Council of Mortgage Lenders (CML) Statement of Practice

Handling of Arrears and Possessions

CML Statement of Practice
January 1997

1. Introduction

This Statement provides an overview of how mortgage lenders currently deal with mortgage arrears and possession cases. The facts of each arrears and possession case are unique, and each case needs to be treated individually. Mortgage lenders adopt flexible procedures for the handling of arrears and possession cases which are aimed at assisting the borrower as far as possible in his or her particular circumstances. Individual practice will, of course, vary between lenders depending, in particular, on whether they operate on a centralised or decentralised basis. This Statement describes how lenders deal with mortgage arrears; the procedures adopted when handling possession cases; the subsequent sale of property in possession and finally the recovery of any outstanding debt. Individual circumstances might arise in which action outside those referred to in this Statement may need to be taken.

2. Mortgage Arrears - General Principles

The following general principles are relevant to the question of mortgage arrears -

1. When a borrower falls into arrears, the problem should be handled sympathetically and positively by the lender. The lender's first step will be to try to contact the borrower to discuss the matter.
2. As soon as financial difficulties arise, the borrower should let the lender know as soon as possible.
3. Once contact has been established, a plan for dealing with the borrower's financial difficulties and clearing the arrears will be developed consistent with the interests of both the borrower and the lender.
4. Possession of the property will be sought only as a last resort when attempts to reach alternative arrangements with borrowers have been unsuccessful. The borrower will remain liable for the full mortgage debt.

3. The Handling of Arrears - Initial Action taken by Lenders

Mortgage lenders or their agents may use the following administrative procedures for dealing with arrears -

1. The lender's first step will be to try to contact the borrower, for example, by letter or telephone.
2. The lender may seek a meeting with the borrower to discuss the situation and examine ways to resolve the problems. Alternatively, this may be done via the telephone or letter.
3. Once contact has been established, a plan for clearing the arrears will be developed consistent with the interests of both the borrower and the lender.
4. If contact cannot be made with the borrower and payments continue to be missed, legal action to recover the arrears or take possession of the property may be necessary.

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4. Alleviating Arrears Problems

Lenders have the following measures which they can use to help some borrowers in arrears difficulties -

1. Extend the Term of the Mortgage
   In the case of a repayment loan the term of the loan can be lengthened, although in most cases this does not make a significant difference to the monthly repayments.
2. Change the Type of Mortgage
   An investment backed mortgage may be changed to a repayment, or interest only, mortgage with a subsequent reduction in monthly outgoings. The borrower should also take appropriate professional advice.
3. Defer Payment
   Payment of part of the interest may be deferred for a period. This may be particularly appropriate where there is a temporary shortfall of income (for example, because of an industrial dispute or a temporary illness), or where there has been a rapid increase in interest rates. Lenders may in certain circumstances be willing to accept, for a reasonable period of time, the most the borrower could reasonably afford if this is in the best interests of both the lender and the borrower. However, this is not a solution where, because of a permanent reduction in income, a borrower is unable to afford anywhere near the full mortgage repayments and there is little prospect of an improvement in the situation in the foreseeable future.
4. Capitalise Interest
   Linked to (c) is the possibility of capitalising interest. This may be appropriate where arrears have built up but full monthly repayments can be resumed. The amount outstanding (capital sum and arrears of interest) may be rescheduled and repaid over the life of the loan. This might have an impact on the interest rate levied, whether a repayment vehicle will repay the loan in the case of an investment backed mortgage and eligibility for mortgage interest relief at source (MIRAS). Such an approach is unlikely to be adopted where the borrower has in the past failed to adhere to an alternative payment arrangement.

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5. Agreeing Alternative Repayment Arrangements

When agreeing alternative repayment arrangements, lenders will carry out an appraisal of a borrower's ability to meet the repayments. In some cases, the arrangements might be made for a specific period of time, after which an assessment is made as to whether the circumstances have changed to the extent that the arrangement can be varied.

6. Debt advice

In addition, lenders try to ensure that the borrower is aware of the availability of social security benefits which might apply such as income support to meet part of the mortgage interest repayments where a borrower is unemployed. Where the borrower has a multiple debt problem, the lender might suggest that the borrower contact a Citizens Advice Bureau or debt advice agency. At the borrower's request and with the borrower's consent, the lender will liaise wherever possible with a debt advice organisation, for example, Citizens Advice Bureaux, money advice centres or the Consumer Credit advice Service.

