Societies still in doghouse with many home owners

Housing may be in a slump but lenders haven't heard the end of complaints, says Clifford German

DECLINING demand for mortgages and increasing competition among lenders is steadily pushing the balance of financial advantage in favour of borrowers, but there is still some way to go before lenders provide a perfect service. Astonishing though it may seem, the Building Societies Ombudsman hears complaints every day from borrowers who have found that the endowment policies they thought were building up the capital to pay off their mortgages at maturity do not even exist.

Through some oversight, the policies were never set up, and no premiums have been paid. Home owners have been paying only the interest on the loan, and the mortgage debt itself remains the same. Societies argue that the responsibility for setting up the policies rests with borrowers, who must ensure that they are making endowment payments to the insurance company as well as interest payments to the lender. Borrowers all too often assume that the monthly payment to the lender includes an endowment premium as well as the interest.

In the absence of clear evidence that the borrower has been clearly warned of this responsibility, the Ombudsman tends to rule in the borrower's favour. But the likely compensation clearly will not cover the shortfall - so, in their own best interests, borrowers are advised to check for themselves whether or not their monthly payments do cover their premiums as well as interest.

Equally surprisingly there is a steady trickle of complaints that societies have been collecting monthly payments on repayment mortgages that are not sufficient to pay off the mortgage by the due date. In such cases the Ombudsman has tended to order the building society to credit the borrower with 50 per cent of the shortfall.

This, however, can still leave the borrower with a problem that ought not to exist in these days of advanced computerisation.

Many societies are still failing to explain to borrowers exactly what is covered and what is not by mortgage payment protection policies and mortgage indemnity policies. All too often borrowers agree to take out such policies with only the haziest idea of what protection they offer.

This issue becomes all the more serious if the Government decides to go ahead with plans to reduce state payment support for borrowers who lose their jobs - leaving them to take out private insurance cover instead. Mortgage payment protection policies are designed to take over the payment of mortgage interest if the borrower is unable to do so as a result of illness or the loss of a job and income. But many claims are being refused, usually on the grounds that the borrower has failed to read the requirement to notify the lender of specific risks - which include existing medical conditions or impending redundancy programmes - or that the borrower was employed on short-term contract rather than being in regular employment. In one case, the Ombudsman ruled that the lender had failed to refer a borrower, who suffered from asthma, to these policy exclusions, and that if the borrower had known of the exclusions he would not have taken out the policy. But he only received repayment of the premiums, plus pounds 150 for inconvenience, and not the mortgage cover that he had hoped to get.

Another continuing cause of complaint has been mortgage indemnity policies that lenders normally require borrowers to take out if they borrow more than, say, 75 per cent of the value of a property. This is in case the property value falls, the borrower fails to maintain payments and the lender is forced to reposses the property and sell it at a loss. Many borrowers still assume that since they are required to pay the premium, they should be entitled to some compensation when the claim is activated.

Not so, of course. The borrower pays the premium but the insurer pays the lender, not the borrower, to cover losses. Worse still, the insurer retains the right to pursue the unfortunate borrower for any remaining assets, to reduce the insurer's payout. Lenders often refuse to allow the borrowers even to see the policy documents that support the insurer's claim, on the grounds that it is commercially sensitive information or might, in law, justify the borrower's claim to part of the insurance payment.

These payouts have cost the insurance industry several hundred million pounds in the last few years. And thousands of borrowers have lost their homes.

Many borrowers also feel that insurance payouts have reduced incentive to lenders to reposses sensibly and sell off property carefully to minimise the size of the loss. Although lenders now claim to be much more pragmatic in treatment of repossession cases, the Ombudsman still has on his books a claim from a borrower who says he could have sold his property for just pounds 3,500 less than his debt, but was refused permission to sell by the lender. The borrower fell further into arrears, the lender clocked up claims, the property value continued to fall and, by the time it was repossessed and sold, the shortfall was pounds 40,000.

Some societies still charge fines that can be as high as 2 per cent a month on arrears when borrowers get behind with their payments. The practice is much less common than it used to be, but the Ombudsman has been forced to admit that he could not overrule such fines because the possibility of these penalties would not have deterred the borrower from borrowing. There are hopes that the practice will be killed off by the Unfair Terms in Consumer Contracts Regulations, a gift from Brussels that comes into force this month.

All this could pale to insignificance if there is ever a serious challenge mounted against the penalties for early redemption that lenders are seeking to impose on the current crop of discount and fixed-rate mortgages. There is a school of thought, which is tacitly encouraged by lenders who have not taken the short-term discount route to win business, that the penalties may be unenforceable once the discount has expired - although, on both ethical and practical grounds, no-one should be influenced to take out a fixed-rate or discounted mortgage with the hope or the intention of reneging on terms of the offer.