News Column

Thinktank proposes 10-point plan to avert surge in mortgage defaults

July 24, 2014

Phillip Inman Economics correspondent



The government and finance industry regulators have been urged to adopt a 10-point plan to prevent a surge in mortgage defaults when interest rates begin to rise.

The Resolution Foundation warned that as many as 2 million mortgage payers could struggle financially once interest rates climbed from 0.5% to 3%. The thinktank said that without a state-backed plan to alleviate the financial pain for over-borrowed households, many could be forced to hand back the keys to homes.

The report, which called on the Bank of England to show restraint on interest rate increases until there was evidence of rising incomes, said the Financial Conduct Authority should instruct lenders to contact mortgage payers who were vulnerable to higher monthly loan charges.

Lenders should also be prevented from abusing so-called mortgage prisoners who were already in arrears, and whose financial pain could be worsened by a rate increase. Those lenders should be forced to clear mortgage rate rises with the regulator, the thinktank said.

It said with so many homeowners paying the standard variable rate, and therefore facing higher costs as base rates rise, lenders should be told to offer five-year deals that protect borrowers from higher monthly payments.

Matthew Whittaker, chief economist at the Resolution Foundation and co-author of the report, said the thinktank had consulted with big banks and consumer groups before compiling its 10-point plan.

He warned that it would be a serious mistake to believe that the legacy of debt built up in the pre-crisis years would evaporate with a return to economic growth. "The magnitude of the stock of debt is simply too large, given expectations that income growth will be gradual at best," Whittaker said.

"And, while the mortgage market largely remains competitive, tighter lending criteria mean that some highly stretched borrowers face limited choices. There is a pressing need for regulation to respond to this new context."

Whittaker added that lenders should be prevented from approaching customers in a haphazard and aggressive fashion that would make a bad situation worse.

He said: "We need an orderly and carefully managed approach to managing the debt overhang in order to minimise the numbers pushed over the edge as borrowing costs rise and to improve the safety net in place for those who can't avoid such an outcome."

The Resolution Foundation called for a big expansion of free debt advice, which the FCA should fund. The cost of the new service would be borne by consumer credit firms, which will soon come under the watchdog's remit.

Among the other proposals, lenders would develop a standard way of selling repossessed homes to prevent families from being burdened with fees and debts from quick sales.

A new scheme - Help not to be Repossessed - would allow homeowners to trade down to shared ownership.

3%

The base rate of interest at which up to 2 million mortgage payers could be struggling, according to the thinktank



For more stories on investments and markets, please see HispanicBusiness' Finance Channel



Source: Guardian (UK)


Story Tools






HispanicBusiness.com Facebook Linkedin Twitter RSS Feed Email Alerts & Newsletters