MP’s Say Mortgage Plan is Doomed to Fail
MPs have said the government scheme to kick-start the UK mortgage market is not working.
The Communities and Local Government (CLG) Committee said the £50bn asset-backed guarantee scheme (ABS) was “doomed to fail”.
Further steps must be taken to boost mortgage lending if the housing market is to recover, it added.
The government has said it was working hard to improve access to mortgages and protect jobs in the property sector.
The MPs’ report came as two separate reports – by PricewaterhouseCoopers and the Royal Institution of Chartered Surveyors (RICS) – said that UK property prices would struggle to make meaningful recoveries until mortgages were more readily available.
The Latest figures suggest that mortgage lending picked up in May. But the number of home loans was still 28% lower than a year ago, according to the Council of Mortgage Lenders (CML).
The asset-backed scheme, announced in this year’s Budget, provides guarantees on lenders’ mortgage-backed securities – a step that enables them to sell on mortgages to investors, raising new money to lend to consumers.
But restrictions on which institutions can take part, and the types of loans that it covers, meant that it had so far had limited success, the MPs said.
“In its current form the ABS is a leap that reaches across only half the chasm: impressive, but doomed to fail,” said chair of the committee, Dr Phyllis Starkey.
“If we are to meet house-building targets, then CLG ministers and senior officials must maintain pressure on the Treasury to bring forward new measures to get the mortgage markets moving.”
The report also stated the government policy gave too much attention to promoting home-ownership, with not enough attention given to the rental sector.
“We now need a vigorous debate to review this approach and formulate a more coherent vision to guide effective housing policy and investment into the future,” Dr Starkey said.
And it called for skills and capacity in the UK construction sector to be protected, warning it took ten years to rebuild capacity in the construction industry after the last recession.
For the Conservatives, Grant Shapps said the report showed the government’s “inability to get beyond headline grabbing housing announcements which later turn out to be empty”.
Kay Boycott, speaking for the housing charity Shelter, said the report was right to flag up “our obsession with home ownership”.
Future housing policy should look at making renting more attractive by improving standards in the private rental sector and giving tenants more protection, she said.
A spokesman for the Department of Communities and Local Government said the report had recognised there had been “significant additional investment in building new homes”.
“We continue to do all we can to help the housing market and are working hard with the Treasury and Council of Mortgage Lenders to improve access to mortgages,” he said.
The government had come up with new ways to protect tenants in its response to the Rugg Review, a study into the private rented sector, he said.
Banks Take Action on Boiler Room Share Scams
Some banks in UK have begun screening customer transactions to clamp down on so-called “boiler room” fraud.
It is estimated by the Financial Services Authority that up to 30,000 people a year are losing hundreds of millions of pounds to these share scams.
It happens when criminals call potential investors attempting to sell shares which are effectively worthless.
Barclays and HSBC have told the BBC they suspend transactions if they are being paid to known boiler room firms.
The two banks use a warning list published by the Financial Services Authority (FSA) which contains the names of hundreds of companies.
The FSA says the companies are not authorised and pose a high degree of risk to customers.
Barclays told BBC Radio 4’s Money Box programme it had blocked around 150 transactions since introducing a screening system in February, potentially saving customers millions of pounds.
It said although around 90% of customers contacted chose to cancel the transaction once they were told the company was on the warning list, 10% insisted on it going through.
HSBC has been screening transactions since 2006 and also said it has saved its customers millions of pounds.
A spokesman told Money Box: “If we receive requests for payments to any of these companies we will delay payments until we have checked with our customers to ensure that they are aware of the company’s activities.
“Usually, when customers realise that the companies in question are on the non-authorised list, they want to stop the payments.”
Lloyds TSB and Nationwide would not comment on their security procedures.
Operation Archway
The Financial Services Authority has been working with police officers from Operation Archway in London for several years to try to tackle boiler room fraud.
Officers say fraudsters often persuade investors to part with tens of thousands of pounds and they get about 100 calls a week from victims.
