The Government will announce plans today to close a legal loophole which enables lenders to repossess people's homes without going to court. As the law stands, lenders can repossess and sell a property without the permission of either the homeowner or a court.
The problem came to light last year after a buy-to-let lender repossessed a property after the borrower got into arrears.
In a response that will be hailed as a victory for thousands of homeowners struggling to meet their monthly repayments and as a further blow to banks, the Government will publish plans to close the loophole that left homeowners who had missed two repayments vulnerable to immediate repossession. The Ministry of Justice will say that lenders will be able to take a property only if they have a court order or if the owner voluntarily hands over the keys.
The decision, part of an eight-week consultation, comes after months of objections from debt charities to an antiquated law, dating from 1925, that allows banks and building societies to repossess without going through the courts. The campaign began after the High Court used the loophole to rule in favour of the sub-prime mortgage lender GMAC-RFC in a repossession case last year.
The ruling by Mr Justice Briggs in the case of Horsham Properties Limited v Clark and Beech related to landlords who had their buy-to-let property in Kent repossessed. Mr Justice Briggs ruled against the borrowers’ claim that the repossession violated their human rights. The decision prompted fears that other lenders would use the loophole to sidestep government rules designed to contain a sharp increase in repossessions during the recession.
Bridget Prentice, the Justice Minister, said: “Under the existing law, lenders have the right to repossess and sell a property without seeking either the agreement of the owner, or of the courts. While there is no evidence that owner-occupiers are being treated in this way, the government proposals published today would close this loophole and prevent any future instances of ‘rogue lenders’ behaving this way.”
An estimated 48,000 homeowners had their properties repossessed in the past 12 months, according to the Council of Mortgage Lenders (CML), fewer than the 75,000 it had expected for the year at the beginning of 2009. The trade body has estimated that the number of borrowers in arrears is currently 195,000, a figure that is expected to rise to 205,000 next year.
The bulk of those who have lost their homes are thought to be borrowers with sub-prime mortgages from a non-mainstream lender. The Financial Services Authority fined GMAC a record £10.5 million in October for failing to treat customers in arrears fairly.
Main high street banks, particularly those in receipt of government bailout funds, have been subject to close scrutiny of their treatment of hard-up borrowers and have been forced to adopt a more tolerant approach to customers in arrears. The CML has attributed the lower-than-expected number of repossessions this year to low interest rates and the introduction of government schemes.
Figures from the Financial Services Authority, the City watchdog, showed that 13,987 homes were repossessed by lenders between July and September this year, 3% more than the previous quarter but 6% lower than the first three months of the year.
The Ministry of Justice also announced that 33,176 families had been helped over the past 12 months by the Government’s Housing Possession Court Duty schemes, which aim to provide last-minute help to keep borrowers in their homes.
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