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With increasingly indebted households struggling to make ends meet, there has been a sharp rise in the number of home repossessions since 2004.

Repossessions on the increase

According to the Council of Mortgage Lenders (CML), there were 8,200 repossessions in 2004. This rose to a high of almost 48,000 in 2009; [1] with repossessions expected to remain high over the coming years. In the same period, the proportion of statutorily homeless households losing their last settled home due to mortgage arrears doubled from 2 per cent in 2003/04 to 4 per cent in 2008/09. [2]

Against such an alarming backdrop, it is critical that mortgage lending practices are made more responsible to ensure households don't take on risky loans that could put them in danger of losing their home.

The rise in risky borrowing

House prices trebled between 1997 and 2007 [3] and first-time buyers have had to stretch themselves to the limits of what they can afford to obtain a mortgage by borrowing higher multiples of their annual income. In many cases, the only way for individuals to raise the necessary capital for a deposit was by borrowing from family members, or splitting the cost by entering into insecure shared ownership arrangements with other people.

Many first-time buyers have been finding it hard to get mortgages and the average size of their deposit has increased. In these circumstances, if mortgage repayments or other household costs go up, or income goes down, borrowers can quickly find themselves struggling to meet their financial commitments and falling into arrears, putting their homes in jeopardy.

In recent years, increasing household expenditure on council tax, fuel bills, and transport costs have all placed massive pressure on homeowners' already overstretched budgets. Those on low or fluctuating incomes, or suffering relationship breakdown, have been particularly vulnerable.

The joint forces of rising unemployment and an increasing cost of living are also threatening the ability of many households to pay their mortgage, exposing households to greater risk of losing their home.

To make matters worse, it has also become increasingly common for non-housing debts to be secured on the borrower's home, whether as a condition of taking out the loan or as an enforcement measure imposed by the courts if these repayments fall into arrears. This is known as a secured loan, or a second charge mortgage.

This means homeowners are increasingly running the risk of losing their homes in the face of long-term financial uncertainty.

The rise in irresponsible lending

Over the last decade, the mortgage industry has diversified and expanded to supply larger and riskier loans. The short-comings of this practice have been highlighted recently by the spectacular collapse of the sub-prime market - in which mortgages were given to borrowers with bad credit histories at premium interest rates. In a 2007 review of sub-prime lending practices, the Financial Services Authority (FSA) - the regulatory body for the mortgage industry - highlighted the following concerns:

• inadequate initial assessment of whether borrowers could afford to repay a mortgage loan
• inadequate initial assessment of whether mortgage products were suitable to borrowers' needs
• absence of lending policies covering all responsible lending considerations. [4]
  

Both arrears and repossessions are higher among sub-prime mortgage customers.

In October 2009, the FSA began a review of how the mortgage market should be regulated in the future. Through the Mortgage Market Review, the FSA is looking at the entire mortgage market to learn from the crisis and explore options for putting things right.

The FSA are currently consulting on regulations for responsible lending and responsible borrowing. The main proposals include:

• banning self-certified and fast track mortgages and make all mortgages subject to income verification
• introducing affordability tests that accurately capture borrowers’ ability to pay, including full assessments of income and expenditure and a 20 per cent% affordability buffer for credit impaired borrowers
• ensuring arrears charges are based on fair administration costs
• ensuring borrowers are not charged for missed payments more than once a month.
  

Shelter believes the FSA’s proposals close many of the loopholes that have allowed lenders to give out reckless loans, and will prevent lenders from hitting struggling borrowers with unfair charges. We believe these will prevent thousands of people losing their home.

The FSA’s proposed rules for assessing borrowers’ income offer genuine flexibility for lenders to look at individual borrowers’ circumstances and make evidence-based judgements on their ability to make repayments.

Shelter's view

The need for more effective regulation

Mortgage lending has only been regulated by the FSA since 2004.
Shelter believes that there is a need for more effective regulation of the mortgage market to prevent such unsustainable lending happening in the first place, and contributing to an affordability crisis.

We fully support the proposals in FSA’s Mortgage Market Review, which we believe will close many of the loopholes that have allowed lenders to sell unaffordable mortgages that some homeowners had no hope of ever being able to pay back.  The FSA must also continue tough enforcement of its arrears rules..

The need to widen the scope of FSA regulation

Shelter calls on the Government to extend the FSA's regulatory powers to cover lending practices that currently fall outside its remit, in particular:

• Second-charge lending
• Buy-to-let lending

We believe these lending practices can pose great risks for households and should be brought within the FSA’s regulation regime.

[1] Council of Mortgage Lenders (CML) 2009.

[2] Statutory homelessness statistics, CLG, 2009.

[3] Land Registry Office, 2009.

[4] www.fsa.gov.uk