Detective Superintendent Bob Wishart told the programme the banks are playing a significant role in reducing losses.
“We’re having some notable successes. If we can help them identify potential fraud and a bank is a 100% happy that it is a potential fraud, then it can take the appropriate action,” he said.
Jonathan Phelan, FSA head of Retail Enforcement, agrees the banks are making an important contribution but believes there are limits to how successful screening by banks alone can be.
“We are in discussion with banks,” he added. “It is a very difficult area. There’s a certain amount of intrusion about it, so one has to be careful about promoting it too much.”
The Financial Services Authority and the police insist they are having some success at closing down and prosecuting the criminals involved.
The FSA said it has recently closed down six boiler room agents and recovered close to three million pounds of investors money from four boiler room operations.
Officers from Operation Archway said they are currently involved in a dozen major boiler room investigations.
The FSA says it is illegal for any broker either in the UK or abroad to cold call customers and anyone who receives such a call should hang up immediately.
Nationwide Say House Prices Rose 0.9% in June
The latest survey from the Nationwide building society UK house prices rose by 0.9% in June.
It said this was the third rise in the past four months, and shrank the annual rate of decline to just 9.3%, from 11.3% in May.
The increase in prices during the past month means the average home now costs £156,442, which is £15,973 less than a year ago.
The Nationwide said the stabilisation of prices was a “welcome surprise”.
Since their recent low point in February, of £147,746, average UK house prices as measured by the Nationwide have now risen by £8,696.
“House prices have now risen in three of the last four months, suggesting that the improvement that began to show up in March represents more than just statistical noise,” said the Nationwide’s economist Martin Gahbauer.
“What is unusual about the recent trend reversal, however, is that it has taken place against a background of transactions activity that is still very low by historical standards,” he added.
The Nationwide said the best measure of short-term trends was to compare the average price for the past three months with that for the previous three.
On that basis, prices were now 0.9% higher, the first time they have been on an upward trend since December 2007.
The building society said that if this pattern continued then this year would end with prices down by only “small single digits”.
“This would represent a stark shift from trends seen at the turn of the year, when most indicators were pointing to a repeat of the large declines seen in 2008,” it said.
Although there has been no let up in rationing of loans by mortgage lenders, the building society said potential sellers, and builders, were putting very few properties up for sale, which was bringing some equilibrium to prices.
But it warned against interpreting its latest data as the beginning of a sustained recovery in prices.
Abnormally low supply levels would not last for ever, it warned.
The increase in the enquiry pipeline has not yet led to large increases in sale volumes, because credit criteria remain significantly more restrictive than in the years leading up to the downturn,” said Mr Gahbauer.
“Rising unemployment and associated job insecurity are also limiting the extent to which enquiries can translate into real transactions,” he added.
A report by HM Revenue & Customs (HMRC) Last week said that completed house sales in the UK had risen again in May, to their highest level since last October.
And on Monday, the Bank of England reported that the number of mortgages approved by lenders, but not yet lent, had risen for the fourth month in a row in May.
This suggests that the revival in buying and selling seen this spring may continue into the summer.
“Nationwide house price data provides further evidence that the residential property market appears to have found a floor, at least for the time being,” said Simon Rubinsohn, chief economist at the Royal Institution of Chartered Surveyors.
Not all measures of house prices are pointing in the same direction.
Although the rival survey from the Halifax has also detected a recent upturn in prices, more comprehensive figures from the Land Registry for England and Wales reported that prices had still fallen in May, by 0.2%.
This meant the annual rate at which prices had dropped was 15.9%.
Mortgage Approval Rises Again
The Bank of England have released figures suggesting the property market continued to pick up during May,
The number of mortgages approved for house buying rose to 43,414, up from the figure of 43,191 in the previous month.
It was the fourth month in a row that approvals have risen, suggesting that the recent increase in sales is likely to continue.
