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Hangover Cure household debt report recommendations by Resolution Foundation
1. Hangover Cure
Dealing with the household debt overhang as
interest rates rise
Report recommendations
Matthew Whittaker
2. The following recommendations are from
Resolution Foundation’s report Hangover Cure:
Dealing with the debt overhang as interest
rates rise by Katie Blacklock and Matthew
Whittaker:
Introduction
3. Maintain the window of opportunity by resisting significant
increases in interest rates until there is clear evidence of
sustainable, broad based recovery, not just in output but in
household incomes too
Theme 1: maintain the window of opportunity
4. To better inform its decision making on
future rate rises, the Bank of England
should work with the government and the
ONS to develop accurate, reliable and
timely data on household incomes across
the income distribution. It should also
amend its own NMG survey – potentially a
very useful addition to earnings and
income data from the ONS – in advance of
this year’s questions being asked to
ensure that sufficient data is collected to
allow for distributional analysis.
Recommendation 1
5. Prepare for the imminent closing of this window, by being more
proactive in ensuring that households can and do make
appropriate re-financing decisions in order to lock-in today’s
low rates for a defined period
Theme 2: prepare for the imminent closing of the
window of opportunity
6. The Financial Conduct Authority should
mandate standardised proactive pre-
arrears engagement by lenders. In the
same way lenders and the regulator
recognised interest only mortgagors as an
‘at risk’ group, a second cohort can be
identified. This should include borrowers
who have previously fallen into arrears and
have since recovered, along with those
who took out self-certified, high loan-to-
value or high loan-to-income mortgages
pre-crisis. In addition, customers currently
in forbearance should be included.
Recommendation 2
7. Lender contact would in the first instance encourage
them to assess their financial position. They should
provide them with a tailored assessment of the
impact of a given range of hypothetical increases in
interest rates on their mortgage repayments. To aid
understanding, the design of these approaches and
the information contained within them should be
standardised across the industry. In addition, the
lender should provide the customer with access to a
standard budget planner tool (such as the one used
by the Money Advice Service), detailing current
income and expenditure. This communication would
also provide direct referrals to a range of free
agencies that can help with financial planning and
debt advice.
Recommendation 3
8. The FCA should review the use of transitional arrangements by lenders to
ensure that existing borrowers are not being unnecessarily prevented access to
mortgage products that would improve their repayment position. This review
should have explicit regard for Outcome 6 in the Treating Customers Fairly
initiative. Where the FCA concludes that a lender has imposed “unreasonable
barriers” on a customer changing product by failing to take advantage of the
transitional arrangement option, the regulator should take sanctioning action.
Where further macro-prudential rules are deemed necessary as a means of
cooling activity in the housing market, the regulator should design similar
transitional arrangements for existing borrowers in order to avoid the creation of
significant numbers of new mortgage prisoners.
Recommendation 4
9. It is important that potential mortgage prisoners
are given at least one option to insulate
themselves against rises in interest rates. All
lenders should be obliged to offer a medium
term (e.g. five year) fixed rate mortgage to
existing borrowers as an alternative to the SVR.
For prisoners, the rate would inevitably be
above the current SVR and above the rates
offered to lower risk customers, but it would at
least provide certainty for those who want to
take it up. It should be commercially determined,
but it should also be ‘reasonable’ and
transparent, set with reference to five-year
swap rates and capital requirements, and with a
cap on fees.
Recommendation 5
10. The FCA should require lenders to
account for any future pricing changes in
variable rate products with specific
reference to a change in the funding cost
environment. This extra regulatory
vigilance in relation to the SVR is
required while significant numbers of
mortgage prisoners remain in the market
and will allow the FCA to prevent
changes in the SVR where it suspects
lenders are taking advantage of their
monopoly position.
Recommendation 6
11. Support those households that find themselves in debt crisis,
by ensuring there is sufficient capacity among debt advisors
and improving mechanisms for minimising the social and
economic upheaval associated with exits from the housing
market
Theme 3: support those households who find
themselves in a debt crisis
12. We believe that additional funds generated by the
arrival of consumer credit firms within the scope of the
FCA should be used to boost provision of free debt
advice, rather than being offset by reductions in levy
payments made by existing regulated firms as is
planned. The monies should be distributed beyond the
face-to-face support provided by MAS partners to
expand coverage across the sector and focus on
prevention as well as cure. In particular, MAS should
explore the potential for funding less expensive non-
face-to-face debt advice channels.
In addition, we think the FCA should rebalance the
burden of the MAS debt advice levy to include a higher
contribution from fee-charging debt management
companies, reflecting the negative externalities they
have on individuals in debt and on the free sector more
generally.
Recommendation 7
13. The industry should work together to agree the
principles underpinning an approach to savings for
clients under a debt management plan (DMP),
Individual Voluntary Arrangement (IVA) or Debt
Relief Order (DRO). Creditors should be prepared to
accept that the debt management company has
established an appropriate and reasonable amount of
savings subject to specified industry-level guidelines
about the purposes of this savings element. It should
be clearly recognised as being for the purpose of
meeting unbudgeted spending rather than for
unexpected falls in income. In the event of falling
income, debt advisers should continue to seek a
reduced payment as is current practice.
Recommendation 8
14. In advance of a potential new wave of mortgage
arrears, industry groups such as the BBA and
CML should work with their members to
establish a suite of standardised Assisted
Voluntary Sale (AVS) options. This would deliver
much needed visibility and consistency while still
allowing the lender to vary its approach in order
to best meet the needs of different borrowers.
Customers taking this option should not be
penalised by local authorities in relation to
accessing housing assistance. To this end,
lenders and advisers should provide local
authorities with the external validation required
to demonstrate the unsustainable nature of the
borrower’s debts.
Recommendation 9
15. Homeownership may prove unaffordable for some as
rates rise, but the cost of moving households between
tenures can be high. Support for Mortgage Interest will
continue to play an important role in helping those facing
temporary difficulties associated with unemployment, but
there is a need to develop a new approach for those
facing structural affordability problems. To mitigate the
social and economic costs associated with losing the
home, the government should establish a new scheme –
Help not to be Repossessed – to enable eligible
borrowers to enter into shared ownership with a
Registered Provider. Eligibility should be limited to
households who took out their mortgages before 2009
and government grants to RPs for this time-limited
scheme should therefore come from new funds rather
than from existing pots.
Recommendation 10