Interest-only mortgages will be the subject of the next big mis-selling scandal, the boss of one of the UK’s biggest high street banks claimed last year.
That he was allegedly misquoted didn’t matter as the story went viral. No surprise there – everyone loves a scandal and the idea that the big high street banks were conning people into taking out unsuitable mortgages fits the prevailing narrative beautifully.
So a few eyebrows went skywards this week at the Financial Conduct Authority’s insistence that mis-selling of interest-only mortgages wasn’t widespread.
The comment came as it revealed that up to 1.3 million people may not be able to pay off their interest-only mortgages by maturity. The average shortfall is around £70,000, not far off half the average house price in Scotland.
Suspicions that many people were mis-sold the loans by greedy bank staff aren’t unfounded. Sales of the loans surged in 2005 to 2008 as the housing market began to overheat. This is the period, remember, in which lenders were handing out mortgages to anyone who asked for one, regardless of their ability to repay. If you drove past a bank slowly enough and with your window rolled down, they’d throw a loan agreement into your car.
The FCA’s research show that interest-only accounted for more than half of all new mortgages advanced in the first three months of 2008. That was the last hurrah before most lenders walked away from the market altogether, leaving homeowners high and dry.
Around 190,000 loans due for repayment in 2032 include “concentrations of highly indebted individuals with low or negative equity”, said the FCA. That’s borrowers who took out their loans at that housing market peak between 2005 and 2008.
Interest-only deals had a genuine appeal when house prices were rising. But there was plenty of mis-selling. The FCA found that of the 10 per cent of borrowers without a repayment plan, one in four said they didn’t know they needed one.
Even taking a degree of stupidity and ignorance into account, that’s not a healthy statistic.
Yet the regulator is right to say that mis-selling wasn’t widespread. There’s no doubt that greedy bank branch staff failed fully to explain the loans to some borrowers and persuaded others to sign up without ensuring they could repay them. It wasn’t systematic, though - that description applies to mis-selling on the scale of payment protection insurance (PPI).
But lenders can’t run away from this. They made a mint out of interest-only mortgages and they have a responsibility to do the right thing by those who now face shortfalls, whether or not they were mis-sold their loan. While some will be forced to sell their homes, many more interest-only borrowers will become mortgage prisoners.
Evidence suggests that so far, most lenders are playing fair. However, there are serious questions around the way in which one of the UK’s biggest banks in particular is taking advantage of mortgage prisoners by shifting them onto more expensive rates, despite regulatory pressure not to do so.
The impact of PPI mis-selling was exacerbated by the disgraceful (and ongoing) attempts of the banks to dodge their duty to the victims. While mis-selling isn’t the cause of the interest-only time-bomb, lenders must still heed the lessons from the atrocious handling of the PPI scandal.
The FCA’s report isn’t all bad news; not for claims management vultures anyway. Having picked almost all of the meat off the PPI carcase, they’re now switching their attention to current accounts and mortgages.
Claims management companies (CMCs) are those responsible for the spam emails clogging up your junk folder and the unsolicited automated phone calls offering to get you compensation for mis-sold PPI, whether or not you bought it. They’ll take up to 30 per cent of your redress yet there’s no evidence that they enhance your chances of securing it.
News that more than one million people face interest-only mortgage shortfalls is little short of a gift to CMCs. Whether or not there was mis-selling is irrelevant. Many of the firms made their fortunes from the endowment mis-selling scandal, in which they successfully equated shortfalls with mis-selling. They’ll be employing the same tactic again, lining their pockets by exploiting the misfortunes of hard-pressed homeowners.
Tough new rules governing CMCs are coming into force soon south of the Border, but the Scottish Government has been slow to act.
Claims management is being considered as part of the Review of Expenses and Funding of Civil Litigation in Scotland, due to report in the summer. However that looks at a wide range of issues, including referral fees, and the chances are that CMCs will continue to rip off people north of the Border.