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7. Prevent minor arrears becoming a larger problem

In the vast majority of cases these approaches, together with the efforts of the borrower, are sufficient to prevent a minor arrears problem from becoming a major problem leading to possession. It is significant that while many people fall into arrears for a short time, a much smaller proportion have large arrears and a very small proportion result in possession.

8. Administration of mortgage arrears

Where mortgage arrears have accrued on an account, lenders recognise the need for the account to be closely administered by staff with relevant expertise in dealing with borrowers experiencing repayment difficulties. Details of the mortgage account may be transferred to the lender's specialised mortgage arrears department, where the staff would liaise directly with the borrower. Alternatively, the account may be administered by the local branch, with overall monitoring by the lender's central arrears department. The borrower would be contacted to establish why the mortgage repayments were no longer being made, whether the borrower's circumstances had changed, for example, if the borrower was no longer employed, and if an alternative payment arrangement could be agreed. A record of the mortgage arrears may be held by a credit reference agency.

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9. The Levying of Charges on Accounts in Arrear

In recent years, lenders have developed effective administrative and forbearance procedures to deal with cases where the borrower is unable to meet the mortgage repayments in full. A great deal of time and resources has been devoted to ensuring that these procedures operate to assist defaulting borrowers remain in their homes. Taking into account the additional costs which might be incurred in administering accounts in arrear, lenders may levy a fee on the borrower's account to meet a proportion of these costs.

10. Fees levied on account

However, lenders also recognise the difficulties facing borrowers who are experiencing problems in meeting their mortgage repayments. If a fee is levied on an account, it usually represents the reasonable cost of the additional administration required. When fees are charged, these may be on either a monthly or quarterly basis. Alternatively, lenders may charge only where certain administrative procedures have been carried out, for example, a home visit by a money adviser (employed by the lender) or where legal proceedings have been initiated.

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11.

In practice, lenders advise borrowers of any fees which might be charged either prior to the fee being levied or, when the fee is in respect of services, prior to the services being provided. Lenders may also advise borrowers when they take out a mortgage that fees may be charged to the account if it falls into arrear. Information on any fees is usually incorporated in mortgage documentation or published tariffs.

12.

In many cases where borrowers are experiencing difficulties in meeting their mortgage repayments, an alternative payment arrangement may be reached between the lender and the borrower. If an alternative payment has been agreed, and is being adhered to by the borrower, lenders may either cease levying a fee on the account or continue to charge fees until the account has been brought up to date.

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Possession

Methods of Obtaining Possession

13.

Possession of a property will be sought only as a last resort when all attempts to reach alternative arrangements with the borrower have been unsuccessful. A lender may obtain possession of a property in three ways -

1. By Court Order
   When pursuing possession proceedings through the courts, lenders must adhere to all the legal requirements and procedures to enforce their security, a number of which give considerable protection to the borrower. Proceedings may be suspended should the court consider that a borrower may be able, within a reasonable time period, to pay any sums due under the mortgage. The execution of the possession order may be postponed for a time to allow the borrower to secure alternative accommodation.
2. By Voluntary Agreement with the Lender
   A borrower who has fallen into arrears and who has little prospect of repaying such arrears may reach an agreement with his lender to hand over the property to the lender without the need to obtain a court order. A borrower may also be asked to sign a voluntary possession declaration to confirm the agreement, which would make it clear that mortgage interest together with other charges will continue to accrue until the property is sold. A voluntary surrender may result in an earlier sale of the property than would be the case with court proceedings.
3. Surrender (or Abandonment) by the Borrower without Notifying the Lender
   In cases where a borrower has failed to discuss his mortgage arrears problems with the lender, or where suitable arrangements have not been reached between the lender and borrower, a borrower may simply vacate the property without advising the lender; often keys are sent to the lender, this being possibly the first intimation that the property has been surrendered. In such circumstances, the property would be sold by the lender. Again the borrower is liable for the total debt including mortgage interest which accrues until the property is sold.

Irrespective of how the property is taken into possession, the borrower will remain liable for the outstanding debt including any accrued interest and charges between the date of possession and the date of sale.

14.

