Scottish Government

MORTGAGE ARREARS AND REPOSSESSIONS IN SCOTLAND

Chapter Eight: Conclusions

Objectives

8.1. This chapter draws on all the research components to meet four principal objectives

1. To present the best possible estimate of repossessions in Scotland with associated trends.

2. To offer suggestions on how repossession figures might be obtained in the future.

3. To identify actions that might prevent some arrears cases leading to repossession.

4. To identify the range of lenders' practices and identify any practicable changes that might reduce the incidence of avoidable repossession, based on information obtained from both borrowers and lenders.

8.2. The research programme was of an exploratory nature. Many of the findings are of interest and value, but are not of direct relevance to the central conclusions presented here. This chapter therefore draws on the findings in a selective way.

Borrowers survey

8.3. The nature of the sample of borrowers was described in Chapter 7. The caveats should be reiterated here, when presenting the conclusions. The sample was both small and, in a sense, self-selecting. In particular, it must be emphasised that it does not represent all those who experienced arrears. It is easy to hypothesise that many of those who came forward did so because they felt they had something to contribute in terms of the difficulties they experienced.

8.4. Many of those we spoke to expressed some dissatisfaction arising from their relationship with their lender and it is particularly important that no attempt is made to generalise from this. Firstly, we have heard only the borrowers' perspectives on these cases and it seems likely that the lenders would have offered something additional and, in some cases, contradictory. Secondly, borrowers whose difficulties were resolved, and whose lenders were instrumental in helping this come about, would have been much less likely to come forward.

8.5. In summary, therefore, the borrowers survey cannot be used to derive either a general picture of those who have experienced arrears or a balanced assessment of the relationships between lenders and borrowers. What it does provide, however, is illustrative examples of individuals', usually adverse, experiences. This is valuable data although the findings may not be representative. This is because a function of the research was to identify possible routes to assisting those in difficulties.

estimate of repossessions in Scotland

Repossession numbers and trends

8.6. An objective of the research was to derive the most reliable estimate of the number of repossessions in Scotland in 1999. This was principally a function of the lenders' survey, which sought to establish an independent total for comparison with the widely differing Council of Mortgage Lenders (CML) and Civil Justice/Judicial Statistics (CJS) figures. The lenders survey could not, in itself, identify trends as it focused on a single year. However, the collation and analysis of court records contributed evidence of trends.

Number of repossessions

8.7. Firstly, it must be re-stated that the CJS data do not provide an indication of the number of repossessions, primarily because they record court orders only. The majority of orders do not result in repossession, and some repossessions occur without recourse to the courts. Evidence of numbers must therefore be sought in the CML and research survey findings.

8.8. These surveys did not yield identical estimates. A potential source of variance was the survey sampling. The CML survey covered only a sample and the research survey did not achieve 100% response. In addition, unlike the CML survey, the research survey covered secondary lenders and non-CML members. A fully valid comparison with CML was therefore not possible. Nevertheless, based on a sample of lenders ³⁵, there were 2,995 repossessions in 1999 (4,189 grossed up to 100% of lenders) and 2,727 in 2000 (3,761 grossed up to 100%). A comparison of figures between the sources is shown in Table 8.1. The research survey estimate is significantly higher than that of the CML.

Table 8.1 Estimates of repossession in Scotland 1999 and 2000

Notes

1. The CML figure for 2000 was not ready at the time of publication.

2. The research figures were grossed up using market share estimates based on the number of standard securities recorded in the Register of Sasines, 2000.

