FCA rates the number of mortgage inmates in the UK as it admits a ‘low estimate’

The financial watchdog has admitted that the number of ‘mortgage inmates’ in the UK may exceed previous estimates.

Mortgage inmates are borrowers who took out high-interest mortgages with lenders like Northern Rock, which collapsed during the 2008 financial crash.

Caught in a catch-22 situation thanks to the rules of mortgage lenders (see fact box below), they pay dazzling interest rates of up to 9 percent, in some cases for more than a decade.

Caught: Mortgage inmates took out high-yield loans before the financial crisis and are finding it difficult to re-mortgage due to tighter affordability criteria, debt and negative equity

The Financial Conduct Authority has previously said there are 250,000 mortgage inmates, but the assessment will question that figure.

The terms of reference set out by the FCA states: “We believe that our July 2020 assumptions have resulted in a low estimate of the number of customers who have mortgages with inactive companies and are unable to switch despite being on be aware of payments.

“We expect that the change in economic conditions, more recent data and updated assumptions will likely lead to an increase in our estimated number of mortgage inmates.”

The review was announced in April 2021 by the Economic Secretary of the Treasury, John Glen.

It happened when he led the opposition to a House of Lords amendment to the Financial Services Bill, which proposed limiting the standard variable interest rates mortgaged borrowers could charge, lowering their monthly bills.

The amendment was not passed, as 355 Conservative MPs voted against it.

Rachel Neale, who founded the UK Mortgage Prisoners Action Group, said borrowers were frustrated that the FCA assessment only happened after the old numbers were used in the debate over the potentially life-changing change.

What is a Mortgage Inmate?

Mortgage inmates took out high-interest housing loans before the financial crisis, after which lenders collapsed. The most talked-about example is Northern Rock.

Their mortgages were then placed in a government holding company, which sold the loans to investment funds, such as Cerberus.

Their loans are currently under brands like Heliodor, Landmark and NRAM.

These companies do not offer new mortgages, so refinancing with them is not possible.

Other lenders will rarely accept mortgage inmates because they adjusted their affordability requirements after the financial crisis and they are now ineligible. Some have also fallen behind due to their high payments.

As a result, they are locked into standard ‘standard variable’ interest rates as high as 9 percent, meaning they have paid tens of thousands more than regular mortgage customers at a time when broader interest rates have fallen to rock bottom.

As a result, they say they’ve had financial problems, as well as emotional problems, including mental health problems and family breakups.

“There are so many people who have contacted us and said the SVR cap decision just crushed us,” she said.

‘Utilities [The FCA] admits that all the numbers they have produced in the past have been produced on assumptions.

‘Everything [The FCA and John Glen] have done misguided the whole situation, the way people voted for solutions that have been implemented and it has completely damaged mortgage inmates.”

Neale believes the actual number of mortgage inmates due to the financial crash could be closer to 300,000.

She also said a new cohort of mortgage inmates was being created as a result of the cladding scandal, making homes unsaleable and in some cases impossible to re-mortgage.

This is in addition to the pandemic, where people on leave and who have taken government subsidies for the self-employed are being turned down for re-mortgages and falling on higher standard variable rates.

Neale said these cases should also be included in the assessment.

“Everything is created by the government and the banking industry. They are the only two who can solve all those problems because they are the ones who caused the problem,” she added.

Neale also worries that FCAs intend to ‘update’ [the] data to consider the demographics and loan characteristics of mortgage inmates may lead to unfair stigmatization of some mortgage inmates, for example those who are in arrears due to high interest rates.

“The big concern with this review, which is why we never wanted to do it, is that they want to create a story that victimizes and plays a blame game,” she said.

The UKMPAG will meet with the FCA next month to discuss the review.

The cap proposed by the Lords amendment would have been no more than 2 percentage points above the Bank of England’s base rate, which would put it at 2.1 per cent currently, and the UKMPAG said it would pay some of its members £800 could have saved per month.

Sky high: some mortgage inmates pay up to 9 percent interest (photo taken by model)

Sky high: some mortgage inmates pay up to 9 percent interest (photo taken by model)

In the Commons, Glen cited the Financial Conduct Authority’s analysis that, he said, showed that half of mortgage inmates would be eligible to switch mortgages if they wanted to.

He also said the SVR cap would be “extremely unfair” to borrowers in the mainstream mortgage market who are in arrears or unable to close a new fixed-rate deal, as they would not be able to benefit from the same rate cut.

Glen promised that the Treasury would work with the FCA on a new solution for mortgage inmates, which the review is part of.

The review will also report on the effectiveness of the ‘adjusted affordability assessment’, a government intervention designed to make it easier for mortgage inmates to transfer from active lenders.

The policy has been in effect since October 2019 and means that lenders can choose not to ask for proof of a customer’s income and expenses, or to apply a stress test.

However, this is not mandatory for the lender, and the UK MPAG says many mortgage inmates cannot take advantage of it.

The Treasury has pledged to work with lenders and regulators to find 'practical and proportionate' solutions to the high interest rates paid by mortgage inmates

The Treasury has pledged to work with lenders and regulators to find ‘practical and proportionate’ solutions to the high interest rates paid by mortgage inmates

In April, it said it only knew 40 borrowers who had benefited.

The FCA assessment will be presented to parliament at the end of November this year.

In a statement, the Treasury Department said it will work with lenders and regulators after the assessment is published to “find practical and proportionate solutions to help as many affected borrowers as possible switch to an active lender, should the desire of the lender so require.” be the customer. ‘

This could include taking advantage of the changed affordability rating, “providing additional flexibility around other aspects of the underwriting process,” or taking other steps to reduce the barriers that prevent borrowers from switching to a better deal.

Separately, the UKMPAG is now launching the Home Ownership Protection Enterprise, an intermediation service that aims to provide an ‘end-to-end open channel of communication between mortgage lenders, local authorities and homeowners when homelessness is likely due to repossession’.

Another way mortgage inmates can get help is by taking legal action against the private companies that now manage their loans.

The law firm Harcus Parker is currently working with some mortgage inmates to prosecute such claims, but the process is at an early stage.

The FCA and Treasury have been contacted for comment.

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