Mortgage PAP – 12 months on
The number of repossessions has gone down since the Pre-Action Protocol for Mortgage Possession was introduced a year ago. But does that mean it has been successful? Richard Taylor of HL Interactive LLP reports
On 19 November 2008 the Pre-Action Protocol (PAP) for Mortgage Possession cases (the “protocol”) came into force as the government’s response to the credit crunch and to help those who were at risk from losing their home in the economic downturn.
The protocol mirrors the Rent Arrears Protocol which was introduced in October 2006 in seeking to regulate the pre-litigation conduct between lenders and borrowers and in encouraging both parties to explain what actions they had taken to comply with the protocol and account for any instances of non-compliance. Its aim was to provide clear guidance on what the court would expect lenders to have done prior to bringing proceedings and to ensure that litigation by lenders was only an action taken against borrowers as a last resort. But, one year on, has it achieved what it set out to do?
Aims and scope of the protocol
The protocol applies to first charge residential mortgages, second charge residential mortgages, un-regulated residential mortgages and other secured loans regulated under the Consumer Credit Act 1974 on residential property. Its main aims are to:
- Ensure that a lender and borrower act fairly and reasonably with each other to resolve any matters concerning both mortgage and home purchase plan arrears;
- Encourage more pre-action contact between the lender and the borrower in an effort to reach an agreement; and
- If an agreement cannot be reached, enable efficient use of the court’s time and resources.
In attempting to reach these aims, the protocol provides clear guidance on the expected conduct of each party. These include an obligation on the lenders to provide the borrower with details concerning the amount of arrears; to advise the borrower to take independent legal advice from an early stage where necessary; to ensure all information provided to the borrower is clear, fair and not misleading and communicated in a language the borrower can understand; and to demonstrate that alternatives to repossession have been considered. These alternatives to repossession include extending the term of the mortgage, deferring payment of interest due under the mortgage or capitalising the arrears, many of which the main high street lenders all look to offer to their borrowers wherever possible.
The protocol emphasises that possession claims should only be brought as a last resort and should not normally be started when settlement is actively being explored. In return, borrowers are expected to provide lenders with up-to-date information that could assist with early resolution of the matter.
Where contact has been established between the lender and the borrower, the protocol requires lenders not to consider starting a possession claim where the borrower can demonstrate to the lender that:
- They have submitted a claim to an insurer under a mortgage protection policy with all evidence required to process such a claim;
- They have a reasonable expectation of eligibility for payments from an insurer; or
- They are able to pay a mortgage installment not covered by the insurance.
The lender should also consider delaying the possession claim if the borrower can demonstrate that reasonable steps have been taken to market the property at an appropriate price.
The court may take into account whether a party to proceedings has complied with a protocol when it gives directions for the management of the case and when it makes orders for costs. The court may impose a sanction on a party that fails to comply with a protocol where that failure either caused proceedings to be commenced which would otherwise have been unnecessary; or led to costs being incurred in proceedings which might not otherwise have been incurred.
If proceedings are commenced and the court finds that a party involved has not complied with the protocol, the court may order that the party pays the full amount or part of the costs of the proceedings of the other parties; or that the party pays those costs on an indemnity basis.
What has PAP achieved?
A report issued by the Ministry of Justice in March 2009 showed a fall in the number of mortgage and landlord possession orders presented to the County Court in the first quarter of 2009, following the introduction of the protocol in November 2008.
Overall, the report found that mortgage possession claims were reduced by 42 per cent compared to 12 months earlier. The statistics showed a 39 per cent decrease in the number of claims resulting in the County Court issuing a mortgage possession order, compared to the first quarter of 2008. Justice Minister Bridget Prentice said at the time that the figures “show that more and more people are making the most of the many government initiatives aimed at helping people in arrears. The number of people facing repossession has considerably reduced since this time last year, and the statistics are levelling out after the major impact felt when the Mortgage Pre-Action Protocols were first introduced.”
These figures seemingly suggest that the protocol was successful in reducing the number of possession claims issued by lenders, yet the apparent success of the protocol must be viewed alongside other possible factors, such as the significant reduction in interest rates which have made standard variable rate mortgages more affordable. The affordability of mortgages has reduced the likelihood of borrowers actually defaulting on their mortgage, and furthermore the range of measures introduced by the government to help homeowners in financial difficulty has also had an effect. Such measures include changes in the eligibility criteria for Income Support Mortgage Interest and the introduction of the Mortgage Rescue Scheme. In addition on 21 April 2009, the government announced that Homeowners Mortgage Support would be available to help homeowners who suffer a temporary income reduction caused by redundancy, for example. The scheme means eligible homeowners are able to make smaller mortgage repayments for up to two years without the risk of losing their homes, and so less homeowners were likely to default on their mortgage following its introduction.
Impact on lenders
So, on the first anniversary of the introduction of the protocol, what impact has it really had on lenders over the past twelve months?
