Miscalculated Mortgages

Small and repeated charging errors are then substantially amplified over the mortgage term.

The first one or two payments on a new mortgage contract are often much different from the subsequent standard payments.

The change in rate hasn’t always been applied in sufficient time, meaning additional interest cost. The more frequently these changes have occurred, the greater the likelihood of multiple interest miscalculations.

Altering the mortgage repayment type can easily cause overpayments of interest to happen, especially if, for example, the change occurs mid-month and normal repayments are scheduled at the start of each month.

Further advances were unlikely to be offered at the same rate as the initial borrowing, or over the exact remaining mortgage term.

In 2010, the FSA – who were the Regulator at that time – warned banks about precisely how they should deal with mortgage arrears and related charging. This was the culmination of a two year review. Incredibly, in 2016, a further review by the FCA determined that around 750,000 mortgage customers had seen their arrears capitalised by their lender.

A policy that saw mortgage customers who were already having financial problems being effectively forced into repaying their borrowing at an accelerated rate. In July 2013, following discussions with the FCA, Lloyds Banking Group set aside a provision of £283 million to cover for incorrect mortgage arrears handling and inappropriate charging on these accounts for the whole period from January 2009 up until January 2016.

It’s estimated that as many as 590,000 customers of Britain’s biggest bank could be affected. Back in 2009, GMAC-RFC, now known as Paratus AMC, were fined £2.8 million by the FSA for mistreating around 46,000 mortgage customers that found themselves in arrears. The compensation bill back then was £7.7 million.

Since the financial crash at the end of 2007, many lenders have either been sold or required to transfer their total lending book to a new provider. The most famous is, of course, Northern Rock, where mortgage borrowings were transferred into Northern Rock Asset Management and some were even bought and transferred to Landmark. There have been many others, such as Edeus. Edeus collapsed in 2008 and then saw their mortgage book being returned to its joint major funders, namely Wave and DB Mortgages. Calculation and charging models between lenders are not always identical.

Kensington, a specialist sub-prime lender hit hard during the financial crisis, was bought by Investec in 2007. In 2014, they were sold once more – this time to two private equity firms, namely Blackstone and TPG. Again, in these situations, interest and charging mechanisms can vary.

There were many mortgages that offered this type of facility. An example of this is Bank of Scotland through their “Personal Choice” mortgage. This was offered on a self-certification basis and with a borrowing limit of up to 85% of the property value. To withdraw funds, customers simply wrote a cheque directly from their mortgage account. The continual drawing and repaying of mortgage borrowing laysitself open to calculation errors.

Again, a very complex model to compute. Borrowers often had the ability to use savings held with the lender to reduce their monthly repayment or the mortgage term. Many lenders offered this type of borrowing, such as Intelligent Finance, Barclays through their Woolwich brand, Scottish Widows, Yorkshire Building Society, Accord and The Coventry to name just a few.

The most notable being the Virgin One Account. Incredibly complex, it was where mortgage and personal account were rolled into one product. This meant the borrowing was both flexible and off-set. Initially a joint venture with Virgin and RBS, the latter took a majority shareholding in 2003 and rebranded it as the One Account at which point it was sold aggressively through their branch network.

Originally an Australian concept and first offered to the UK market via Clydesdale Bank. Customers were encouraged to review their mortgage on an annual basis with a view to increasing payments in-line with inflation or increases in salary and in turn shaving years off their original mortgage term. In 2013, the Clydesdale Bank were fined £8.9 million by the FCA for miscalculating the payments on more than 42,500 mortgages.

A mortgage amount representing 95% of the property value and an unsecured borrowing portion of another 30% on top. These types of mortgages were offered by the likes of Northern Rock, Alliance andLeicester and BM Solutions. Many customers took the option of re-mortgaging further down the line, but leaving the unsecured portion with the existing lender. Laterally with Northern Rock, this could see the interest on the unsecured element increase to a whopping 8% over their standard variable mortgage rate. Once again, potentially complex calculation models for the lender.

Although lender KFI’s (Key Facts Illustrations – or quotes) and mortgage offers had an obligation to be “penny perfect,” they often weren’t and some of the opening charges applied by some lenders did not appear anywhere. A good example of this would be a “CHAPS” fee debited to the mortgage by the lender when the initial mortgage funds were sent to the solicitor to settle the transaction.

KFI’s, Loan Offers and Terms and Conditions were all based on English law and adapted for customers based in Scotland and Northern Ireland. Often, they may not have actually reflected the set-up fees and charges.

Opening mortgage fees may have been substantial. Arrangement fees of £999 were entirely normal. Some lenders, however, charged significantly more than that – especially on Sub Prime and Buy to Let borrowing. How these were added to the borrowing and the interest in turn how these were applied to them, may have varied from what was outlined in the Terms & Conditions.

For many years banks have suffered from what we call Successive Short-termism. With banking more than any other business, it’s all about delivering a constant and increasing return for shareholders. Bank CEO’s focus all their efforts on delivering now and enhancing CV’s and their personal worth in the marketplace.

Our established banks have constantly avoided the issuing of tackling ageing and ineffective legacy systems, the cost of which can be enormous. Back in 2008, Nationwide made a £1 billion commitment to transform their IT systems. Aside from Santander, not one single one of the other traditional banks have faced up to this massive commitment.

It’s not just that. Banks in the UK have been on the acquisition trail since the turn of the century. They haven’t done anything to replace any of the individual core systems operated by each bank and it’s even claimed that one High Street bank, following many takeovers, now runs off up to forty legacy systems. The industry standard worryingly would appear to be dozens. Additionally, it’s also become an industry dominated by contractors who constantly move on. This, in turn, means little continuity and an often fundamental misunderstanding of the core issues.

RBS, Santander and Lloyds Banking Group are just three of the banks to score massive IT own goals in recent times. In 2011 Tracey McDermott, the then Head of Enforcement at the FCA, commented that unless these issues were addressed, “it will be their [the bank’s] customers who suffer.”

Since then, these banks have chosen to do little to address this massive issue of potential customer detriment. This is despite them all being subsequently written to by the FCA on this very specific issue.

An announcement in February 2018 by Lloyds TSB sums this up perfectly. Incredibly, despite spinning off from Lloyds Banking Group back in 2013, it still continues to use its former parent’s IT technology. All of which in the previous year meant a huge £122 million increase in outsourcing fees.

With all of this as a background, what is the likelihood that all of the millions and millions of mortgages in the UK have been calculated exactly in accordance with their original loan offers and terms and conditions, which often can be complex?

With results showing discrepancies in 80 to 85% of mortgages checked to date, the proverbial writing may be on the wall for banks in what will be a massive and totally avoidable own goal.

Although scarcely if ever seen these days, mortgages based on 3 month LIBOR rates were fairly common from the end of the 1990’s right through to the crash of 2008. As many as 5% of all mortgages taken during that period would have seen the borrowing priced on this much more volatile benchmark as opposed to traditional UK base rate. The rate for 3 months LIBOR is seen as more of a predictor as to how our base rate may be likely to change. Mortgages linked to this charging mechanism are far more likely to see frequent interest rate increases and decreases.

As with mainstream borrowing, the greater the number of changes, then the harder it is by definition for legacy calculation models to apply the changes accurately and on time.

This reference rate was mainly used by subprime lenders for both their mainstream and buy to Let offerings. They would take their funding from the money markets and then sell tranches of mortgage borrowing on to investors all over the world. Incredibly some lenders borrowed in packages linked to our standard base rate, but then lent on in 3 Month LIBOR. Kensington, one of the very first sub-prime lenders was in turn the very last one to exit LIBOR lending.