For this my first blog for Mortgage Prisoners I thought it worth thinking back and reflecting on how we arrived at our current position.
Some 34 years or so ago I started my career in financial services as a fresh-faced and ambitious young man. My early years saw me work for a Building Society and a French Bank and I had a particular interest in the UK mortgage market.
Back then the mortgage world looked very different from today and we were in the period before de-mutualisation in the Building Society sector and this was a time when mortgages were rationed by lenders. To illustrate this I recall my first Building Society Manager’s response to a question about how you obtained a mortgage vividly, he deadly serious answer was ‘on your hands and knees!’
Back in those days, the lenders all followed each other when setting interest rates and there were no fixed rates, with lending just being granted at the Standard Variable Rate (SVR). In the years that followed, market de-regulation saw the World change dramatically and choice for consumers proliferated. Fixed rate mortgages, capped rate mortgages, discounts from SVR, Base Rate Trackers, deferred mortgages, remortgaging and much more became commonplace as lenders went head to head and actually competed with each other on rate for the first time – competition for the benefit of consumers had arrived with a bang.
Ultimately this new found competition for business gave consumers a better deal, but as lenders appetite grew, they went further and further down the risk curve as they fought for new business. Mortgages were granted without any evidence of income to support the borrowing, indeed in many cases, lenders didn’t even ask what the customer’s income was. With hindsight, this was, of course, a disaster waiting to happen.
As we now know the financial world stopped spinning in 2008 and all the chickens laid in the era of de-regulation came home to roost at once. FCA (in my view correctly) sought to do what any regulator does post-crisis, lock the gate after the horses had bolted. They rightly wanted to ensure that the market had a more robust set of Rules to govern lending practices, irresponsible lending was to be stopped and the Mortgage Market Review (MMR) process commenced.
The MMR process was long and drawn out with a number of Consultation Papers (CP’s) flagging FCA’s latest thinking to the market. It became very clear that there was to be no return to the days of self-certified mortgages and one of the major MMR themes was a new focus on affordability. Now as with most regulatory interventions it was well-intentioned, but I argued long and hard through this entire process that any change in lending Rules going forward should not disadvantage those borrowers who already held a mortgage.
Eventually and very, very late in the Consultation process and perhaps a little begrudgingly FCA introduced Transitional Provisions (TP’s) into MMR and these were specifically aimed at ensuring that responsible existing borrowers were not disadvantaged by the new MMR Affordability Rules. The TP’s aid that if an existing borrower (pre-MMR) wanted a new mortgage (post-MMR) then provided that they were not in arrears and that they were not borrowing more than they currently owed lenders would not have to apply the new MMR affordability Rules. Had these TP’s been implemented by lenders as intended by FCA then the mortgage prisoner issue we see today would be greatly diluted.
Sadly, when MMFR came into force in 2014 lenders chose to implement TP’s for their existing customers, meaning that switching borrowers on to new products was quick and easy for them to do, but they failed to apply them to new customers. In doing this, lenders acted in a way that was diametrically opposed to FCA Policy intent and in so doing they knowingly created captive customers in their own back books.
Why is this so important? Well put simply it meant that each lender knew they had in one fell swoop trapped a chunk of customers on their books, who would not be able to remortgage away to another lender and as in any market when a provider knows a customer can’t vote with their feet there is no incentive to give them the best possible deal.
In future blogs, I will delve deeper into how this happened and will question why it was allowed to happen. We will also walk through some of the wider issues around mortgage prisoners, back book sales to non-regulated lenders, as well as the utter rubbish that has been spouted by so many about the European Mortgage Credit Directive (MCD) being to blame for this.
As I draw to a close and reflect on the plight of today’s mortgages prisoners I am reminded of how in so many ways they seem to have been transported back to where started – the anti-competitive World of the early to mid-1980s. The big difference between then and now is that it is only mortgage prisoners who are being taken for a ride by lenders and I can only imagine the sense of injustice they must feel when being locked out of what is an otherwise very competitive market that works so well for other borrowers.
It is not too late for FCA to do the right thing and when thinking about this I would urge them to remember that lenders have shown through their actions they cannot be trusted to sort this out themselves. FCA’s latest idea that ‘voluntary’ measures from lenders will fix this is frankly naïve after all these are the same lenders that deliberately implemented MMR TP’s in a way that was diametrically opposed to FCA’s Policy intent. Now is the time for imposition of change through hard FCA Rules as opposed to more enabling provisions that lenders can once again choose to ignore with impunity.
Pat Bunton was a Director at London & Country Mortgages (L&C), where he worked between 1993 and 2018 and was also Chairman of the Association of Mortgage Intermediaries (AMI) between 2013 and 2018.