The Government’s failed 250,000 mortgage prisoners and only it can release them – with coronavirus a tipping point, not acting now could devastate lives
A new MSE-commissioned report by the London School of Economics proposes eight practical policy solutions to free trapped borrowers, which Government has committed to reviewing
A new, landmark report on mortgage prisoners is being published today by the London School of Economics and Political Science (LSE), highlighting the urgent need to unlock 250,000 trapped in unaffordable mortgages. The research – commissioned by MoneySavingExpert.com (MSE) – was funded by a substantial personal donation from MSE’s founder and chair, Martin Lewis (who also chairs the Money and Mental Health Policy Institute). The Economic Secretary to the Treasury, John Glen MP, wrote to Martin Lewis when the research was announced earlier this year, saying he would give “full consideration” to the proposals and setting out his key requirements.
MSE has been campaigning to free mortgage prisoners since 2015 (1). Mortgage prisoners are those trapped with their current lenders (which are often inactive or not authorised to offer new products), through no fault of their own, leaving many paying far higher rates than they would otherwise need to. They are often rejected when they apply for cheaper mortgages because they don’t meet strict borrowing criteria brought in after the 2008 financial crash – even if they are keeping up with repayments.
The LSE’s report has found:
- Mortgage prisoners are up to 40% more likely than other borrowers to default due to coronavirus. The economic impact of the pandemic has deepened the crisis – LSE’s modelling shows some borrowers in ‘closed books’ (those whose loans were sold to a firm that cannot offer them another mortgage) could be almost 40% more likely to default on mortgage payments in the face of a coronavirus-like scenario than another borrower with a similar income.
Meanwhile, lenders have become more risk-averse in the pandemic, with much less appetite to help mortgage prisoners, while a possible fall in property prices leaves borrowers at risk of negative equity. This means solutions urgently need to do more than simply help prisoners access the wider lending market.
- Mortgage prisoners have higher rates of physical and mental health problems. The LSE’s research found that mortgage prisoners are more likely than the average borrower to have general debt problems or be in arrears. Many pay mortgage rates that are far higher than the market average and cannot escape from the situation by remortgaging.
This contributes to higher rates of physical and mental health problems, generating costs for prisoners and their families, neighbourhoods, the NHS and society as a whole. Many mortgage prisoners have told MSE of the extreme emotional and physical burdens of the situation they have been left in. The LSE report stresses that effective solutions should prevent defaults, keep people in their homes and mitigate debt problems, including other non-mortgage debt.
- The regulator has likely reached the end of what it can do. The Financial Conduct Authority (FCA) has adopted policies to make sure mortgage prisoners are treated fairly where possible, yet the solutions it can put in place will only help a small minority. The LSE has shown that the regulator has, for all intents and purposes, gone as far as it can within its current powers, including relaxing affordability rules – but take-up of its measures by lenders has been slow, especially in light of coronavirus.
- Only the Government can free mortgage prisoners – and it has a moral responsibility to do so. The LSE report concludes that only the Government can, and should, free the huge number of mortgage prisoners, as the problem was largely created by the policies of successive Governments.
Before the global financial crisis, mortgage prisoners entered into loans with reputable, mainstream lenders that subsequently failed, such as Northern Rock. Many of their mortgages were taken into Government ownership, and then moved to a new, Government-owned holding company called UK Asset Resolution (UKAR). Prioritising financial profit over consumer protection, UKAR sold a large proportion of mortgage prisoner loans to firms that are not mortgage lenders and are not able to offer them a different, cheaper product.
LSE has devised eight potential solutions to free mortgage prisoners. Now the Government needs to assess the full costs and benefits of these proposals.
The biggest stumbling block in assessing solutions for mortgage prisoners is a lack of publicly available data – even Freedom of Information requests submitted by the LSE couldn’t get to it.
MSE and LSE are calling on the Government to urgently use data on all UK borrowers – which only it and the financial regulators have access to – to accurately calculate the costs of the proposed policy measures.