3. Market share of sample is shown in brackets.

8.9. As indicated in Chapter 5, the CML survey does not include repossessions by secondary lenders and therefore will not include all the repossessions in Scotland. However, it seems unlikely that this would explain all the difference between the figures. Other contributory factors could be:

• the method of expanding the research survey sample. Expansion using market share indicated by the number of securities recorded in the Register of Sasines in 2000 was a relatively crude process. Although the expanded estimate of the total number of loans validated well against other sources, it remains possible that other variables would show greater error. This could happen if individual lenders with higher than average repossession rates were assigned too high an estimate of market share using this method. However, the expansion factors used are not large enough for this to account for more than a small amount of the discrepancy
• the effects of expanding the CML survey sample. We have no grounds for criticism of the CML survey and expansion method: however, the survey and expansion processes may lead to elements of imprecision, in common with virtually all other surveys
• it is possible, but unlikely, that the research survey included a small element of double counting of cases when more than one lender held a security on a property. A selection of lenders were asked about this possibility in a follow-up and none said that this was possible as only the lender which moved to repossess the property would record it as a repossession.

8.10. Considering all the factors, it seems certain that the true figure lies between the survey estimates, and is probably closer to the research total. This implies a working estimate of about 3,800-4,000 cases in 1999. It must be acknowledged that this is judgement, albeit one formed within the constraints of the survey estimates.

Trends

8.11. A principal reason for undertaking this research was the substantial upward trend between 1994 and 1999 indicated by the CJS and CML data. It appears, for reasons set out in Chapter 4, that the CJS data may be unreliable and, in particular, that the 1994 baseline may be unrealistically low. In addition, the number of orders granted has not been found a reliable indicator of either total numbers or trends. However, the increase of 70% indicated by the research data collated at the sample of courts was the same as that shown by the CML figures. While it must be fortuitous that an identical increase was measured, this consistency suggests that the true figure is close to 70%.

8.12. However, the research findings suggest that trends should be interpreted with caution. The number of repossessions recorded in any year is a function of historical as well as current factors. Such factors include

• the number of mortgages extant at that time
• the distribution of maturity of these mortgages, which is a function of rises and falls in the market over time. The likelihood of repossession is higher in the early years of a mortgage
• lending policies over the years prior to the 'indicator year'
• social, administrative, economic and legislative changes over the years prior to the 'indicator year'.

8.13. The difficulties surrounding the use of repossession numbers as indicators for social policy development are readily illustrated by two points made in Chapter 3. Firstly, it appears that, once the unavoidable effects of increases in the number of loans and a reduction in the maturity of loans has been taken into account, the underlying 1994-1999 trend is far smaller than that initially suggested. It is not possible to quantify this precisely, but a residual trend of about 25-30% seems likely. Secondly, it appears highly likely that the trend between 1993 and 2000 would actually be downward if account were taken of fluctuations in the size of the market, which would greatly reduce the implications of the 1993-1999 figures in this volatile situation.

future indicators

8.14. As the trend indicators are both volatile and lacking in direct relevance to current circumstances and policies they seem to be of limited value as a guide for policy development. Certainly, it would not be advisable to attempt a year-by-year response. That being the case, it appears that the CML survey results give an indication of trends that is sufficiently reliable to meet most functional requirements. The differences in absolute numbers (as opposed to trends) between the CML and the research surveys are notable, and it would be feasible to undertake surveys similar to the research survey from time to time as an independent check. Any future survey should incorporate the following:

• number of loans (secured loans and mortgages)
• average number of securities per property
• the value of the loans
• the number of repossessions carried out by the responding lender.

8.15. A survey such as this could be used as an occasional cross check against CML annual returns. It would differ from the regular CML survey, as it would include secondary lenders.

8.16. It seems unlikely that court data summarised from registers will ever be suitable as an indicator of the number of repossessions, or of trends. That said, it would be desirable to standardise recording more effectively than in the past. Chapter 4 points out some of the specific problems encountered with this data. The new computerised court system may aid standardisation between courts, but cannot, in itself, eliminate errors of scope or definition.

8.17. It appears certain that the introduction of the Mortgage Rights (Scotland) Act 2001 will affect the use of legal action by lenders and the outcome of cases. Indeed, the implications of the act seem sufficiently far-reaching to require an evaluation of independent design, rather than assessment using standard indicators. This design would have to be prepared with some indicative knowledge and understanding of the use of the act in its early period. The findings of this research should be of value in setting a baseline before the act, but assessment of future monitoring data requirements would have to be made as a part of its evaluation.