In some cases borrowers who have had their properties taken into possession may seek a mortgage on another property. Potential borrowers should not conceal the fact that they have defaulted on a previous loan. The subsequent lender will be aware of the previous mortgage either as a result of enquiries of the original lender or the CML Mortgage Possessions Register which lists borrowers who have had their properties taken into possession.

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Administrative Aspects

15.

Whilst lenders operate different administrative procedures to deal with possession cases, the following procedures are common -

1. Should direct contact with the borrower not result in an arrangement (for example, an alternative payment arrangement) which would enable the borrower to remain in the property, then solicitors may be instructed to start possession proceedings. This is usually the only course of action available to the lender by that time.
2. In some cases, further follow-up contact may continue to be made up until, and after, the court hearing, every effort being made to encourage the customer to discuss suitable repayment arrangements and avoid the need for possession.
3. Instructions for a warrant to be issued for possession are implemented by the lender, after a full review of the borrower's file by a person fully aware of the facts, and a final letter or telephone call to the borrower.
4. Before taking possession, a lender may liaise with the relevant local housing department. The borrower may also be advised to register on the local authority's list as soon as possible. Lenders recognise that it is important to give local authority housing departments as much notice as possible where borrowers and their families might need to be rehoused. However, this has to be balanced against the possibility that alternative arrangements might be reached between the lender and borrower which would enable the borrower to remain in the property. The timing of providing advice to housing departments will vary from case to case and lenders will only take this course of action with the consent of the borrower.
5. On taking possession, the Court Officer may be accompanied by the lender's representative, after which the property will usually be put on the market as soon as possible to minimise the mortgage interest continuing to accrue on the account. A record of the possession may be held on the CML Possessions Register.

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CML/Government Statement on Arrears and Possession Procedures

16.

In December 1991, after detailed discussions with the Government, the CML reaffirmed that it is the policy of lenders to take possession only as a last resort, and to handle arrears problems efficiently and sympathetically. A formal announcement was made by the Chancellor of the Exchequer in the House of Commons and at a CML Press Conference on 19 December 1991. The announcement referred to the fact that -

1. Where borrowers have suffered a significant reduction in their income but are making a reasonable regular payment, lenders do not seek to take possession.
2. In the knowledge that income support will in future be paid direct, lenders will not take possession in cases where mortgage interest payments are covered by income support.

17.

From October 1995, income support has been paid by the Department of Social Security at a "standard rate" of interest, which may be less than the interest rate charged by the lender. Borrowers will need to make up any shortfall in the mortgage repayment. Some lenders have decided not to participate in the direct payment scheme. In these cases, the borrower will be responsible for passing on the income support for mortgage interest payment to their lender.

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Sale of Properties in Possession

18.

When selling properties which have been taken into possession lenders are under a duty to obtain the best price reasonably obtainable. A lender is not bound to postpone the sale in the hope of obtaining a better price at some future date; however, the lender should allow sufficient time to permit, for example, proper advertising so that the best price obtainable may be achieved. Mortgage lenders generally use the following administrative procedures for selling properties which have been taken into possession:

1. Administration
   The sale may be dealt with either via a lender's in-house department or through a separate property management company employed by the mortgage lender. Dedicated staff are responsible for co-ordinating the sale of properties in possession which will include reviewing the offers received from potential purchasers as well as monitoring the condition of these properties and their valuation.
2. Valuation
   A valuation of the property is obtained from either one or two qualified surveyors and another from the appointed estate agent. Prices are usually reviewed every three to four months and more often when the circumstances justify a revaluation.
3. Estate Agents
   Properties are usually marketed through an estate agent in the immediate locality of the property being sold. Agents may advertise properties in the local press, with such advertisements being repeated as and when necessary. Mailshots and national advertising may also be carried out in some cases. In general, lenders do not market these properties as "repossessed properties"; in many cases estate agents are specifically instructed not to do so.
4. Report on Activity
   Estate agents are usually required to report on activity every four to six weeks if a property remains unsold. The estate agent will notify a mortgage lender of any offers received. Only when satisfied that the best price has been obtained, would the estate agent recommend this offer for acceptance. If the offer is substantially below the asking price, the agent must provide supporting evidence to suggest that this would be the best offer obtained. In practice, all offers are accepted or declined promptly. Where there are a number of very close offers on a property, a sealed bid procedure may be carried out whereby the person putting forward the best offer would be the successful purchaser.
5. Visits to the Property
   The agent will usually visit the property on a regular basis and ensure that any repairs and maintenance to the property are carried out and that the property is secure. When properties are first put up for sale, mortgage lenders will usually arrange that essential repairs, cleaning and tidying of the garden are carried out. Whilst the estate agent will take care of minor repairs which are identified on the regular visits, other repairs usually require the approval of the mortgage lender. Where this work is carried out, estate agents will be required to obtain competitive estimates. Prospective purchasers will normally be accompanied by the agent when viewing a property.
6. Auction
   Properties in possession may be sold via auction. These properties are reviewed relative to sales experience and the length of time on the market. There are occasions when properties may be sold by auction because either the auction is specifically targeted at the type of property in question, eg a period type of residence, or the property will generally appeal to the speculator market because of its condition. Such properties are referred to an appropriate auctioneer. A catalogue would be issued and the properties are available for viewing. A reserve price is usually based on information relating to the number of viewings and general level of interest. A reserve price is set several days before the auction following consultation with a surveyor on the valuation of the property.

