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Mortgage Market Review: “Hard-Wired Common Sense?”

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Abstract

The financial crisis triggered a major rethink of neo-liberal notions of rational decision-making within mortgage markets. In the UK, the Mortgage Market Review conducted by the Financial Services Authority provided this rethink and has resulted in a shift in responsibility in mortgage sales onto mortgage providers which has been hailed as “hard-wired common sense.” This article argues that the common sense within the sales process is of limited utility unless matched by a coherent fit with responses to the consequence of mortgage default and overall housing policy. Common sense will only be achieved by formulating effective safety nets and housing alternatives which reflect an appropriate balance of responsibility between all stakeholders.

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Notes

  1. Directive 2014/17/EU commonly known as the Mortgage Credit Directive. Implementation is required by March 2016.

  2. Through mortgage interest relief at source (MIRAS) and the principal private residence exemption from capital gains tax.

  3. The right of certain local authority and housing association tenants to buy their homes at a discount popularised by the Thatcher Government through the Housing Act 1980.

  4. For an account of this growth, see M. Stephens (2007).

  5. Some commentators suggest that the MMR focus on irresponsible lending which addresses the wrong target when the cause of the financial crisis was dislocation of mortgage funding caused by the turmoil in the financial market (see CML 2010).

  6. Agreed by the Basel Committee on Banking Supervision on 16 December 2010.

  7. Comprising the Capital Requirements Regulation, Regulation (EU) No. 575/2013, and the Capital Requirements Directive, Directive 2013/36/EU, implemented into domestic law by the PRA (see PRA, PS 7/13 (December 2013)).

  8. Government initiatives have come in three forms: First, under the Help to Buy scheme, a guarantee against the risk of default is available to mortgage providers offering 80–95% loan-to-value advances to fund the purchase of a home not exceeding £600 000; second, a government-funded equity loan secured by way of second charge is available on advantageous terms; and lastly, the government made available cheap lines of mortgage funding through the Funding for Lending Scheme which ended in 2014.

  9. The prudential controls flowing from CRDIV also discourage high loan-to-value and loan-to-income lending by requiring higher capital ratios to be held by banks to offset the risk they present.

  10. For an interesting conceptualisation of this dynamic, see Policis (2010).

  11. As a regulated mortgage contract, see SI2001/544 FSMA (Regulated Activities) Order 2001, Art. 61 (as amended).

  12. See for instance Wightman (2003) and McVea (2005).

  13. See for instance CML (2012a).

  14. See for instance Ben-Shahar and Schneider (2011).

  15. See for instance the implications of this work for financial services in Erta et al. (2013).

  16. Longer-term fixed rate mortgages have occasionally been mooted (see for instance http://www.guardian.co.uk/money/blog/2011/oct/20/30-year-fixed-rate-mortgage-shapps, viewed 7 April 2013). By contrast, fixed rate mortgages are common in the USA.

  17. As a core term, interest rates are not subject to the Unfair Terms in Consumer Contract Regulations 1999 and common law and equitable controls form only a base protection against rates that are arbitrarily or irrationally varied (see Paragon Finance Plc v Nash (2002), 1 WLR 685), or constitute an oppressive or unconscionable term (Cityland Property (Holdings) Ltd v Dabrah (1968), Ch 166, and Multiservice Bookbinding Ltd v Marden (1979), Ch 84).

  18. Financial education is controversial (see Ramsay and Williams 2011).

  19. S19, 31, and Part IVA FSMA. A regulated mortgage contract entered into by an unauthorised lender risks unenforceability (see S23 and 26 FSMA).

  20. See s64 and 64A FSMA and FCA Handbook, Principles of Business (PRIN).

  21. See Part IXA FSMA. Compliance with rules does not automatically satisfy compliance with the overreaching principles (see R (on the application of British Bankers Association) v FSA (2011) EWHC 999).

  22. See Part V FSMA.

  23. S138D FSMA.

  24. See for instance Emptage v Financial Services Compensation Scheme Ltd (2013) EWCA Civ 729.

  25. See for instance The Turner Report para 2.7 and the MMR.

  26. S1B(2) FSMA.

  27. S1B(3) and s1C-1E FSMA.

  28. FSA (2006) followed a series of discussion and consultation papers, research papers, and thematic reviews (see for instance FSA 2001, 2002, 2004, 2005a, b).

  29. See s137D FSMA.

  30. As indeed, mortgage providers have done it in an interesting example of self-reflection (see CML 2012b).

  31. Other significant consultation papers include those of FSA (2010b, c).

  32. See T. Edmonds (2013) for a convenient summary of this “conversation.”

  33. See proposals in FSA (2010b, Chapter Three, 2011a, Chapter Five, pages 193–199).

  34. See general proposals in FSA (2010a, 2011a, Chapter Three).

  35. Mortgage providers, as opposed to their brokers, are responsible for assessing affordability (see FSA 2010b, Chapter Two).