The latest evidence from lenders has also suggested that the slump in house prices is slowing down.
The Bank of England’s figures show that net lending for house buying in May, by all lenders, grew by just £324m – the smallest monthly increase on record.
“Bank of England data suggests that mortgage approvals for house purchases only rose modestly in May,” said Simon Rubinsohn, chief economist at the Royal Institution of Chartered Surveyors.
“While mortgage approvals by banks actually rose by around 2,500, loans from building societies and other specialist lenders both fell during the month,” he added.
The Building Societies Association (BSA) said approvals by its members in May were still about 35% lower than in May last year.
“Therefore, while the mortgage market appears to have recovered slightly from the start of the year, levels of activity remain depressed,” said the BSA’s director general Adrian Coles.
Building societies saw their savers withdraw more money than they put in, for the third month in a row.
“Those banks that are supported by the state are able to compete unfairly for retail deposits, and steps need to be taken to ensure that government backing for some institutions does not distort competition for savings,” complained Mr Coles.
“These pressures are exacerbated by the current low interest rate environment; there is evidence that households are looking to repay debt rather than save,” he added.
Total lending by building societies shrank for the fifth month in a row, reflecting the fact that borrowers have been repaying their mortgages at a faster rate than they have been taking out new home loans.
OFT to Pursue Bank Charges Whatever House of Lords Rule
The Office of Fair Trading (OFT) will still pursue bank overdraft charges as unfair, even if it loses the current legal appeal in the House of Lords.
The announcement was made by Jonathan Crow QC, for the OFT, on the final day of an appeal before five Law Lords.
Seven banks and one building society are trying to overturn two previous rulings that would let the OFT investigate their overdraft fees.
Jonathan Sumption QC, for the banks, ridiculed the OFT’s concerns.
He said they were part of a “developing saga” which he suggested had no basis in law.
Mr Crow ended his submission to the Lords by pointing out that the OFT was not just concerned about the high cost of bank charges.
The OFT was, he said, also worried about the way bank accounts and their charges operated in practice.
“This relates to the interplay between the amount and the fact the customer does not truly consent to the charges,” he said.
He argued that bank customers were at a disadvantage at two stages: when they first opened an account and when they triggered the overdraft fees.
He listed some of the problems that bank customers faced.
The issue at stake is whether or not these regulations, which derive from European legislation, allow the OFT to scrutinise bank charges.
The banks argue that as their overdraft fees are part of the price paid by customers for having a current account, then they necessarily fall outside the scope of the regulations.
But Mr Crow argued that when people opened a current account “overdraft charges are not what is being sold as part of the bargain”.
He said the crucial distinction that meant the 1999 regulations did in fact apply to bank charges was that current accounts did not involve any free negotiation between customers and banks.
There was “no meaningful consent”, he said.
He went on to argue that overdraft charges could only escape the regulations if they were central to the bargain between bank and customer; were readily recognisable as the price of the service to the customer; and arose in the normal operation of the contract.
None of these conditions applied, he argued.
“Penal” conditions
Mr Crow accused the banks of “cosmetically rewriting” their terms and conditions in the past couple of years to disguise the penal nature of their overdraft charges.
He said that most banks had rewritten their terms and conditions to remove any suggestions that consumers were not allowed to go overdrawn and would be penalised for doing so.
One that still does is the Nationwide building society.
He pointed out that its terms and conditions stated explicitly that a customer can be expelled from membership for running up an unauthorised overdraft.
How could having an unauthorised overdraft be a central feature of having a current account under these circumstances, he asked.
Mr Crow went on to warn the five Law Lords hearing the appeal not to be scared of some dire warnings issued earlier by Mr Sumption.
He said it should not be assumed that the banks’ current policy, of providing free current accounts to people in credit, was doomed if their appeal failed.
The structure of current accounts might just need to be adjusted, Mr Crow said.
He denied that victory for the OFT implied there would be a deluge of litigation in other industries where cross-subsidies were common in pricing tariffs.