The solutions all need Government action and clear leadership. They are explained in detail in the report’s executive summary, but here are some brief examples:
· Interest-free Government equity loans – which, similar to the Help to Buy scheme for first-time buyers, would bring down some prisoners’ loan-to-value ratios so they can remortgage.
· Remove ‘Together’ loans as an obstacle – by decoupling the secured and unsecured elements of this former Northern Rock product (2), taken out by many mortgage prisoners.
· Mortgage rescue – which would allow those whose mortgages are financially unsustainable to remain in their homes as tenants, while the property is sold to housing associations with a buy-back option later.
· Bringing all owners of ‘closed books’ within the FCA’s oversight – similar to measures in Ireland, this would bring owners of ‘closed books’ within the FCA’s regulatory perimeter.
The LSE also suggests, regardless of which solutions are used, that mortgage prisoners are provided with better information about their loans and protections and are better signposted to debt counselling and advice.
Martin Lewis, founder of MoneySavingExpert.com, and who funded the LSE research, said: “Mortgage prisoners are the forgotten victims of the 2008 financial crash. The Government at the time chose to bail out the banks, but unfairly – immorally – hundreds of thousands of their victims were left without adequate help, trapped in their mortgages and the financial misery caused by it. And they have been forgotten ever since.
“The Prime Minister has touted the idea of subsidising 5% deposit mortgages for first-time buyers. Alongside that, there is a moral responsibility to release money to free mortgage prisoners from their penury. I was delighted when Treasury Minister John Glen agreed in advance to review any policy proposals the LSE came up with. The independent, practical solutions in this report leave no excuse for not tackling this, though as an urgent first step, the Government must agree to do the remedial work, using critical data it has access to, to cost the solutions up fully.
“Speed is necessary now, as coronavirus has torn through people’s livelihoods. But for people whose finances and freedom have already been destroyed for more than a decade, they had already met breaking point – they are now defeated. Nobody should underestimate the detriment to people’s lives and wellbeing if the Treasury doesn’t act, and act soon. Intervention can and will save lives.”
Kath Scanlon, distinguished policy fellow at LSE London, said: “The Government took measures after the global financial crisis to make mortgage lending less risky, but these policies also contributed to locking some borrowers in to their existing lenders. The situation has caused real harm for many affected borrowers, yet UKAR and FCA policies to address the problem help only a small minority. And now coronavirus is making the situation much worse.
“Our research aimed to understand the range of circumstances facing mortgage prisoners and identify solutions so more of them can reduce their payments and/or restructure their mortgage arrangements and keep their home, and we found a strong case for fully investigating a wider variety of solutions. We hope our work contributes to a long-lasting solution for these borrowers.”
Rachel Neale, from the UK Mortgage Prisoners group, which campaigns for victims of this mortgage scandal, said: “UK Mortgage Prisoners would like to thank Martin Lewis for funding the research and researchers at LSE for their attempts to find solutions. It is now abundantly clear that borrowers were ‘not to blame’ for taking out mortgage products with ‘household names’ such as Northern Rock and Bradford and Bingley. The responsibility lies largely with ‘successive Governments’.
“The financial and emotional harm sustained for over a decade has been devastating for mortgage prisoners. These consequences are well known by the Government; therefore it is now time to find a fair and ethical solution for all mortgage prisoners.”
Notes to editors
(1) MSE has repeatedly called for the Government to take action to free mortgage prisoners. While Economic Secretary to the Treasury John Glen MP indicated he is open to considering extending the FCA’s remit to help, so far the Treasury has made no practical attempt to find a way to release those still stuck in this financial trap.
(2) ‘Together’ mortgages were loan products, issued by former lender Northern Rock, which were often above 100% of a property’s value. They combined a secured mortgage and an unsecured loan (intended for costs such as home improvements) at a single interest rate with a combined monthly payment. Mortgage prisoners with Together loans can only remortgage with an authorised lender if the unsecured debt is de-linked, and they pass affordability checks for a new mortgage. However, the LSE has found that contractually, if the borrower cuts the link – say, by switching the secured element to another lender – it could trigger a sharp rise in interest on the unsecured element.
Please find annexes to the LSE’s report here.