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The Government’s financial watchdog, the Financial Services Authority, has demanded mortgage lenders must ensure they are treating sub prime customers fairly

In the current market conditions, the FSA says there is still work to be done with mortgage lenders when it comes to handling arrears and repossessions.

This warning comes as new data on mortgage lending from the FSA shows that the number of consumers facing arrears and repossessions is increasing.

In dealing with customers in arrears, the FSA is urging mortgage firms to be flexible, to make sure they consider customers' individual circumstances and to use court action as a last resort.

Lesley Titcomb, director responsible for the mortgage sector at the FSA, says:
"As our data shows in these current market conditions more people are struggling to meet their mortgage payments and it is vital that firms treat them fairly. This means paying attention to their individual circumstances and not repossessing their homes when there may be an alternative solution. Repossession has to be the last resort."

There were particular concerns with specialist sub prime lenders that operated a ‘one size fits all' approach, focused too strongly on recovering arrears without reference to the borrower's circumstances.

The FSA also found that they were too ready to take court action; and
had lower standards of systems and controls in place to control mortgage arrears handling, including training & competency arrangements.

Sue Edwards, head of consumer policy at Citizens Advice, says: "Our 2007 evidence report showed that in some cases lenders have taken borrowers to court without exploring all the other options available to address the arrears resulting in excessive costs, stress and worry for borrowers. We also see cases where it appears that the lender had taken little or no account of the borrower's ability to repay the mortgage. The borrowers got into mortgage arrears and faced repossession.”

The CAB says that it dealt with over 57,000 problems about mortgage and secured loan arrears last year, an 11% increase on the previous year and these problems rose by 35% in the first two months of 2008 compared with the same period in 2007.

Peter Williams, executive director of the Intermediary Mortgage Lenders’ Association, says: "We strongly contests the suggestion made by the FSA that all specialist lenders systemically operate a ‘one size fits all' approach to arrears management.

“Our members ensure borrowers in distress are treated as individuals and that even in the worst case scenario of possession, the borrower is given the best advice and assistance. Keeping people in their homes is always preferable in a market such as this.

“By repossessing assets and selling them at a discount to their book value because of falling house prices, lenders could crystallise their losses. In some situations, however, delaying an inevitable sale of the property means the debt will continue to rise with no realistic chance of the borrower ever clearing it.”

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