Government made £2.4 billion from mortgage prisoner scandal - Martin Lewis says it must fix problems caused
A landmark new report published today by the London School of Economics and Political Science (LSE) puts forward costed solutions to the horror of the situation facing up to 200,000 mortgage prisoners, who have been trapped on high rates after their loans were sold by the state to 'closed book' inactive lenders.
Update: 10 March 2023: Economic secretary to the Treasury, Andrew Griffith, has confirmed that he will read and seek official advice on the proposals put forward in the report – see our Mortgage prisoners report update for the latest.
The report, which was commissioned by MoneySavingExpert.com and funded by a private donation of almost £60,000 by Martin Lewis, is the third in the series and was launched in a Parliamentary event at the House of Commons today (Wednesday 1 March).
For more on the history of Martin and MSE's campaign, and what limited help you can get if you're affected, see our Mortgage prisoners guide.
Key findings from the new mortgage prisoners report
Here's a summary of the key points from the report:
- Mortgage prisoners have been trapped on high rates since the 2008 financial crisis. Many have loans that were sold by the state to 'closed book' inactive lenders – largely investment companies that are not regulated to lend new mortgages – making it difficult for them to move to cheaper rates.
- This final LSE report is for the first time able to include indicative costings the Government requested. Chief Secretary to the Treasury John Glen MP committed to reviewing solutions put forward in the LSE report, telling Martin Lewis that proposals would be given "full consideration" as long as they met his three criteria: delivering value for money; fair use of taxpayer spending; and addressing risks of moral hazard.
- Prisoners have suffered financially, mentally, and physically for more than a decade. The horror of being unable to escape unaffordable mortgages has had a devastating impact on many. In the past year, near-monthly rate rises have seen some prisoners' rates leap from 4.5% to as much as 8.29%. Groups representing mortgage prisoners have told MSE that some have even sadly taken their own lives.
- The Government has made £2.4bn from the sale of these loans. Not only has it made back the cost of managing the sales, the LSE report finds evidence that it has generated a £2.4bn surplus. In 2009, the Government acknowledged that selling these mortgages to inactive lenders had the potential to severely harm consumers, but didn't take action to prevent this.
- The LSE report has proposed solutions that would help prisoners eventually remortgage with active lenders. These are detailed in full in LSE's third report and include...
- Free comprehensive financial advice for all prisoners (required for any borrower who might go on to access other solutions).
- Interest-free equity loans to clear the unsecured element of Northern Rock's 'Together' loans.
- Government equity loans on the model of Help to Buy, interest-free for the first five years.
- Fallback option: A Government guarantee for active lenders to offer prisoners new mortgages.
- The LSE report estimates these solutions could cost between £50m and £347m over 10 years depending on take-up. While the overall outlay would be £370m to £2.7bn, this is reduced to £50m to £347m net, as the Government would hold some equity loans itself.
Martin Lewis: 'This has destroyed lives – the Government has a moral and financial responsibility to mitigate some of the damage done'
Martin Lewis, who funded the report and is the founder of MoneySavingExpert, said: "This report lays out starkly that the state sold these borrowers into poverty, knowing it could cause them harm, and made billions doing it. The result has destroyed lives. People have been left in financial, physical and mental misery, exacerbated by the pandemic and cost of living crisis ripping through their already dire situations.
"When we put solutions to the Treasury in the past, it said it wanted to look at them, but couldn't as they weren't costed. Now, having fought tooth and nail to get some of the data needed from official institutions, it is costed. The Government has a moral and financial responsibility to mitigate some of the damage done. Mortgage prisoners are the forgotten victims of the financial crash. The banks were bailed out at the expense of these borrowers.
"I hope the Treasury lives up to its past promise to investigate at speed and uses this report as a springboard to find any and all solutions to free mortgage prisoners."
Martin Lewis, MoneySavingExpert.com founder, speaking at today's report launch in Parliament (Photography courtesy of Seb Higgins.)
Report launched in Parliament – Wednesday 1 March
Here are some statements made by key spokespeople at today's event:
- Martin Lewis said: "Sadly, things have been worsened for mortgage prisoners, like the rest of society, because of the cost of living crisis. There are many people in the country now who are struggling financially, and it is jolting their mental health.
"But the continued long-term pounding that mortgage prisoners have had since 2008 cannot be overlooked - and is not negated by the fact that other people are now struggling too. The shock after shock after shock that mortgage prisoners have been dealt, is simply untenable without some form of Government involvement.
