Up to 140,000 British homeowners may have been trapped paying over the odds for their mortgages after the Treasury shelved plans to help them six years ago, it has emerged.
A freedom of information request submitted to the Treasury by This is Money has revealed that plans were almost finalised in 2013 to help thousands of so-called mortgage prisoners.
But at the last minute, Sajid Javid, now Home Secretary but then economic secretary to the Treasury, torpedoed proposed regulation that could have saved them thousands of pounds each.
Borrowers dubbed mortgage prisoners are stuck with lenders who no longer offer new home loans, but due to their financial position are unable to move to cheaper rates elsewhere.
Sajid Javid, then economic secretary to the Treasury, torpedoed the proposed regulation that could have saved mortgage prisoners thousands of pounds
At the time, the Treasury said Mr Javid and his advisers judged that ‘there was not sufficient evidence of consumer detriment taking place to justify the additional regulation at that time’.
But this followed multiple statements from previous Treasury officials, the former financial secretary to the Treasury Mark Hoban and the financial regulator that the Government had ‘evidence that some borrowers may be treated unfairly because their mortgage has been sold on to an unregulated firm as part of a mortgage book sale, a decision over which they had no choice or control’.
It now transpires that there are more than 140,000 people in this position. Mr Javid declined to comment on his decision.
The revelation comes just weeks after the Treasury Select Committee called on the Financial Conduct Authority to ‘act swiftly’ to help the 140,000 mortgage prisoners stuck with firms that no longer offer loans.
Nicky Morgan, the committee’s chair, said MPs had consistently raised the problems of mortgage prisoners with the Government and the regulator but so far just 10,000 borrowers were being offered help.
‘Under pressure from the Committee, the FCA has worked with industry and established a voluntary agreement, which allows most of the 10,000 mortgage prisoners of active lenders to switch to a better deal,’ she said.
‘Whilst help for these customers is a welcome step, there remain 120,000 mortgage prisoners with unregulated firms, and 20,000 with regulated but inactive firms. These customers are trapped on a far higher interest rate than is necessary through no fault of their own.’
A formal statement from the Treasury said: ‘The Government and the regulators are committed to helping homeowners trapped on high interest-rate mortgages. That’s why, following new evidence, the FCA recently announced plans to change the rules to make it easier for people to switch to deals that are easier to pay.’
Sources close to the current economic secretary to the Treasury, John Glen, said he had been ‘working hard’ on the issue.
Nicky Morgan, chair of the Treasury Select Committee, has put pressure on the FCA to help mortgage prisoners trapped on expensive deals
What’s the problem with mortgage prisoners?
Hundreds of thousands of borrowers were sold large mortgages in the run-up to the financial crisis with loose checks on affordability – the most high-profile examples being Northern Rock’s 125 per cent Together mortgages and the proliferation of interest-only loans without repayment plans.
After the credit crisis hit in 2007, the Financial Services Authority (the precursor to today’s watchdog the Financial Conduct Authority) cracked down on overly lax regulations.
It worked with the Government, trade bodies, mortgage lenders and consumer bodies to work out how to improve things.
Over the next six years they came up with the Mortgage Market Review – a set of rules that completely changed the way that mortgages were sold after 2014.
The most significant change was the fact that mortgage applications were assessed on how much borrowers could afford to repay each month. Affordability tests meant their income minus their fixed outgoings were checked, rather than loans issued at a simple multiple of their annual salary.
The other big change was that lenders were required to get evidence proving that borrowers could afford the loan for the foreseeable future. That meant bank statements, payslips and for older borrowers, proof of a guaranteed pension income.
Stress testing involved lenders ensuring borrowers could meet payments at highe rates, reflecting how short term fixed rate deals shift to more expensive standard variable rates.
This meant some borrowers who had been accepted for a mortgage in the past, could no longer meet the criteria for their existing loans. They were dubbed ‘mortgage prisoners’.
Were mortgage prisoners abandoned?
Initially, they weren’t. The work done in the run-up to 2014 when the rules were implemented included a huge amount on mortgage prisoners.
In particular, a waiver was included in the rules called the ‘transitional arrangement’, which allowed lenders to disregard the new mortgage affordability rules when an existing borrower applied for a new deal and they’d been paying their monthly payments to date.
This gave lenders the power to help those who had a mortgage with a provider that was still actively lending – not that they actually used it.
However, a second wave of rules came in the following year from Europe. The Mortgage Credit Directive overruled the FCA and stopped lenders from being able to use the transitional rule to take on mortgage prisoners from other lenders.
