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TSC hits out at FSA over interest-only time bomb

The Treasury Select Committee has criticised the regulator for not doing more to help the large number of borrowers in their late 50s who have no repayment vehicle in place for their interest-only mortgage.

The Financial Services Authority was today giving evidence to the TSC on the Mortgage Market Review.

TSC member Michael Fallon questioned Martin Wheatley, managing director of the Conduct Business Unit at the FSA, as to why the regulator was being so complacent about the time bomb and why it was just going to let it go off.

Wheatley admitted: “There is a ticking time bomb that has been created over the last 20 years, and what we are trying to do is make sure that time bomb does not get any worse.”

But Fallon responded: “But you are not defusing the bomb, you are making the rules for new borrowers but not tackling what I think is going to be quite a serious problem for a lot of people in their late 50s who are not going to be able to pay their mortgage.”

Wheatley responded by saying its regulations could not solve all the ills of the last 20 years, but said they can ensure that new mortgages are taken out with reasonable measures in place.

He says the MMR does include proposals to allow some existing borrowers to move home or remortgage without passing the current stringent checks.

Wheatley could not clarify how many people in their 50s have interest-only mortgages but said it was a large number.

Fallon also questioned whether there was a risk of moral hazard if a lender did not carry out the appropriate checks on an interest-only mortgage.

He challenged the FSA’s proposal that lenders only need check the repayment vehicle at the start of the term and at one point during, arguing this would allow lenders to get away with checking it just one year after the mortgage had been taken out and not again for the remaining term.

But Wheatley stressed that it would be a decision for the banks to make and that the regulator would have questions for a bank that adopted this kind of practice.

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  • Manx Norton 19th March 2012 at 5:17 pm

    Repayment mortgages usually are stuffed with front-end loaded charges so it makes sense, providing you have the financial discipline, to have interest-only and pay off lumps along the way.

    Another point,why can’t the plebs pull the Queen Mums stunt and die in (mortgage) debt, which has to come off the estate before IHT is levied.

  • Grey Haired Underwriter 16th March 2012 at 9:44 am

    I think the problem is that too many advisors are thinking short term and are failing to understand some very basic concepts.

    1. A mortgage is a contractual loan and that loan needs repaying on completion of the term. It is not a substitute for renting and was never intended to be
    2. The world is full of people with good intentions and I assume that most IO borrowers started out intending to repay the loan but for one reason or another failed to make provision, probably because they left it too late and didn’t like the price.
    3. Now that they have failed to meet their contractual obligation and have nowhere to go they will do whatever they can to avoid being homeless (an ideal breeding ground for ambulance chasers).
    3. We know that not all brokers were scrupulous in the way they dealt with their clients. Most lenders paid at least lip service and wanted to know the nature of the repayment vehicle but it is patently obvious that some of these exit routes were figments of someone’s imagination.
    4. When the original sale was made the repayment of the loan was some 20/25 years hence so I suspect that many people just thought the matter would somehow take care of itself. Let’s face it a lot of people only consider their financial future in terms of the next 1 or 2 years.
    5. It is also a fact that many borrowers get lost in the purchase of their ideal home and take no notice of terms and conditions of their borrowing. Their whole approach is more emotional than practical but we underwriters have to rely upon the seller to ensure that they (the borrower) fully understand the product (and that includes the internal salesmen as well as brokers).
    6. In practical terms if the borrower has a financial hiatus during the term of the mortgage the first thing that goes is the repayment vehicle, quite often never to be resurrected. This was especially true in the early 90’s when so many endowment premiums were just stopped and no alternative provisions were made. And a lot of these loans are coming to maturity now!

    The issue for lenders is not just how we prevent this from happening again but is also how we deal with those people who are coming to the end of their term.. I suspect that all lenders want to help a good long standing customer but MMR and the FSA’s attitude to lending into retirement make this a tough proposition.

    So when you are bemoaning the lack of IO loans (they are not a product by the way) just think of what will happen to your clients in the coming years. It is not always about the now.

  • Mike 15th March 2012 at 10:57 pm

    Its really all water under the bridge anyway in that at the time the clients had a good reason for using Interest Only and our Suitability Letters will reflect that, but I really take issue with some of the contributers who are already giving clients the bone that ‘they didn’t know what interest only meant’! All my Suitability Letters point out what it does mean, that they will not repay the loan and they will either have to repay the mortgage or sell the property to repay the mortgage at the end of the term. So it’s a none issue in the blame game but why are we always made to be on the defensive and why are fools always taking the part of nay Sayers. Let’s not dwell on this negative but continue to do what we do best, look after our clients. (make sure we cover our backs though with good suitability letters though) LOL

  • anon 184 15th March 2012 at 6:10 pm

    loans that will never be paid back? shocking. ban them. NB isnt this exactly what george osbourne is considering doing for the whole country?