"There is no more that we can do to prove that urgent action is needed... Mortgage prisoners deserve financial justice."
- Seema Malhotra MP, co-chair of the All-Party Parliamentary Group on mortgage prisoners, added: "It's clear that FCA [the Financial Conduct Authority] and Government interventions to date have not worked… We do need urgent action. We do need something that will be done in the short-term as well as those medium-term interventions that can shift and try to see an end to the crisis prisoners are facing."
- Campaigner Rachel Neale, who leads the UK Mortgage Prisoners group, said: "Through our campaign work, we get hundreds of requests for help from prisoners whose stories are already devastating, living in crisis since the 2008 financial crash. But [it's] now so much worse in the current cost of living crisis. Ten consecutive rate rises later, the need for solutions is urgent. For some families it is already too late."
The LSE report's proposals in more detail
The LSE report – Releasing the Mortgage Prisoners – has come up with a structured set of solutions that could be used to free mortgage prisoners. A full policy assessment, which only the Treasury has the data to do, would also have to calculate expected benefits. The proposals are based on significant research, but there are other potential policies that could cost less or more – which can and should be explored.
- Free comprehensive financial advice for all prisoners. Up to 200,000 closed-book borrowers should be contacted individually to access comprehensive and holistic financial advice – not only about mortgages, but also debt, benefits and income.
This advice would be paid for by Government and delivered through organisations like Citizens Advice and StepChange. Complex cases could be referred to specialist financial advisers. This advice would be required for borrowers to take up any of the next steps.
- Interest-free equity loans to clear the unsecured element of Together loans. This former Northern Rock product, taken out by many mortgage prisoners, was made up of a mortgage of up to 95% loan-to-value (LTV) and a linked unsecured loan of up to 30% of the value of the property, capped at £30,000. The interest rate on the unsecured element goes up dramatically if the secured element is remortgaged with a new lender – making this a particularly toxic product.
The LSE's report says the secured and unsecured parts of Together loans could be uncoupled by clearing the unsecured element through a second-charge loan provided by the Government – removing some barriers to remortgaging, which could free some mortgage prisoners with these loans. This would be interest-free for the first five years, with no requirement for regular repayments, and then would bear interest at normal market rates.
- Government equity loans on the model of Help to Buy. Using the established model of Help to Buy loans, the LSE report proposes that some with more substantial arrears could be helped by similar funding from the Government. This would be an equity loan for a maximum of 40% of the value of the property in London, and 20% elsewhere, which could be used to pay down the mortgage and other existing debt.
Those with interest-only loans could be moved to part-part loans (where some of the repayment goes against capital). Again, this solution would be interest-free for five years and then attract the same interest as Help to Buy (currently 1.75% increasing annually by RPI plus 1%).
This solution would make sure borrowers keep some equity in their homes and they do not incur extra debt. Importantly, it could reduce some mortgage prisoners' LTVs, helping them to eventually refinance on the open market.
- Fallback option: A Government guarantee for active lenders to offer prisoners new mortgages. This would change lenders' perceptions and actions for lending to borrowers with higher LTVs. The Government recently introduced a similar, temporary Mortgage Guarantee Scheme to ensure high LTV mortgages continued to be available during the pandemic.
The LSE report says the Government could consider something similar for mortgage prisoners to make borrowers who have done the above steps more attractive to mainstream lenders, releasing them into the open market.
The LSE report's model looks at cost to the Government – using several assumptions – if a realistic minimum of 10% engaged with this process, right up to a target of 70% engagement. It suggests this suite of solutions could cost anywhere between £370m and £2.6bn (net discounted over 10 years).
But the LSE report adds that with this proposal, the Government would still hold a stock of second-charge and equity loans at the end of the 10-year period used to calculate the cost – so as these are assets, they can further reduce the net overall cost of the programme to between £50m and £347m.
See the LSE's full report for more detail on these solutions and how they measure up to John Glen's criteria.
Pictured at the report launch: Kath Scanlon (LSE report co-writer), Jill Hulme (representing the UK Mortgage Prisoners Group), Seema Malhotra MP (co-chair of the All Party Parliamentary Group on mortgage prisoners), Martin Lewis (MoneySavingExpert.com founder), Rachel Neale (representing the UK Mortgage Prisoners Group), Peter Williams (LSE report co-writer). (Photography courtesy of Seb Higgins.)
What does the Government say?
A spokesperson for HM Treasury said: "We are open to practical and proportionate solutions to help mortgage prisoners, working with the Financial Conduct Authority and industry to carefully consider all proposals put forward."
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