
• lenders stressed that each case was assessed on its merits. Decisions to repossess were reviewed by high-level staff
• lenders felt that face-to-face contact was the most effective means of resolving circumstances and attitudes leading to arrears. Lenders try to be as accommodating as possible with borrowers in arrears and are keen to avoid repossession. However, potential solutions must involve the borrower continuing to make payments, even reduced ones
• there is wide variation in charges for telephone calls, letters and counsellor visits during arrears difficulties. With some lenders substantial charges could build up quickly. However, others operated a maximum charge
• legal action was perceived as an effective means of tackling arrears. This may be true, although it can be seen as harsh action. Possibly about 15% of applications to the court are never completed and, of the applications granted, only about 40% result in repossession. The implication is clear - without the potential for possession, or an alternative measure, lenders' problems with mortgage arrears would be greater
• lenders stressed that they were obliged to obtain the best price possible. Nevertheless, there was little that borrowers could do if they felt that the best price had not been obtained. In practice, the borrower has very little control or input to the sale of a repossessed property, but if a shortfall occurs, they are still liable for the outstanding amount
• shortfall was always pursued. However, a large proportion of shortfall is never recovered. Borrowers rarely made contact with lenders after the repossession had occurred. Where surpluses occurred, lenders rarely knew where to send this.

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