ACTIONS THAT MIGHT REDUCE ARREARS AND REPOSSESSION

8.18. Despite the uncertainties regarding precise numbers and trends, it is evident that repossession is an adverse outcome for both borrower and lender. The remainder of this chapter is concerned with identifying actions that are being taken, or could be taken, to reduce its incidence. Current action is considered first.

Recent Action - Mortgage Rights (Scotland) Act 2001

8.19. The Mortgage Rights (Scotland) Act 2001 has been summarised in Chapter 2 (2.58).

8.20. There are a number of issues that have a bearing on the use and effect of the Act in practice, some of which are picked up in this report. Firstly, much may depend on whether borrowers take legal advice. Research evidence suggest that some people do not seek advice about problems of this kind (Genn et al, 2001; Scottish Consumer Council, 1997), often because they don't know where to go, or think there is nothing that can be done. There is accordingly a need to ensure that people are exposed to suitable advice.

8.21. Secondly, it will depend on how many people will be eligible for legal aid. Those who are not represented by a solicitor must appear in court themselves, as the Act contains no provision for representation by a lay representative e.g. a CAB worker.

8.22. There is some evidence in the report that borrowers perceived the court process as intimidating, that they felt lenders would have better legal representation, that sheriffs might not be sympathetic. These reflect more widely held public perceptions of the legal system in Scotland, as described in recent research (Genn et al, 2001).

8.23. Very few borrowers raise any defence. The new bill puts the onus on the borrower to seek the section 2 order- the experience of debtors behaviour in other types of debt case as well as previous cases of repossession, suggests that few will take this up, and/or seek appropriate advice.

Action in areas currently under consideration

8.24. There is a need for better pre-purchase advice and information for buyers. (This is presently being considered more generally by the Housing Improvement Task Force)

8.25. The report has highlighted some incidences of borrowers failing to seek adequate pre-purchase advice from formal sources. There was a high reliance on brokers and little shopping around to find properties and lenders. Overall, few borrowers had sufficient concept of the risks involved in home ownership. Nevertheless the vast majority of all borrowers, not just the interviewees, cope.

8.26. The need for more, and better, pre-purchase advice and information for buyers is particularly important for first time buyers, right to buy and other low-income buyers.

8.27. Areas where more advice would be beneficial include

• the dangers of taking on additional secured loans, possibly to improve the property
• the need to take financial advice when difficulty occurs, before it becomes unmanageable
• emphasis on the importance of communicating with their lender at the onset of financial difficulties
• information on the risks and costs associated with buying a property, including responsibility for repairs, and the costs of maintenance
• guidance on property surveys (some borrowers had bought properties with structural problems, hidden costs of repairs). Research carried out by the Scottish Consumer Council suggested that 18% of respondents said they had not clearly understood the differences between the various types of survey available (Scottish Consumer Council, 2000). They tended to opt for the cheapest, a mortgage valuation, which may not show up major problems. The percentage of those not understanding the differences between surveys and opting for the cheapest rose to 31% among first time buyers ³⁶
• information and advice on mortgages - including information on interest rates (including the cost implications of coming off a fixed rate), Mortgage Payment Protection Insurance (MPPI), the risks of high Loan To Value (LTV) mortgages and/or borrowing to the limit (given the possibility of unexpected costs arising or changes in personal circumstances etc.)

8.28. None of the above is new: however, the need is reinforced by this research.

8.29. To be effective, this advice would have to be given pre-purchase by solicitors, brokers and lenders. While it is not suggested that such advice is never offered at present, it did not appear to be provided to some of our respondents, at least in a sufficiently effective manner. Written information may be available, but it is possible that those who are in most need of advice may be least likely to avail themselves of this. A recent report into house buying and selling in Scotland (Scottish Executive, 2002) concludes that there is a great deal of written information on the house buying process. However, the sheer volume of different information resources, and the fact that few publications seem to offer a concise, clear guide that covers each of the components properly, mean that buyers often feel overwhelmed and find it difficult to distil the information they need.