On the face of it, the requirements of the protocol do not appear to be significantly onerous towards lenders and do not alter the parties’ contractual rights and obligations. However, there has clearly been a reduction in the number of cases referred to litigation by lenders since the protocol was introduced. This suggests that the lenders’ criteria for referring cases to litigation is perhaps not as strict as it was pre-November 2008 although other factors must also be taken into account. Whatever the reason, the reduction in numbers is of course good news to the many thousands of homeowners who might have seen their home under threat had their arrears accrued before the protocol came into effect.
The flip side to this is of course the argument that having to adhere to the protocol simply delays the inevitable repossession of a borrower’s property where it is clear that a borrower cannot pay the arrears and/or the monthly instalments. The delay in obtaining possession and seeking a sale of the repossessed property merely increases costs, such as the additional interest on the principal sum and the monthly arrears fees which are added to the mortgage balance. However, the significant fall in house prices has offset these costs as the majority of properties that are repossessed are worth less than the outstanding mortgage balance, resulting in shortfall sales in many cases. As these debts can ultimately be pursued for up to 12 years by the lender, any delay in the sale will only increase this debt which is arguably to the detriment of the borrower. Even the Ministry of Justice acknowledges that the extent to which the protocol has resulted in the issue of claims being delayed rather than abandoned is unclear.
The courts are ultimately responsible for applying the rules of the protocol to ensure lenders are complying with it and borrowers are being treated fairly in the circumstances. It is clear that over the past 12 months, some district judges have adopted a stricter approach towards compliance than others. Whilst the protocol is drafted so that the responsibility for trying to reach a solution applies equally to lenders and borrowers, it has been a rare case where a district judge has criticised a borrower for failing to contact their lender to explain their circumstances prior to proceedings being commenced. By the same token, many cases have been adjourned because district judges have found fault with the lender in applying the protocol itself. The expectation placed on lenders to adhere to the protocol is, perhaps understandably, far greater than that placed on individual borrowers.
The amendments to the Civil Procedure Rules in July 2009 brought with them a minor but very welcome change to the protocol. Previously it was at the discretion of the lender as to what information was provided to the court to show compliance with requirements under the protocol, which invariably led to different information being provided amongst lenders and different judges having varying criteria for what was acceptable. The introduction of a new standard checklist Form N123 on 1 October 2009, which has to be completed by the lender prior to every possession hearing, hopefully prevents any further confusion and ensures a more uniform approach to the issue across the courts.
Should it go further?
One area of concern that has yet to be addressed is the regulation of the agreements that the lender and the borrower are expected to try and reach over the repayment of arrears. Currently there are no specific guidelines which set out what can and cannot be agreed between the parties, or what the courts would expect to be a fair solution. Some have expressed concern that borrowers are often vulnerable at the time of going into arrears and will accept unduly onerous terms demanded by their lender to avoid legal proceedings. Some lenders may indeed be driving a hard bargain as to what they would accept to stop possession proceedings. For instance, some borrowers have agreed to a change of status from homeowners to tenants, and to give up any interest in the property in exchange for lenders granting a periodic tenancy on ‘favourable terms’. Others who have failed to maintain a previous agreement to repay arrears have simply handed the keys to the property back to the lender without fully exploring the other options open to them. The protocol does not yet protect vulnerable borrowers from such agreements outside legal proceedings.
If the protocol is to achieve its aim of encouraging resolutions outside the courts, it can be argued that further provisions are required to ensure that either independent legal advice is given to borrowers on ‘agreements’ with lenders and to make agreements void if they have not had such advice. From a lender’s point of view such a requirement would only create more hurdles to overcome in order to recover the money owed to them, which they would argue equates to increased costs and delays, ultimately eroding any remaining equity in the property.
Although the protocol may have prompted lenders to adapt their processes prior to starting proceedings, it should in reality have caused few problems to reputable lenders who already have fair and transparent polices in place to deal with borrowers having difficulties keeping up with their mortgage repayments. The majority of what is contained in the protocol amounts to good practice and for many lenders it will mirror their current polices in dealing with repossessions in any event. It is those lenders who exercise bullish tactics and unreasonable notice periods that the protocol serves to protect against, and to this extent, the protocol appears to have been a success. The principle of Treating Customers Fairly is one that is high on the agenda of many financial institutions and the Financial Services Authority, and covers in particular the lenders’ treatment of the defaulting borrower.
However, it must be remembered that in the tough current economic climate, the protocol will always be limited if borrowers simply cannot afford to keep up with their mortgage repayments. This basic premise must remain at the forefront if any further amendments to the protocol are to be considered. A balance has to be struck between the needs of the lender to recover monies due and the chances afforded to the borrower to remedy any default in the repayment of the mortgage. After a year in force, the current protocol just about manages this delicate balance.
Richard Taylor is a partner at HL Interactive LLP. Richard.firstname.lastname@example.org