He also said it was “assuming a great deal” to suggest that banks might have to automatically make huge refunds to their customers if they lost the current appeal.
“Banks will not necessarily have to reimburse everything”, he said.
“The domestic courts will have to sort out the consequences,” he added.
He argued that they typically did not study the terms and conditions of their accounts; had no opportunity to opt out of their contract with their bank; could not work out in advance when the fees might be imposed; would find they were triggered without an explicit request to the bank for an overdraft; and often happened by mistake.
“The OFT is concerned that banks are capitalising on a mistake,” he said.
‘True consent’
The Law Lords will now consider their judgement and may refer some issues to the European Court of Justice.
That would further delay a final judgement on the OFT’s jurisdiction, in a legal process that started in July 2007.
At stake is the currently frozen ability of millions of customers to demand that their banks refund overdraft fees they consider too high.
For the banks, an adverse judgement could lead to them repaying billions of pounds in past charges, and foregoing income of more than £2bn a year.
Jonathan Sumption rejected the OFT’s reasons for keeping its campaign against bank charges going, even if it lost the appeal.
He said it was “quite impossible” for the OFT to use the concept of “true consent” in any further action over bank charges without re-writing the European directive on unfair contract terms.
“True consent is simply not the method by which the directive seeks to give effect to consumer choice,” he said.
During the morning of the third day of the appeal, Mr Crow attacked the banks’ claim that their charges were so central to the operation of current accounts that they fell outside the scope of the 1999 consumer contract regulations.
Lenders Demand High Deposits
Mortgage lenders are still demanding high deposits from buyers as the number of deals expands.
More than two-thirds of the 1,485 mortgage deals on offer require the customer to put up a deposit of at least 25%, according to Moneyfacts.
This crept up slightly to 68% of home loans on 6 April compared with 66% a month earlier.
Some recent figures have suggested that the moribund housing market may have started to show some signs of life.
Deposit demand
The number of mortgage deals on offer has increased slightly from 1,398 to 1,485 over the last month, according to financial information service Moneyfacts.
The number of mortgages available at 90% of the value of a home has dipped, down from 101 at the start of March to 93 on 6 April. Deals with a loan-to-value rate of 85% have risen, up from 237 to 258.
David Hollingworth of London and Country Mortgages suggested that this might be because lenders were still being cautious about their lending criteria.
“The increase in deals with a 15% deposit could be due to lenders reducing the number of, or withdrawing altogether from, deals with a 10% deposit,” he said.
However, he added that some mortgage providers were offering 90% mortgages again through brokers – their primary source of custom.
Interest rates on these mortgages were not as attractive, or falling in the same way, as those with a loan-to-value of 60% or 75%.
The number of deals in this range is also growing, up from 921 at the start of March to 1,016 a month later.
Survey results
The figures come after a recent set of contrasting results from house price surveys.
The Nationwide Building Society reported that property prices rose by 0.9% in March compared with the previous month. The following day, Halifax, now part of the Lloyds Banking Group, said that prices fell by 1.9% during the same period.
Recent surveys from the Royal Institution of Chartered Surveyors (Rics) have shown rising interest from prospective buyers.
Mr Hollingworth said there was anecdotal evidence that increasing numbers of potential buyers were “scoping out” the mortgage market to see what deals they could get before making offers on properties.
House Price Decline Continues To Rise
House prices are falling even faster than before in England and Wales, according to the Land Registry.
Prices dropped another 2% in February, pushing the annual rate of decline from 15.1% to 16.5%.
It means the average property is now worth £153,862, down by £30,361 in the last year, and back to the level last seen in September 2004.
House price inflation has fallen for 18 months, due to the impact of the recession and the credit crunch.
The Land Registry’s figures confirm the downward trend indicated by other surveys, such as those from the Halifax and the Nationwide.
Hand-in-hand with the fall in prices has gone a slump in sales.