8.30. Financial advice should be regulated to protect borrowers and ensure that they receive sufficient good quality advice to make an informed decision as to the financial products they sign up to. The Financial Services Act 2002 aims to regulate the advice given by mortgage brokers.

Mortgage to rent schemes

8.31. A feature of this which distinguishes it from all other approaches to assisting borrowers in difficulty is that it can actually provide them with more income, in the form of housing benefit. Widespread adoption of the scheme would, of course, be costly but the benefits for those involved can be considerable. It must also be recognised that the alternative - homelessness - will also bring with it costs to the public purse.

MPPI insurance

8.32. There are issues about the role which private insurance can play. The borrowers and lenders interviewed in this study placed limited store on MPPI as it existed. Concerns were expressed that those most in need of it cannot afford it or do not want it. The DETR/DSS Housing Green Paper has proposed changes to create a more direct link between ISMI and the take-up of MPPI.

Mortgage brokers

8.33. Again, this is an issue reserved to the UK Parliament. Advice given by mortgage brokers will be regulated to some extent by the Financial Services Authority (FSA). However, some borrowers were clearly unhappy with the service they provided. It was suspected, based on evidence obtained in the interviews with borrowers, that some brokers may have recommended the products that earn them the highest commission, which tend to be at the higher risk end of the market. The research evidence from the borrowers' survey was that many borrowers were recommended to remortgage with lenders which charged high interest rates.

8.34. These products inevitably have high interest rates. While in many cases these may be the only products available to customers with low incomes or a bad credit history, the high rates will contribute to their inability to keep up payments.

8.35. A related point is that it is unlikely that mortgage brokers will often suggest to potential clients that their financial circumstances and prospects make them high-risk borrowers. People often turn to brokers simply because they believe that this will be a route to a loan, or size of loan, that they might not obtain without such representation.

The need for better financial education

8.36. This is again a reserved issue, which is being dealt with elsewhere (Department of Trade and Industry (DTI) Task force on Tackling Over-indebtedness).

8.37. There is a clear message from lenders and, to some extent, from borrowers that such education is required. Consumer education (for adults) is reserved to the UK Parliament as part of consumer protection policy. However, education in schools is devolved, and the responsibility of the Scottish Executive. People need to know from an early age how financial products work and how to compare these. They need to know the basics of budgeting, how to avoid getting into debt, and how to spend sensibly. It is recognised that the idea of introducing financial education in schools may be contentious, given the strong body of public opinion wanting schools to focus on the 3 'R's.

Access to credit

8.38. This issue is related to the need for better financial education, as consumers need to be educated to use credit sensibly. Experience and research show that a debtor with only one debt is rare - most have multiple debt, and easy access to credit is often blamed as a reason for this. Again, this is a reserved issue, and is being considered by the DTI Task force on Tackling Over-indebtedness.

8.39. There is also an issue about the availability of credit to those with bad credit records, those who live in certain areas and/or are on low incomes. Those with the least money are those who have access only to the most expensive credit (including mortgages). This may well contribute to difficulties and repossession in some cases.

Need for better consumer choice

8.40. The report describes how customers are often offered building, contents and MPPI insurance by their lender. While ostensibly optional, in many cases it is made difficult for them to go elsewhere.

8.41. Equally, there is a suggestion that customers are encouraged (in one case until recently required) to take out a current account with their lender.

8.42. While these are reserved issues, and are being tackled by the FSA, they may be worthy of more investigation.

OTHER RECOMMENDATIONS

Lenders' policies

8.43. While many lenders do operate good practice, it is always possible that some further consideration of policy and consistency will be productive.