This posed a huge problem for hundreds of thousands of customers with loans from Northern Rock and Bradford & Bingley, for example, as well as from a number of now defunct lenders such as Lehman Brothers, Beacon, Southern Pacific Mortgages, Mortgages Plc, edeus, Rooftop, Amber and more.
Lehman Brothers went bust in 2008, largely as a result of trading sub-prime mortgages
Many of these loans were bundled up and sold to private equity firms, hedge funds and institutional investors.
The Northern Rock and B&B mortgages meanwhile were rolled into UK Asset Resolution – a state-owned company set up specifically to ‘run down’ the book.
Customers’ loans were often sold on to investors, but many were not authorised to offer new mortgages.
These are the 140,000 mortgage prisoners, who are consequently paying much higher mortgage rates than they could be. Some of them could have been saved this by the proposed rules to help them that were dropped by Mr Javid in 2013.
Why did the Treasury abandon their plans?
From May 2010 until September 2012 Conservative MP Mark Hoban was financial secretary to the Treasury and was in charge of overseeing its work in relation to the mortgage market rules.
He signed off an impact assessment in December 2010 which proposed to expand the regulator’s ability to intervene to help trapped borrowers.
It stated: ‘Some mortgage book sales may result in severe harm to borrowers, for example repossession without exploring forbearance options.’
At the time, the cost to implement the change was estimated at just £250,000.
Mark Hoban MP (left) backed plans to help mortgage prisoners in 2010; Sajid Javid (right) chose to put those plans on ice in 2013, leaving 140,000 borrowers overpaying their loans
Then in 2012 Sajid Javid was appointed economic secretary to the Treasury and subsequently financial secretary to the Treasury from 2013 to 2014.
A freedom of information request submitted to the Treasury produced the following statement: ‘The decision not to take forward the proposed legislation at that time was taken on 22 January 2013 by the then Economic Secretary to the Treasury, under the advice of officials that, as set out by the 2013 Treasury annual report and accounts, there was not sufficient evidence of consumer detriment taking place to justify the additional regulation at that time.’
What the Treasury said at the time
In 2013, the Treasury published its annual report and accounts, in which it said:
‘The Treasury continues to implement alternatives to regulation wherever possible.
‘For example: The Government previously announced it would be introducing further regulation in relation to circumstances where regulated mortgage contracts are sold on to unregulated firms.
‘Following a review, the Government took the decision it would not be taking forward legislation at this point in time, but would instead keep the position of contracts sold to unregulated firms under review and return to legislation if there is evidence consumer detriment is taking place.’
It followed years of preparation. In 2009 the Treasury published a consultation paper on mortgage regulation which said: ‘The Government proposes to extend the scope of FSA regulation to include the managing of regulated mortgage contracts as a regulated activity, so that borrowers will continue to benefit from the important protections provided by FSA regulation when lenders sell on mortgage books.
‘Firms that have the power to exercise or to control the exercise of any of the rights of a lender of a regulated mortgage contract (where a regulated mortgage contract is sold on, this is likely to be the owner of the mortgage) will be subject to the requirements of FSA regulation, including the requirements to treat customers fairly and treat repossession as a last resort.’
The FSA’s Mortgage Market Review discussion paper (which was their proposed rules) was then published in July 2010.
It said: ‘The previous Government…said it was minded to bring currently unregulated purchasers of mortgage books within our scope, albeit that technical issues raised by respondents first required addressing.’
Have these mortgage prisoners suffered?
Yes. There remain 120,000 mortgage prisoners with unregulated firms, and 20,000 with regulated but inactive firms.
These customers are often trapped on a far higher interest rate than is necessary through no fault of their own.
What’s happening to help them?
In January 2019 the FCA confirmed that it will consult on changing its lending rules to allow such customers to switch to an active lender, with whom they may be able to get a better deal.
This is five years after the mortgage market review rules were implemented, meaning that for five years, these borrowers have been overpaying on their mortgages.
The consequences for the mortgage prisoners
This is Money has received many calls and emails from readers affected by these issues.
One lady, aged 68 and who wished to remain anonymous, got in touch with This is Money claiming that the company which now owned her mortgage wrote to her in 2017 threatening to evict her.
She was struggling with arrears on her mortgage interest, having been granted a self-certification interest-only mortgage in March 2006 by then Lehman Brothers-owned mortgage lender Southern Pacific Mortgages Ltd (SPML).
She kept up with her payments until she retired in 2009, when she began to fall behind.
She claims SPML – now owned by a mortgage servicing company called Acenden – has pursued her ‘relentlessly’ since, threatening court action and eviction while piling on penalty fees and extra charges which have caused her debts to spiral.
She said: ‘I am caught up in a terrible financial nightmare. Every time I think I’m catching up, more charges appear.’