This week the HM Revenue & Customs (HMRC) published figures showing that property sales in the UK hit a new low this year.
There were just 42,000 completed transactions in February, only slightly higher than in January but still half the level seen a year ago.
Earlier this month figures from the Bank of England suggested that the number of mortgages being approved, but not yet lent, had bottomed out at an average of 31,000 for each of the past six months.
But despite surveyors and estate agents reporting a pick-up in enquiries from would-be buyers, there is little evidence so far that this is translating into higher sales.
“Lower prices and the cheap cost of money has begun to fuel an increase in buyer interest as reflected in the RICS “new buyer enquiries” series which has risen for four consecutive months,” said Simon Rubinsohn, chief economist at the Royal Institution of Chartered Surveyors (Rics).
Concern At New Current Account Charges
A consumer group has voiced its concern about the fees and charges attached to a new breed of current account.
Some banks use cash bonuses to entice customers to sign up, but overdraft charges can be as expensive as £5 a day.
Which? said it believed banks were planning to end free banking if they lost their landmark battle over charges with the Office of Fair Trading (OFT).
The British Bankers Association said the accounts were simply the product of a competitive marketplace.
Earlier this month, Halifax Bank of Scotland launched its Reward Current Account, which offers a monthly cash bonus of £5 if £1,000 is paid in during the month.
However, if a customer goes overdrawn, even with a prior agreement, it will cost them £5 a day for an unauthorised overdraft.
A similar current account from the Alliance and Leicester is offering new customers a £100 bonus just for signing up.
Again, the unauthorised overdraft costs £5 daily.
Also becoming more common are so-called packaged deals.
Two have been launched by the Abbey, offering discounts and free insurance in return for a flat fee of £15 a month.
An Abbey spokesman said: “There is no connection whatsoever between us launching packaged accounts and the end of free banking.”
Referring to the two accounts that charge a fee, he said: “Added value accounts such as these can be great value – but only when customers actually use the benefits.
“Our accounts have been designed so that the benefits are relevant to the needs and lifestyles of our customers and they can maximise the value they get from their account.”
Phil Jones, head of money research at consumer group Which?, said a new trend was developing while the OFT inquiry into the legality of bank charges rumbled on.
“Well it seems like a bit of a coincidence that while this court case is going on – and it looks like the banks are going to lose and have to repay consumers what they’ve unfairly charged them – that they are actually introducing a whole range of accounts with different charging structures.”
But the British Bankers Association dismissed this claim as nonsense, saying accounts like these aimed to attract customers in a competitive marketplace.
Brian Capon, assistant director of the BBA, said cash bonuses were simply part of a bank’s attempts to gain an advantage.
“With the interest rates we’ve got at the moment, which are quite flat, the banks are looking to get A competitive edge… so really it’s to have that little bit of something [extra], that unique selling point.”
Some MPs however say it is a worrying development on the part of the banks and are urging them to spell out the true cost of these deals when selling them.
“If there is the slightest doubt on transparency, then they are laying themselves open to charges that these costs are hidden,” said John McFall, chairman of the Commons treasury select committee.
“The lesson for the banks, after the debacle of recent years, is that they cannot get away with hidden charges… so let them be transparent, let them be open and honest with consumers about what they are letting themselves into.”
New Debt Legislation Comes Under Fire
A new way to help people on low-incomes clear their debts has been criticised by a leading creditor organisation.
Debt Relief Orders are available to people who do not own a home, have less than £300 in assets and an income of no more than £50 a month.
The government says the orders will offer hope to people in debt and keep them from using loan sharks.
But the Civil Court Users Association says the help for debtors is at the expense of creditors.
Debt Relief Orders can be applied for from 6 April if the debts owed are no more than £15,000 and there is no foreseeable way the money can be repaid.
Instead of going through a court, debtors apply to the Insolvency Service through an intermediary like Citizens Advice.
Sleepless nights
“Karen” from North Yorkshire said she is going to apply.
