My Lords, I declare an interest as co-chair of the APPG on Mortgage Prisoners. Mortgage prisoners exist almost entirely because the Treasury made a terrible mistake when it sold the first tranche of former Northern Rock and B&B mortgages to an unregulated American vulture fund called Cerberus. Cerberus is the name of the multi-headed dog that in Greek mythology sits at the entrance to the gates of hell. That is not an inappropriate name, in view of what happened next.
Three things are needed to rescue mortgage prisoners. The first is to reduce immediately to comparable market rates the SVRs that they pay. The second is to make sure that transfers to much less expensive fixed-rate deals are properly available to them. The third is to make sure that new classes of mortgage prisoners cannot be created in the future.
Amendment 99, moved by the noble Lord, Lord Stevenson, to which I have added my name, deals with the first of those things. My Amendments 116 and 117 deal with the second and third. Amendment 99, as he has so clearly and forcefully explained, would protect the thousands of mortgage prisoners stuck paying high standard variable rates. It would introduce a cap on the standard variable rates paid by customers of inactive lenders and unregulated entities. That would provide immediate relief for thousands of mortgage prisoners, and could give space for longer-term solutions to be found. It would help mortgage prisoners who took out loans with a fully FCA-regulated high-street bank which were then sold on to vulture funds.
Money-saving expert and consumer champion Martin Lewis supports this proposal, and on Monday he released a statement saying:
“While the government chose to bail out the banks in the financial crisis, it has never bailed out the banks’ customers who were victims of that collapse. Mortgage prisoners have been left
paying obscene interest rates for over a decade through no fault of their own. They have been completely trapped in their mortgages and unable to escape the financial misery it causes … Coupled with the devastating impact of the pandemic on people’s finances, urgent action is needed to prevent the situation from becoming catastrophic. The independent LSE report I funded has a cogent argument as to why an SVR cap isn’t a balanced long-term solution. Yet in lieu of anything else, I believe for those on closed-book mortgages it is a good stopgap while other detailed solutions are worked up, and I’m very happy the All-Party Parliamentary Group on mortgage prisoners is pushing it. This would provide immediate emergency relief for those most at risk of financial ruin. No one should underestimate the threat to wellbeing and even lives if this doesn’t happen, and happen soon.”
The Government will no doubt say that some mortgage prisoners are already paying rates lower than 3.5%, so rates do not need to be capped. But those sold on by the Government to vulture funds like Cerberus are paying high rates. In the package sold by the Government containing more than 66,000 mortgage loans, 52% were paying rates between 4.5% and 5%, and 37% were paying rates of over 5%, when the mortgages were securitised.
The Government could have set strict conditions when selling the mortgages on the interest rates which could be charged. But when they sold £16 billion of mortgages to Tulip and Cerberus, they imposed only a 12-month restriction on increases to the standard variable rate. These have long since expired and the chief executive of Tulip Mortgages told the Treasury Select Committee that the firm now had
“complete discretion to set the interest rate policy.”
On the sale to Heliodor, the Government claimed that the organisation which bought the loans would be required to set their standard variable rates by reference to the SVR charged by a
“basket of 15 active lenders”.
But when you read the details of the securitisation agreements for the mortgage loans sold, you will find that, actually, the Government have required the SVR to be set only at the level of the third highest of the 15 active lenders. This is absolutely critical, as the third highest SVR is actually 4.49%. The lowest SVR among those 15 active lenders is 3.35%, and the average SVR weighted by market share is 3.72%.
The latest and final sale of the Treasury-held mortgages was announced in February. The book was sold to Davidson Kempner Partners and Citibank, with funding by PIMCO. The Government said that the SVR was going to be charged by reference, again, to a basket of 15 active lenders, but there are no details about how this will work in practice. If it reflects the practice in earlier sales, it will not actually provide any protection to customers. The Government will also say that the FCA has changed the affordability test to enable mortgage prisoners to switch to a different lender. But the progress has been very slow, with only a very small number of lenders willing to use these new flexibilities.
The cap on the SVR proposed by this amendment would provide immediate relief to mortgage prisoners who have been overpaying for the past 13 years. It would protect all mortgage prisoners, including those who are unable to switch. It would give time for other solutions to help mortgage prisoners to be developed. The SVR cap would apply only to mortgages owned
by inactive lenders and unregulated entities. It would have no impact on active lenders competing to attract customers.
The cap is supported by the campaign group UK Mortgage Prisoners, as the noble Lord, Lord Stevenson, said. Members of the group have stated that this amendment is the difference between feeding their children and themselves or continuing to rely on food banks. The Government created the problem of mortgage prisoners and it is their moral responsibility to rescue them from the significant detriment that many still face. I urge the Government to accept the amendment in the name of the noble Lord, Lord Stevenson.
I now turn to Amendment 116, which would extend access to fixed interest rates to all mortgage prisoners, enabling them to gain control and certainty over their monthly mortgage payments. When the time came for the nationalised Northern Rock and B&B mortgages to be sold by the Government back to the private sector, they could have pursued an approach which ensured that these customers were in fact protected. They could have sold them to active lenders or secured a commitment from purchasers to offer these new customers new deals.
The risk to these customers was identified. In January 2016, the noble Lord, Lord McFall, wrote to the Treasury, UK Asset Resolution and the FCA to say that the customers affected by these sales should be protected, offered a fair deal and given access to fixed rates. UKAR responded that, by returning these mortgages to the private sector,
“the option to be offered new deals, extra lending and fixed rates should become available”.
