As government and industry bodies consider ways of making the personal mortgage market more secure, one industry body has suggest that the concept of compulsory mortgage payment protection insurance (MPPI) should at least be considered.
In the wake of the financial crisis and the significant rise in mortgage loan defaults, the Building Societies Association (BSA) has written a report arguing that the government needs to do more to prevent future defaults.
Given government budget cuts placing increased pressure on state benefits (including those relating to social housing), the BSA assert that it is worth considering making MPPI a compulsory element of taking out a mortgage loan.
Some argue that making MPPI compulsory has similar traits to the car insurance market where cover is necessary to drive on UK roads. The main difference is clearly that MPPI is designed to protect an individuals home, rather than the property of others. The closest similarity would be in the fact that MPPI would also effectively be protecting the funds of savers at banks and building societies.
Although the benefits of mortgage protection are clear, the BSA do also suggest a return to the dark days of the past where lenders would add the cost of the protection to the monthly loan repayment.
This practice resulted in many consumers paying well over the odds for their cover and a subsequent investigation by the competition commission. The simple fact from past evidence is that lenders offering this type of insurance starved consumers of choice. It also opens the door to confusion as to whether cover is included or not when comparing the costs across competing lenders.
The other main risk relates to lenders not sufficiently checking that the eligibility requirements for cover have been met, which resulted in a large number of PPI complaints with the Financial Ombudsman Service (FOS). For example, most plans require that the policyholder have been employed for at least six months prior to taking out cover. If these such conditions are not met the plan would never have a chance of paying out.
More research is clearly needed in terms of establishing and quantifying the social benefits of making mortgage payment protection compulsory but the cover itself should be left to independent intermediaries to arrange.