  • Peter Stimson 15th March 2012 at 1:03 pm

    All,

    The very fact that they claim not to know, whether this is genuine or otherwise is strong evidence that they coudn’t be trusted with IO loans.

    IO is relying on people largely taking responsibility for a debt, not something the UK population appears to be very good at. Are you lot seriuolsy telling me that the average man in the street is capable of managing a repayment strategy themseleves over 25 years? Most people live month to month.

    Despite all the arguments i keep hearing about IO being suitable for some people, in the vast majority of instances where it has been sold, it is simply about keeping repayments down, period

    There are literally millions of IO loans sold out there where i suspect the advise was inapropraite at best. Take at a look at some of the sub-prime and self-cert securitisations where 50%+ of the pool was IO. Customers took IO to save money with the aim of re-fi in 2 years time to borrow even more. They are now stuck with the loan static and the house price falling

    IO is largely a hangover from the ‘good-old’ days of borrow now and pay later – time to pay the piper…

  • Mike 15th March 2012 at 2:29 am

    John | 14 Mar 2012 4:34 pm
    I really am at a loss with this and to use your words ‘stunned’ that you say people don’t know??? As I said before, solicitors should have to get these people sign a paper of understanding so that they indicate that they do know what they are doing. Many people use the phrase “I didn’t know or understand” when it suits them (see claiming – “gave me the wrong type of ladder” etc.). If it is true……,, they shouldn’t have any type of mortgage as their ability to understand a financial product is insufficient, unless you think a person can understand the concept of capital + interest but not interest only??? Give me a break!

  • Big Dog 14th March 2012 at 7:50 pm

    If you aren’t “clued up sufficiently to understand their obligations.” then renting is for you.

    If you cannot understand the most basic of maths that a child would understand then home ownership is way way beyond you.

  • bobby 14th March 2012 at 7:16 pm

    John

    Exactly what part of the phrase INTEREST ONLY did they not understand. I think you will find they knew full well but want to blame someone else which is the default mode now for the masses of general public in this country encouraged by a ” where there’s a blame, there’s a claim ” mentality.

  • Luke Atkinson 14th March 2012 at 6:40 pm

    Wait for the claims companies to get hold of this data, mark my words, this will be the next ”bomb” to hit.

    How many of you have got insistent client forms signed confirming you advised Cap Rep but the client went against your advice?

    tick tock.

  • T P 14th March 2012 at 5:28 pm

    Don’t be so naiive, John. Of course they knew, but it wouldn’t have advanced their cause to be honest about it, would it ? As to “anonymous”, who showed a shaky grasp of the issues, but then claimed superiority ….. hmmm !

  • John 14th March 2012 at 4:34 pm

    At Anon 3.05pm – you are entirely right.

    I would love to agree with the ‘let people take responsibility for their actions’ but unfortunately not everyone out their is clued up sufficiently to understand their obligations.

    Having worked within a collections environment and made calls to those nearing retirement / coming to the end or their term you would be stunned into how many were not aware that over the years they have been paying purely the interest only element of their loan.

  • Mike 14th March 2012 at 3:38 pm

    Anonymous | 14 Mar 2012 3:05 pm
    Please be specific in your condemnation. What advice are you decrying. Many clients have different reasons for using Interest Only. Which of the reasons would you judge not suitable?

  • peter stimson 14th March 2012 at 3:05 pm

    I think most of you are missing the point (as usual)

    In a perfect world of perfect information and rational, sane customers who have a view on the longer term, and repayment plans in place, IO may make sense

    The question you have to ask is how many of the people in their 50’s with IO does this apply to? How many relasie they have an IO loan and the implications this presents?

    The resaon the economy is in a mess is because the vast majority of poeple geared up. At some point you have to pay the debt back. Putting your head in the sand (which appears to be FSA and most lenders aproach) isn’t going to help

    Unfortunatley it is a fact of life that most people need saving from themseleves. Choosing the low cost, easy, IO route is a long term mess for most people as they don’t want or habe the capability to think long term. The ‘i might be dead by the time i get to 60’ mentality unfortunatly kicks in.