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19. Proceeds of Sale

Following the sale of a property in possession, the proceeds of sale will be applied in the following way. First the lender will use the funds to meet the costs incurred in selling the property and to repay the outstanding mortgage including interest. If there are subsequent loans secured against the property any surplus will also be applied to repay these loans prior to any amounts being paid to the borrower. If there are insufficient proceeds of sale to repay the mortgage, the borrower will remain liable to repay any outstanding debt.

20. Indemnity Insurance

Mortgage indemnity is insurance which a lender may take out for its protection where a high percentage loan is made. This insurance policy covers the situation where, at some future stage, the lender has to repossess the property and sell it and the lender suffers a loss. For example, if the property is sold for less than the amount of the borrower's outstanding mortgage (including accrued interest) the lender can claim on the mortgage indemnity to recover some of its loss. The basic security for the mortgage is the property. The mortgage indemnity, therefore, acts as a form of additional security for the lender. It provides no protection to the borrower who gains no benefit, other than a high percentage loan advance than would otherwise have been granted.

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21.

In most cases, the mortgage indemnity will cover the lender only for part of its loss and, in addition, once an insurer has paid a mortgage indemnity claim, it gains the right of subrogation; this means that the insurer can reclaim from the borrower any money it has paid to the lender under the mortgage indemnity claim. Either the lender or its insurer may take legal action against the borrower to recover the shortfall if the borrower does not repay it voluntarily, although any action is taken in the name of the lender. In most cases, the lender contacts the borrower to recover the shortfall on behalf of itself and its insurer. This does not mean that the lender recovers the loss twice; any money paid by the insurer which is collected from the borrower is then passed back to the insurer.

22. Loss Recovery Procedures

Following the sale of a property, the borrower remains liable to repay any shortfall which might arise between the amount of the outstanding mortgage and the sale price obtained. When a borrower purchases a property with mortgage finance, the borrower enters into a personal covenant with the lender to repay the mortgage in full. When two or more borrowers purchase a property, the lender will treat them as jointly and severally liable for the entire amount borrowed, irrespective of how much each borrower actually contributed to the mortgage repayments on a monthly basis. The lender has 12 years (5 years in Scotland) in which to seek recovery of the shortfall via the courts. Direct recovery could extend beyond that point.

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23.

After the sale of a property, the borrower should keep their lender advised of forwarding addresses so that contact can made regarding the sale and repayment of any shortfall. The lender will notify the borrower either by letter or by telephone as soon as practicably possible of the amount of the shortfall. If the borrower has not provided a forwarding address, the lender will try to locate and make contact with the former borrower.

24.

The lender and the borrower will generally agree a repayment arrangement taking into account the borrower's current income and expenditure. In the majority of cases, payment arrangements are made without the need for court proceedings; this enables both parties to review the arrangement as and when necessary should circumstances change. If the borrower is unwilling to enter into an acceptable voluntary arrangement, the lender may use other enforcement remedies via the courts to seek repayment. A record of the repayment arrangement might be held by a credit reference agency and the borrower will need to advise any future lender of the shortfall debt and repayment arrangement.

Further information can be sourced direct from the Council of Mortgage Lenders.  Call: CML on 020 7440 2255 , or visit their website at www.cml.org.uk.