But this requirement was not written into the contract when mortgages were sold to funds such as Cerberus, with the BBC reporting that UKAR is now claiming to have been “misled” by Cerberus.
A UKAR spokesman told BBC “Panorama” that Cerberus had the ability to lend to the former Northern Rock customers and that UKAR believed that it intended to do so. They said:
“The reply to Lord McFall sent on behalf of the UKAR board of directors was based on information presented to UKAR and the board had no reason to disbelieve this at that time.”
At the very best, this is evidence of catastrophic incompetence. At worst, it is evidence that UKAR heartlessly pursued profit over care for mortgage customers.
Consumer champion Martin Lewis lays responsibility for the treatment of mortgage prisoners squarely with the Government. He said that the Government
“have sold these loans to professional debt buyers who do not offer mortgages and left these people in these types of mortgages, which have been too expensive, crippled their finances and destroyed their wellbeing.”
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The APPG has heard from hundreds of mortgage prisoners, including nurses, members of the Armed Forces and small business owners, all describing the frustration of taking out a mortgage with a high-street bank and being sold on to vulture funds which do not have to treat them fairly or offer them new deals. By contrast, in the wider mortgage market there have been recent improvements in the deals available to those with active lenders.
In 2018, lender trade bodies facilitated a voluntary agreement to offer these borrowers an alternative deal where they meet certain criteria. This means that any borrower in the active market can access a new fixed-rate deal if they are not in arrears and have a minimum of two years and £10,000 left on their mortgage. However, 250,000 mortgage prisoners with inactive lenders or unregulated firms were excluded from this, meaning that they are stuck on standard variable rates. There is nothing these customers can do to gain control over what, for many, is the largest part of their monthly expenditure.
Mortgage prisoners are worried about rates rising, and that this will come on top of recent increases in their monthly mortgage payments if they took a payment holiday. The FCA has claimed that mortgage prisoners who cannot switch are paying SVR interest rates that are only 0.4% a year higher than other customers with active lenders, but this comparison is completely misleading. It ignores the fact that those with active lenders can access new deals. Only around 10% of customers at active lenders are paying the SVR, and most that are typically switch to a new deal very quickly. More than three-quarters of consumers with active lenders switch to a new deal within six months of moving on to an SVR. If you take two customers, both paying an SVR of over 4% and both with a loan-to-value ratio of 75%, the one with the active lender could access a new deal at 1.8%. The mortgage prisoner is stuck on the SVR, costing them hundreds or thousands of pounds extra every year. These financial strains are having a massive effect on mortgage prisoners and their families.
Amendment 116 would extend the benefit of being able to access fixed rates to mortgage prisoners. It would not distort the market, but it would help ensure universal fair treatment and access to fixed rates for mortgage prisoners. Only inactive lenders exploiting their helpless and captive customer base would be affected. This amendment, and a cap on SVRs, would change the lives of thousands of mortgage prisoners and their families. Again, I urge the Government to acknowledge the moral responsibility for the continuing harm their careless and profit-driven mortgage sales have generated. I urge the Minister to accept Amendment 116.
Amendment 117 would set new conditions for the transfer of a regulated mortgage contract. The Government have now sold all the nationalised mortgage books from Northern Rock and Bradford and Bingley, but the underlying problems illustrated by these sales remain. A lender can choose to sell a mortgage book at any time, and the pandemic may cause more mortgage books to come up for sale. The lender can sell you on to anyone. It does not have to sell you on to an active lender or a high-street bank; it can sell you on to an unregulated entity or a vulture fund. This amendment would require a lender to obtain your consent if it was to sell your mortgage to an inactive lender or unregulated entity. When asking for your consent, it would have to give you clear information about the interest rates and policies which you would be offered. You would need to give your consent only if you were being sold on to an inactive lender or unregulated entity. If your mortgage was being transferred to an active lender which committed to offer you the same deals and interest rates as its existing customers, consent would not be required.
The Government have claimed in the past that this would have a negative impact on financial stability. This is simply not the case. Under this amendment, the Bank of England and the PRA would still be able to use their powers under the special resolution regime to enable the transfer of mortgages from failing banks. They would not need the consent of customers when they used their resolution powers.
The Government have now also shown, at the very end of their sales of these mortgages, that they support applying covenants when mortgages are sold on. The latest sale of £4.9 billion of mortgages announced last week by the Government contained a requirement that the legal title of the mortgages must not be sold on to an unregulated firm. The Government have stipulated that these protections must be replicated in any future sale of the £4.9 billion of loans—meaning that they will apply to these customers until they have repaid their mortgages, no matter where the mortgages end up.
We welcome the Government’s inclusion of these requirements, although it is much too little and much too late. The Government should have applied this provision in their earlier sales of mortgages to unregulated firms such as Cerberus or Tulip Mortgages. Everyone needs the same protection from mortgages being sold to unregulated entities. This amendment would put the customer back in control. It would require consumers to give their consent before their mortgage was sold on to an inactive lender or an unregulated firm. It would extend to the full market the protections the Government have shown that they support.
The Economic Secretary to the Treasury has said that he is committed to helping borrowers with inactive lenders and that he “remains open” to “considering practical solutions”. The Chancellor told Martin Lewis after the Budget that he would keep working on the issue and was committed to finding a workable solution. Amendments 99, 116 and 117 are three practical solutions which we hope that he will consider. We very much hope that the Chancellor and the Economic Secretary will recognise their continuing moral obligation. We hope that they will support these three proposals and take action now to ensure that all mortgage prisoners are finally set free.