The delayed debt bomb

The Council of Mortgage Lenders (CML), the body that represents 98% of the home loan industry, is to give way on calls from the National Association of Citizens Advice Bureaux (NACAB) to change legal rules that allow lenders 12 years to chase a mortgage debt from repossessed housebuyers.

But the move would give no relief for ex-homeowners who have already received demands for sums ranging from a few thousands pounds to over a third of a million. Nor will it deal with difficulties raised by a leading backbench MP in a parliamentary motion tabled this week.

More than a quarter of a million people lost their home through court action or handing in their keys during the five years to December 1993 when the repossession crisis was at its height. Many had bought overpriced homes with loans that became even more difficult to repay due to rising interest rates. Falling prices added to difficulties, especially in London and the south east.

The issue has become "live and important", says Halifax head of mortgages Phil Jenks because the London market has recovered and some lenders are taking advantage of that to recover bad debts.

This worries the NACAB. "It's not helpful to be left in the dark for years while lenders bide their time and wait for the financially right moment to strike," says NACAB's Liz Phelps.

Now that negative equity is largely a bad memory, the CML is expected to agree that the mortgage shortfall chasing period be halved to six years in line with other debts. This week NACAB published a hard-hitting report, The Long Shadow, which detailed how many of those who lost their homes as long ago as the late 1980s have been hit again. NACAB says that up to a quarter of its specialist debt advisers' time is taken up with dealing with mortgage shortfall debt.

It is calling on the government to change the law, as a cheaper and quicker method than spending years in the courts deciding how long the debt collection process can run. At present it is 12 years, a period which starts afresh every time a debtor either acknowledges the existence of the shortfall or makes a payment towards reducing it.

The CML says: "Six years rather than 12 is not a problem for us. Most lenders commence recovery proceedings within six years of the property being sold."

One major lender quoting a longer period is Nationwide. It says: "Action is unlikely to be taken more than eight years after the sale of property... It is wrong and unproductive to pursue a debt soon after a repossession so we think eight years is reasonable." A Nationwide spokesperson also claimed to be "under pressure from our wider membership to pursue debts", although he was unable to detail this pressure.

Abbey National says it has contacted all of its shortfall cases from 1990 to 1993. It has resolved one in three with only a tiny minority paying the entire sum. Around one in 20 are "under review" - jargon for being unable to pay any meaningful sum.

NACAB stresses that it is not asking for debts to be wiped out, but to be treated more sympathetically. It says that present practice often hits people just when they have rebuilt their lives, "which can have a disastrous effect on family life, destabilising relationships and plunging the household back into long term poverty".

Lenders refuse to total amounts outstanding, how much they actually recover, and the costs of debt chasers. But outside sources suggest the bill could be as much as £7bn with lenders unlikely to recover more than a tenth. They suggest debt collectors could pocket up to a fifth of the sum recovered. The CML believes typical shortfall arrangements are about £35 a month.

Bristol & West sent a west of England widow a bill for £350,000 earlier this year because of her late husband's debts, incurred in 1991, although this was later recalculated to £235,000 when London based Charterhouse IFA took up her case.

Charterhouse's Paul Panayi says: "They conducted a search and discovered she had a house which had benefited from the recent prices boom. So they hit her with a huge demand via an aggressive letter. The bank was never satisfactorily able to detail just how it got to either sum - a normal demand if the case goes to court where judges will want proof of every penny. Banks don't want bad publicity so in the end they settled for £9,000."

NACAB suggests that where professional debt advisers get involved, settlements average around 10% of the sum demanded. But it is not just the length of time allowed to recover debts that worries debt advisers.

They are also concerned about the lack of information given to people whose former homes have been sold. Abbey National says it always sends a statement detailing the sale price if it has a forwarding address. Many others do not. The Abbey adds that it has a "process of communication that actively encourages customers to keep in touch" but this was introduced only for repossessions after mid 1998 - too late for the bulk of those in trouble. Some non-mainstream lenders allow interest to rack up after the repossession sale, often at a rate far greater than that for current borrowers.

Newport MP Paul Flynn, who has been involved with many home loan issues this week tabled a commons motion, Limit On Homes Debt Repayment.

This reads: "That this House agrees with NACAB that debts on homes should have a six year ceiling in common with other debts; regrets the action of Nationwide and other lenders in demanding repayments of 12 year old debts that they had not previously pursued; sympathises with those victims of negative equity who had lost their homes in the past but who believed that that had discharged their financial obligations until totally unexpected demands recently arrived for substantial sums."

He also calls on the Nationwide to fund a test case "to determine the legality of this oppressive practice which is driving many families into a second financial crisis that they did not anticipate and cannot manage".

The Nationwide had said it will not do this.