  36. Unless there is sufficient equity to fund alternative accommodation (FSA 2011a, in Chapter Four, pages 21–29).

  37. Being defined as borrowers with a net income of over £300 000 per annum or £3 million of net assets (see FSA 2012, Chapter Four, page 13).

  38. In terms of less stringent disclosure and affordability assessments as well as an ability to enter into a mortgage without advice, see FSA (2012, Chapter Four).

  39. The interest swap litigation suggests that some small business borrowers may be susceptible to miss-selling; see for instance Green v Royal Bank of Scotland (2014) Bus LR 168 and Crestsign Ltd v National Westminster Bank Plc (2014) EWHC 3043.

  40. The scope of these provisions has been criticised by the Financial Services Consumer Panel (2013). See their response to CP11/33.

  41. Meeting the call of Barr-Gill and Warren (2008).

  42. See for example evidence in Wallace (2012).

  43. See in particular FSA (2009b, Chapter Four, 2010a, 2011a, Chapter Three).

  44. The adverse effect of repossession on health and child development is well documented; see for instance Nettleton and Burrows (2000) and Nettleton (2001).

  45. A glimmer of a wider recognition of home values is found in the criteria found in s15 Trusts of Land Appointment of Trustees Act 1996, but these criteria apply only in limited circumstances, namely when a creditor is seeking enforcement against one partner’s share in the family home. Attempts to use the rights enshrined in the European Convention on Human Rights as a platform for the recognition of home values have so far failed (see Horsham Properties Group Ltd v Clark (2008) EWHC 2327).

  46. An experience repeated in the USA housing market which helped trigger the financial crisis.

  47. Enforcement proceedings were taken against DB Mortgages, GMAC-RFC, Kensington Mortgages, and Redstone Mortgages; for details, see www.fsa.gov.uk/pages/library/communications/pr/2009/080, viewed 30 March 2013.

  48. Even the FCA acknowledges this variable picture (see FCA 2014).

  49. See Thakker v Northern Rock (Asset Management) Plc (2014) EWHC 2107 where a claim to damages for a lender’s alleged failure to observe MCOB rules did not affect the mortgagee’s right to possession.

  50. Issued by the Civil Justice Council and available at http://www.justice.gov.uk/courts/procedure-rules/civil/protocol/prot_mha, viewed 19 March 2014.

  51. Birmingham Citizens Permanent Building Society v Caunt (1962) Ch 883.

  52. Cheltenham & Gloucester Building Society v Norgan (1996) 1 WLR 343.

  53. The jurisdiction has been subject to extensive criticism and comment (see for instance A Clarke 1983; Dixon 1999; Nield and Hopkins 2013; Ministry of Justice 2009). Section 36 also compares unfavourable with the jurisdiction to grant time orders under s129 of the Consumer Credit Act 1994 which affords the court discretion to alter loan terms (see McMurtry 2010).

  54. Ibid. See also Thakker v Northern Rock (Asset Management) Plc (2014) EWHC 2107 which illustrates the poor fit between MCOB 13 and the lender’s right to possession.

  55. See for instance Wilcox et al. (2010), Stephens et al. (2008), Shelter (2009), and Wilcox and Williams (2013).

  56. Standing for Sustainable Home Ownership Partnership.

  57. Projections suggest a rise in repossession rates per year to 50 000 by 2015 (see Aron and Muellbauer 2012).

  58. See also Scott v South Pacific Mortgages Ltd (2014) UKSC 52.

  59. FSA (2011b) led to rules which place limits on advertising, requiring an independent valuation of the sale price and security of tenure on the rent back of not less than 5 Years.

  60. For instance, introductory or starter tenancies, flexible tenancies, and demoted tenancies.

  61. For example, the levy on spare bedrooms.

  62. See English Housing Survey 2012–2013 which reveals the following proportions: owner occupiers 65%, social renters 17%, and private renters 18%.

  63. See for instance CML (2012b, page 16), Stephens and Williams (2012), Heywood (2011), Taylor and Stroud (2010), and Resolution Foundation (2012).

  64. See Wilson (2013) for a convenient summary of the development of low-cost homeownership initiatives.

  65. See the Coalition Government response in DCLG (2013), and the Labour Opposition proposed manifesto policy; see http://press.labour.org.uk/post/84352297129/ed-miliband-launches-election-campaign-with-rents, viewed 2 August 2014.

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  1. University of Southampton, Southampton, UK

    Sarah Nield

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  1. Sarah Nield
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Nield, S. Mortgage Market Review: “Hard-Wired Common Sense?”. J Consum Policy 38, 139–159 (2015). https://doi.org/10.1007/s10603-014-9280-2

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