People on low incomes are being encouraged to take out mortgages they cannot afford, leaving them deep in debt and facing the prospect of homelessness, a report warned yesterday.
Citizens Advice said dubious advice from brokers, irresponsible lending decisions and aggressive arrears management by sub-prime lenders was driving the current increase in mortgage arrears.
The charity warned that the regulations and safety nets currently in place were failing to protect vulnerable borrowers.
It added that Government policy encouraging people on lower incomes to buy their own homes could only work if these problems were addressed.
The group said people on low incomes tended to rely on brokers and often ended up with inappropriate and unaffordable mortgages, with people buying their council homes often given particularly bad advice.
Some brokers encouraged borrowers who were under the greatest financial pressure to exaggerate their income, while others even submitted false information without the borrower's knowledge.
It said many lenders and brokers failed to carry out basic checks to ensure that borrowers would be able to meet the increased payments when discounted or fixed deals ended, and some had not even checked that payments could be afforded from the outset.
Citizens Advice Bureaux dealt with more than 57,000 problems relating to mortgage and secured loan arrears in 2006/2007, an 11 per cent jump on the previous year.
It said most seeking advice on such issues were on low incomes, more than a third of whom had incomes below the UK poverty line, while one in five were reliant on means-tested benefits.
Around 70 per cent of these people, who tended to have borrowed from sub-prime lenders at higher rates of interest, also had outstanding unsecured debts averaging £22,000.
The group said many people who borrowed from sub-prime lenders started to struggle with repayments early on in the term of their mortgage.
It also found evidence that these lenders were often unwilling to negotiate affordable repayment arrangements with people in difficulties, taking court action for relatively small levels of arrears.
It added that the hard-line approach taken by lenders in threatening to take people to court, as well as their tendency to increase debt levels by piling on penalty default charges, drove many people to try to solve the problem by remortgaging or taking out other loans.
Research carried out for the group found that as many as 770,000 people have missed at least one mortgage or secured loan payment in the previous 12 months, while court actions for repossessions are now at a similar level to that seen during the repossessions crisis in the 1990s.
The group said analysis of mortgage possession cases listed in 23 county courts in January found that sub-prime lenders were responsible for a level of actions substantially above their market share, and in some cases the equivalent of 10 times more than mainstream lenders.
Citizens Advice chief executive David Harker said: "The cavalier behaviour of some brokers and sub-prime lenders is seriously undermining home ownership and hitting the most vulnerable borrowers hardest.
"Our research suggests that many aspiring home owners have been mis-sold unsuitable and costly home loans that are doomed to fail from the start.
"Many sub-prime lenders are flouting the rules on responsible lending by granting loans when it's clear the borrower will not be able to afford to repay it from the very outset, then getting tough immediately things go wrong."
Citizens Advice said many lenders were not complying with the extensive Financial Services Authority rules on mortgages.
The group is calling for tougher enforcement of existing regulations.
It is also calling for a guaranteed "pre-action protocol" to be put in place, under which lenders will only start repossession court action as a last resort.
However the Council of Mortgage Lenders said the report was too simplistic in its criticisms of the lending industry.
It said the vast majority of mortgage customers received a high level of help from all kinds of lenders if they fall into difficulties, in accordance with the rules set out by the FSA.
It added that it should not come as a surprise that groups specialising in lending to borrowers with past credit problems had a higher level of default among borrowers, and that they were pro-active in seeking to deal with arrears as soon as they arose.
CML director general Michael Coogan said: "Citizens Advice has taken a sensationalist tone in this report, which risks throwing the baby out with the bathwater.
"In fact, sub-prime mortgages give people a way to rehabilitate their finances and are important in a financially inclusive mortgage market."