Maturity of Interest-only Mortgages (MIOM) C3 & C4 lenders thematic project overview Council of Mortgage Lenders Interest-only Working Group 7 October 2014 Darcy Tallon & John Hindle 1
Experian’s analysis – IO by maturity date 2
The MIOM risk background Thematic findings: 2.6m interest-only mortgages mature before 2041 including • 600,000 by 2020 Around half of these are modelled to have a shortfall • 50% of the shortfalls are expected to exceed £50,000 • Mitigation to date: Publication of FCA research findings with a strong message to • consumers ‘take action now’ Industry pledge to contact all interest-only mortgage customers • with maturities by 2020, before end of May 2014 Published industry guidance FG 13/7 setting out our • expectations for the fair treatment of affected interest-only customers 3
Project background A follow-up piece of conduct thematic work to establish how small lenders are • embedding the guidance in FG13/7 – “Dealing fairly with interest -only mortgage customers who risk being unable to repay their loan”, published in August 2013; and assess the treatment of interest-only maturity customers touched by the shortfall repayment issue Our work assessed 6 firms’ policies, procedures, strategies and management • information; and included on-site customer outcome testing The project population represents a small proportion of the overall interest-only • market. It included building societies, non-bank lenders, a wholesale bank (mortgage subsidiary), closed-books and firms using third party administrators (TPAs). 4
High level findings • Firms rising to the challenge and acting on our guidance; firms to continue embedding to achieve consistently fair outcomes for their customers • Flexibility seen, predominantly informal arrangements to overpay and/or temporary term extensions to accommodate repayment • Findings are encouraging, but it remains important for consumers to work with their lenders to address early any potential payment shortfalls • All firms had immature MI. Most firms understood that they would need to expand their MI as data became available 5
Examples of good practice seen Outbound mailings sent to customers with maturities before 2020 • Communication strategies developed that included several touch points and • follow-up phone calls Vulnerable consumers defined within policy and senior management signed • off solutions for these cases Senior management review a sample of post maturity shortfall cases • Letters to customers that clearly outlined risks and options • High response rates to mailings – 60-70% • Good oversight and monitoring of TPA activities • 6
Areas requiring further development Strategies to engage with non-responsive customers • Formal and informal contract variation processes • Warning consumers on the risk of inaction • Limited post maturity procedures • Checking affordability for solutions • Confirming solutions in writing • Include arrears/payment shortfall handling in the interest-only strategy • Presentation of options in a balanced way • Quantifying the value of anticipated shortfalls • Training & competency for maturing interest-only mortgage strategy • 7
Next steps • The interest-only maturity risk is a long term risk and so will remain a FCA priority – we will continue to monitor the mortgage back book • Regular dialogue and meetings with firms and trade bodies in order to understand progress and to share best practice • Potential consumer research to understand whether awareness of the interest-only maturity risk has improved 8
• Questions? 9
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