Transitional provisions were introduced into the MMR to minimise the number of ‘mortgage prisoners’ post-implementation.
The FCA realised it would be quite wrong for a normal customer servicing their mortgage to be stripped of their ability to remortgage for a better rate simply because of the MMR. In a masterstroke of common sense, the regulator introduced TPs and, in PS12/16 3.16, stated: “Our revised approach allows lenders flexibility to make their own decisions about making exceptions to the affordability and interest-only rules for existing borrowers.
This will apply whether or not it materially affects affordability, as long as:
- There is no increase in the current amount outstanding (i.e. no additional borrowing), except product or arrangement fees, which may be added to the mortgage balance
- The lender has judged that the proposed transaction is in the customer’s best interests.”
In 3.17, the FCA specifically added: “These transitional arrangements will be able to be used by lenders to take on borrowers from other lenders.”
The intent of the provisions was clear and did not distinguish between new and existing borrowers, yet the market has implemented the MMR in a way that does precisely this.
The FCA says in public that lenders should use TPs to the consumer’s benefit and hints that it will be looking at this more closely when it reviews competition and barriers to moving in the mortgage sector. The problem is, that review is not scheduled until the end of this year and into next, whereas this is a clear and present issue.
Worse still, the issue of an affordability calculation being needed on all cases as a result of the Brussells-fired Mortgage Credit Directive has recently hit the press. The FCA has belatedly concluded that an affordability assessment will be needed on all new mortgages (but not existing product switches) from March 2016, due to the MCD. While this announcement has been greeted with sighs of relief at many lenders, they should keep the corks in the champagne bottles for now and remember that affordability is just one piece of the TP jigsaw.
We come across too many cases where sensible people are finding that they cannot do sensible things. Some commentators downplay this by saying it does not affect many people but, according to Resolution Foundation chief economist Matthew Whittaker, there are 770,000 mortgage borrowers who now find themselves prisoners.
We have seen customers forced off the housing ladder as lenders refuse porting to a new property. Others have been forced into breaking fixed rates with massive early repayment charges as lenders decline ports. To add salt to the wounds, many find they can get the new mortgage elsewhere, albeit after paying thousands more in fees to the new lender. Let me be clear: these are not isolated instances but everyday occurrences.
Lenders would also be foolish to ignore how the Financial Ombudsman Service may interpret all of this. After all, it has just found against a major high-street lender for applying a non-customer specific, one-size-fits-all policy.
The FOS stated that “the bank relied on untested assumptions, stereotypes or generalisations in respect of age” and that the assessment of the application was “inadequate” and “flawed”. It also criticised the lender’s “unfair application of its age policy” and ordered it to pay £500 in compensation and reconsider the application.
So I wonder how the FOS will react when a sensible borrower, with sensible needs, asks: “Why did the lender not use the TPs the FCA designed to help people like me? Why did it force a worse outcome on me? Surely my outcome is exactly what FCA rules are designed to mitigate?”
Going a step further, what if the customer highlights that the lender concerned was using TPs for its backbook customers, as almost all are?
Many lenders tell me the underlying issue is the Prudential Regulation Authority saying something different from the FCA. If that is the case, it is a regulatory absurdity that should be challenged.
Mutuals such as National Counties, Melton Mowbray and Ipswich building societies are using TPs for new customers, so if the issue really is a regulatory one, why are they able to do so when others say they cannot?
Lenders should consider how bad this looks. After all, who benefits the most from stripping away customers’ ability to vote with their feet? Is it the customer or the lender?
The odd mention of this in the occasional FCA speech is also a woefully inadequate response to an issue in which current consumer outcomes are diametrically opposed to regulatory intent.
Finally, it is so ironic that all of this needs saying at a time when political parties are placing homeownership at the heart of their manifestos.
1.3 million people being offered the chance to buy is a great strapline but what about also helping the 770,000 mortgage prisoners we already have?