8.44. Specific topics for consideration include

• it is understandable that lenders generally charge for letters, telephone calls, advice and counselling to borrowers in arrears; they do not think it reasonable that these costs should fall on borrowers who are honouring the conditions of their loans. Nevertheless it needs to be recognised that these charges compound borrowers' debt problems, and may contribute to the reluctance of some to contact the lender to try to sort matters out. The research has demonstrated that borrowers in financial difficulty are not able to meet the charges incurred while they are in arrears. The charges may also serve to undermine borrowers' faith that the lender will genuinely seek to resolve their difficulties in a sympathetic way. Reducing or abandoning charges could be an investment worth considering for lenders when the costs associated with repossession are taken into account
• it was interesting that both lenders and borrowers complained about the quality and quantity of communication. Certainly, there was little reason to doubt that this was a problem for lenders, and it is known that people in financial difficulty tend to hide from their problems in this way. Given the efforts to communicate that we heard about, it is difficult to identify how this problem could be overcome. Reconsideration of charging policy may help. It is also possible that, if people were sufficiently aware of the implications of the Mortgage Rights (Scotland) Act 2001, they would be less inhibited by the fear of repossession
• encouraging face-to-face contact with borrowers in financial difficulties. Borrowers called for increased face to face contact rather than dealing with a call centre. More than one visit by a debt counsellor should be encouraged when necessary
• the need to encourage borrowers to seek independent debt advice at the earliest stage possible. This advice is free and impartial, and there may be multiple debts, which require to be considered together
• the need for flexibility was generally acknowledged by lenders. However, it was also clear that extending time for payments had the effect of increasing borrowers' liabilities. It is apparent that some borrowers will benefit from rescheduling of their debt, i.e. those with difficulties that might be of a temporary nature. Again, communication must be the key to implementation of a rescheduling policy: without this, assessment of a borrower's prospects would not be possible
• sending separate letters to joint borrowers, to avoid some of the problems identified in the report
• the need for more cautious lending practices. The research findings suggest that some borrowers, particularly those on low incomes, were given mortgages above what they could afford.

8.45. Little needs to be done to change the eligibility criteria and credit scoring. The only suggestions are

• limiting the length of repayment terms to retirement age for the majority of borrowers
• ensuring that in all cases (as is already common practice) the overtime element of income, and regular outgoings are taken into consideration when the size of loans is decided;
• considering whether one partner would be able to afford the mortgage if the other partner stopped earning;
• applying more stringent eligibility criteria to those on the lowest incomes. This of course would need to be considered with regard to the present government's wish to reduce financial exclusion.

8.46. It is acknowledged that these issues are already familiar to lenders, and that much good practice already exists.

Local authority housing policy

8.47. At present, it is difficult for borrowers to avoid the very worst effects of arrears by selling their house while it is still possible to cover their debt. An issue is that local authorities' housing allocation policies can discriminate against those who have sold their homes, on the grounds that they have made themselves homeless. Under these circumstances, most sales would leave the borrowers worse off than following repossession, despite having made efforts to clear their debt. This would make it very difficult for a financial advisor or debt councillor to advise action of this kind although, despite the attendant problems, it would leave the borrower in a rather better position to make a fresh start. If this policy were relaxed, it does not seem likely that the local authorities would be inundated with additional applicants: after all, it is they who often have to pick up the pieces following repossession.

Social security mortgage payments

8.48. The ISMI cutbacks have reduced the effectiveness of this benefit. In the last recession only about a quarter of people in arrears were eligible for ISMI. Neither this benefit nor MPPI can .cover all the risks that exist. Work is being carried out on the development of a better safety net.

8.49. Based on evidence from the borrowers survey, help needed which may prevent repossession is primarily financial assistance as soon as loss of income occurs. A delay in support exacerbates arrears and makes recovery much more difficult.

8.50. The research findings suggest that the cases where recovery is possible are much more likely to avoid repossession if short-term help is available for a period of loss of income. Cases that need long-term help are unlikely ever to be recoverable in ways that would be justifiable in terms of cost to the public. There may therefore be a case for providing short-term support, possibly following a review of the individual household's circumstances. However, such an approach would be pragmatic rather than self-evidently equitable.