    Reading most of the responses here I’d hate to be getting financial advice from most of you

  • Bryan Jones 14th March 2012 at 2:53 pm

    It is entirely the FSA’s fault. Totally, Utterly, Completely. 110%. How could they allow this? It is a national scandal.
    Everyday, we each expect our little helper from the FSA to come around, wake us up, pur out the cornflakes, brush our teeth, count out our dinner money allowance, wipe our little botties and tie our shoelaces. It is outrageous then that they let us go and buy a house with no money. Come on FSA, where are you: asleep at the wheel?
    And for goodness sake look at all those homebuyers who went and paid off their mortgage; evil anti-social money grabbing wretches. They probably avoid taxes an’ all, what with tryin’ to save for retirement. Sitting there all smug and santimonious with their “no outstanding debts as I go into retirement” looks on their faces. Them lot should pay up. That’s what they should do. Those smag so and sos should be made to buy a house each for all us people who want everything on the cheap. Well while they’re are at it, reluctantly taking their filthy snouts out of the trough and putting their trotters in their pockets, I demand they buy me a holiday pad on the Costa Brava as well. It’s me human rights an’ all.

  • Derek Robinson 14th March 2012 at 2:17 pm

    I look forward to hearing their proposals for the protection of tenants in their 50s, doomed to a lifetime of paying rent.
    We all have to think like bankers to understand these regulators.

  • the plan 14th March 2012 at 2:15 pm

    IHT plan = die in debt, end of.

  • Concerned? 14th March 2012 at 2:10 pm

    If they are so concerned, instead of entering a ‘blame game’ (who in fact gave us the blame culture?, Have all lenderes contact their interest only customers, advise them that they will have to change to repayment and give them 1 year to prepare. In this year, the client can either decide to sell, rent, downsize, repay, stay on an interest only basis haveing signed a waiver that they are aware of the consequences at the end of the mortgage term or convert to a repayment mortgage.

  • Ancient Wisdom...is a mortgage broker in N3 14th March 2012 at 2:01 pm

    Interest only a time bomb? WTF!

    More like BBR rising to 5% and repayment mortgage = loseing your home because I cant afford to pay the mortgage TIME BOMB.

    Lenders offered interest only and flogged mortgags – now THEY are the ones who are worried, not the borrowers as much lending was done to those that shouldn’t have got a mortgage in the first place.

    Next the FSA & TSC will be telling us what to eat and where to buy our clothes from.

  • Mike 14th March 2012 at 1:59 pm

    HEAVEN HELP US!
    The nanny state strikes again.
    Why did people use Interest Only?
    1) Cheaper than renting – what do tenants do when they retire?
    2) Increasing mobility – you don’t reduce your repayment mortgage mutch in early years so why pay more?
    3) Affordability – Better to have an interest only mortgage now than no home?
    4) Holiday home – dont want to own but better value than a caravan?
    5)Capital growth?
    These are just some reason people took out an interest only mortgage and all valid. The nanny state wants everyone to conform to it’s dull, grey thinking and not give people a choice to run their own lives. There should just be a standard declaration that borrowers should sign and nororised by their solicitor that they are aware they will not repay the loan and that the end of the mortgage term they will have to either repay th emortgage from another source or sell the property and repay the outstanding debt. Simple! Then let the borrower take responsibility where it has always been.

  • Steve 14th March 2012 at 1:39 pm

    How about people taking responsibility for their own decisions? Individuals and banks (and some advisers!) could not believe that prices would stop going up.

  • Bill Wells 14th March 2012 at 1:32 pm

    It sounds to me as if the TSC is as moronic as the FSA.

    It is not up to either to micro-manage ordinary people’s financial decisions. People should be allowed to make choices.

    It is up to providers and borrowers to decide what is appropriate rather than forcing everyone to effect a repayment mortgage.

    There is far too much interference by the Nanny State in all aspects of our lives and this is yet another example of meddling by quangocrats.

    The fact is that the government should have been building affordable social housing for the past 40 years so that people have the choice between buying their own home (if they can afford to do so) or renting from the State. Massive failure on the part of government policy over two generations is not going to be rectified by rules made up by an incompetent, over-bearing regulator.

  • Mr Howazki 14th March 2012 at 1:15 pm

    this is scandalous, why blame the FSA..these people need to take responsibility, I mean how stupid have you got to be to realise your mortgage is not going down and there is a loan outstanding, typical blame culture, and no doubt these people will be bailed out by someone, probably the banks, even though its not their fault.

  • Tim Purdon 14th March 2012 at 1:11 pm

    Maybe some of us who have both the capital and income do not wish to repay our mortgages in later life. So why should we be restricted by the regulators view of what is best for us. That’s our business not the regulators. The assumption that the regulator knows best was blown out of the water some time ago.