She took out loans when she had a job. But now she owes £8,000 to a number of creditors, has almost no assets and no earned income.
She said the presure of being in debt is affecting her health: “It got to the point where I was actually physically sick last week. I still have sleepless nights. I just don’t have the money to pay it.”
A Debt Relief Order costs £90, which can be paid in instalments rather than the hundreds of pounds it costs to go bankrupt.
Citizens Advice estimates upto a third of clients they advise on debts each year could be eligible – around 50,000 people.
Sue Edwards from Citizens Advice has welcomed their introduction.
“They offer people on very low incomes – who cannot pay their debts off within their lifetime – light at the end of the tunnel,” she said.
If the order is granted, the debts are discharged after a year.
Desperate means
Some of creditors are worried that they are too cheap and too easy to apply for, given the serious situation people with debts find themselves in.
Jeremy Sutcliffe, vice president of the Civil Court Users Association, told the programme: “We believe the government is continually assisting debtors at the expense of creditors.
“We think these sorts of things get in the way.”
The Insolvency Service said that intermediaries will be expected to make basic checks and anyone found to be dishonest can have their order revoked.
Pat McFadden is the government minister responsible for the Insolvency Service.
He believes there are sufficient measures to safeguard creditors’ interests and the orders are needed to stop people in debt resorting to desperate means.
“For many it can be a desparate situation. If it was unresolved, they could even find themselves being driven into either very high interest lending or even loan sharks.”
Uncertainty Over Mortgage Support Scheme
Support for a scheme for homeowners struggling to make mortgage repayments remains uncertain as a deadline for lenders to show their support has passed.
50% of building societies will not take part in the Homeowner Mortgage Support Scheme, according to the head of one building society.
The government said it would soon release details of participating lenders.
The scheme, to start in April, defers payments for some people who suffer a temporary loss of income.
In December, Prime Minister Gordon Brown said that people made redundant or who face a “significant loss of income” would be allowed to defer a proportion of interest payments for up to two years.
He suggested that the eight largest lenders – HBOS, Nationwide, Abbey, Lloyds TSB, Northern Rock, Barclays, RBS and HSBC, which together provide 70% of mortgages – have agreed to sign up to the scheme.
One lender, Saffron Building Society, has become the first to announce that it would not sign up – although it applauded the sentiment of the scheme.
“We have concerns that the reporting and administration requirements under the scheme are overly burdensome, especially as we do not believe that this scheme is likely to provide any additional help to our borrowers,” said chief executive Andy Golding.
He estimated that 50% of building societies would not sign up to the scheme, generally for the same reasons.
Paul Broadhead, of the Building Societies Association, told the BBC’s Working Lunch that the complexity of the scheme meant that a 200-page document was sent to building societies only a week ago.
An initial deadline of 20 March was set for lenders to signal their support to the scheme but the government said that it would not yet release names of the participants.
A spokesman for the Department of Communities and Local Government, said: “We are urgently continuing discussions with lenders on joining the scheme and it is wrong to suggest there is a cut off point for signing up. We want to see as many lenders as possible participating in the scheme.
“As we have previously said, the scheme will be open for business with the first lenders in April and will make a real difference to households who are worried about meeting their mortgage payments in the difficult economic climate.”
A series of conditions have already been outlined for those homeowners who could benefit from the scheme.
Those who have a “temporary” loss of income, have a mortgage of less than £400,000, and savings of less than £16,000 will have the opportunity to be involved.
Their monthly payments would be reduced to a minimum of 30% of what they were paying before, and the deferred amount would be added to the outstanding mortgage to be paid later.
Opposition parties said in February that the scheme was announced hastily to grab publicity, without having been properly thought out.
The government has been keen to show its support for struggling homeowners amid gloomy data regarding housing and employment.
This week figures showed that UK unemployment rose above two million for the first time since 1997 and other data showed that gross mortgage lending fell by 60% in February compared with the same month a year earlier.
