FCA: Second charge is higher risk for those in arrears

Ryan Bembridge

December 6, 2018

There is a higher risk of second charge customers seeing debt levels rack up once in arrears compared to other areas, the Financial Conduct Authority’s executive director of supervision Jonathan Davidson warned today.

Davidson was speaking after the FCA published findings on how lenders are dealing with customers who fall into long-term mortgage arrears this morning.

He said: “There is higher risk in the second charge sector, and higher if rates rise of ‘over-forbearance’, because the interest rates and the fees start to rack up at a much faster rate.

“The higher the rate of interest the higher the risk of the interest rate eating into people’s equity if they can’t service the interest.”

He clarified however that he still is more concerned about what happens if interest rates go up across the mortgage market overall.

Steve Walker, managing director of master broker Promise Solutions, seemed to take Davidson’s comments with a pinch of salt.

He said: “Quotes like this in isolation are unhelpful and you need to look at the overall picture and context.

“For example would arrears on a £40,000 second charge at 4% eat into equity faster than arrears on a £200,000 first charge at 2.7%?”

But Martin Stewart, director of broker London Money, thought Davidson has a point.

He said: “There may well be a slightly higher arrears risk in seconds given the poor quality of packaging and advice that many consumers may have suffered due to the past culture of the industry.

“While MCD and the ‘Dear CEO’ letter that the regulator has sent out will have helped I still feel that the second charge sector needs more aligned with first charges.

“This needs the lenders to have more influence in the advice process, as many second charge mortgages will have been arranged when a cheaper further advance or remortgage would have been more appropriate.

“As a result consumers’ finances may be under additional strain due to them borrowing at a higher cost than may have been appropriate.”

In 2008 there were 56,000 customers with serious arrears with a repossession rate of 22%; by 2016 there were 70,000 in serious arrears with a repossession rate of just 2.7%.

In response to low levels of reposessions the regulator decided to investigate further after speculating that lenders were being ‘over-forbearing’ – effectively being too lenient with customers and potentially causing their debts to rack up.

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