Lenders should consider customers' individual circumstances, the FSA says
Mortgage firms should treat customers fairly as the number of homeowners facing arrears and repossessions rises, the UK's financial watchdog has said.
The Financial Services Authority's comments came as it reported a 40% rise in new cases of repossessions in the first three months of 2008 to 9,152.
The number of home loans in arrears rose by 15% in the same period.
The watchdog said a flexible approach was needed from lenders when recovering these arrears.
"More people are struggling to meet their mortgage payments and it is vital that firms treat them fairly," said Lesley Titcomb, of the FSA.
"This means paying attention to their individual circumstances and not repossessing their homes when there may be an alternative solution. Repossession has to be the last resort."
The figures, drawn from data provided by regulated mortgage lenders and administrators, also gives more evidence of the squeeze on the availability of mortgages.
Repossessions have risen, according to figures across the industry
New lending peaked in the third quarter of 2007, but the share of new lending being used for loans for house purchases has fallen since then, the data shows.
The proportion of mortgages where homeowners borrowed more than 90% of a home's value fell from a peak of 15% of new lending in 2007 to 10% in the first three months of 2008.
But the proportion of borrowers with a poor credit history has fallen.
"We believe these new figures paint a terrifying picture showing real people - hard-working families, young first-time buyers and even renters - all living in the shadow of repossession and ultimately homelessness," said Adam Sampson of charity Shelter.
The FSA should tackle "merciless mortgage lenders", he added, as there was concern that some lenders might try to pursue a repossession rather than try to work out a solution.
It is the first time that the FSA has published figures in this way.
It called on specialist lenders not to operate a "one size fits all" approach that was too focussed on recovering arrears without taking account of the borrower's circumstances.
It added that some were too quick to take court action and needed to improve training on dealing with mortgage arrears.
The watchdog also followed up on a review of 250 firms offering mortgage advice.
Better evidence of whether customers were able to afford repayments was needed, the FSA found.
Seven small mortgage advisers are also likely to face enforcement action after the review.
The Council of Mortgage Lenders (CML) says that there are 11.8 million mortgages in the UK that are currently being paid off.
However, it has predicted that, with people feeling the pinch, there will be 45,000 repossessions in 2008, up from 27,100 in the previous year.
The growing numbers are partly the result of rising house prices in recent years, which gave lenders an interest in encouraging people to sell.
With high mortgage repayments, and rising household food and fuel bills, the number of people missing payments on their home loans is rising.
The Ministry of Justice said in May that the number of people facing repossession orders - an early stage of the repossession process - rose by 17% in the first quarter of the year.
There were 27,530 orders in the quarter, up from 23,438 during the same period in 2007.
The government said it was doing more to help those in financial trouble, such as extending free debt advice services and free legal representation at county courts.
"The rate of repossessions is not on the same scale as in early 90s. But that doesn't mean we don't recognise the problems that some borrowers are facing because of global economic pressures," said a Department for Communities and Local Government spokesman.
There was also some better news for new borrowers as a number of the major lenders have also cut their interest rates for new fixed-rate mortgages in recent days.