CML news & views

The government is keen to ensure that, while mortgage arrears edge upwards, the number of homes taken into possession remains as low as possible. Lenders share the same goal and, earlier this year, we wrote to the chancellor to explain the work we have been pursuing with members to reinforce that the use of possession remains the final option for home-owners experiencing mortgage payment difficulty.

Lenders have been reviewing their arrears management policies to make sure that, in each individual case of payment difficulty, they work through a checklist of all possible alternatives for helping the borrower before considering possession of the property. 

Our members are also helping customers by giving them plenty of notice of higher borrowing costs at the end of any introductory discounted rate, and providing information about how lenders manage arrears so that borrowers can be re-assured that they will be treated fairly.

What the government could do

If the government is serious about minimising the number of possessions, however, it needs to take action itself. For a number of years now, we have been urging ministers to improve the woefully inadequate provision of income support for mortgage interest (ISMI). 

Borrowers usually have to wait nine months for government help, which, even at that stage, may not cover their mortgage interest payments in full. More generous state support for home-owners in difficulty – the cost of which could be recovered later by making ISMI payments a second charge on the property – would help the government achieve its own objective of keeping as many people as possible in their homes.

Another option for the government is to encourage more widespread availability of ‘mortgage rescue’ schemes. There is a role here not just for the UK government but for devolved administrations in Scotland, Wales and Northern Ireland. In England, only a handful of individual local authorities or housing associations (HAs) are currently operating such schemes. But they are also being developed, or considered, in Scotland, Wales and Northern Ireland. 

There are differences between the schemes being developed in different countries in the UK. A key feature, however, is that they present the borrower with an opportunity to stay in their home by decreasing their equity stake in the property. Typically, a housing association (HA) or other social landlord takes a share in the property, with the borrower paying a smaller mortgage for his share of his home and rent for the part of the property he no longer owns.

Availability of mortgage rescue

We support more widespread availability of mortgage rescue. 

As long as lenders’ concerns are addressed, this type of scheme offers flexibility for home-owners, allowing some to remain in their properties as an alternative to possession. Mortgage rescue has a number of other advantages, including:

• Reducing the pressure on social landlords to re-house families whose properties are taken into possession. The Local Government Association has already forecast that the number of households on local authority waiting lists for social housing is set to rise from 1.67 million to two million by 2010.
• Providing an alternative to ‘sale-and-leaseback’ plans offered by private firms.  Some borrowers have been tempted to consider this as an option for staying in their home. But without the statutory regulation of sale-and-leaseback that we favour, these schemes can offer poor value – and little real security of tenure – to home-owners.
• An opportunity for social landlords to build their stake in property on a modest scale and increase the stock of affordable housing. In our view, however, the main aim of mortgage rescue should be to provide flexible help for home-owners, and we favour schemes that would allow households to return to full ownership of the property, if their circumstances permit.
• Promoting more stable communities in areas of mixed tenure by allowing families to stay in their homes, rather than selling up and moving.
• Providing households with a means of paying off a range of debts through the release of equity from their homes. That can help them to put their household finances on a more stable and sustainable footing.

Working with stakeholders

Alongside the National Housing Federation, we have been working to build a partnership between HAs, lenders and other stakeholders to promote mortgage rescue for vulnerable households.

Developing consistent criteria for rescue schemes will help ensure more effective delivery of them at a local level. A standardised approach would make it easier for social landlords, lenders and other stakeholders to participate in mortgage rescue and ensure that the maximum number of people can be helped. With only a handful of schemes currently operating in England – and with a range of different approaches in devolved countries – access for households remains limited, variable and dependent on geographical location. 

A national mortgage rescue scheme could be targeted more effectively at households most likely to benefit from this type of support. It could also uphold uniform qualifying criteria, including:

• a consensus on the sources of financial difficulty that could qualify for help, perhaps including job loss, illness and relationship breakdown;
• a requirement that all those liable for mortgage payments on an individual property agree to any rescue plan;
• a review of the sustainability of living in the property after mortgage rescue, based on a realistic assessment of housing and living costs, and whether there is enough equity in the property to cover priority debts;
• a requirement that owners have sought debt counselling and received appropriate advice, discussed their options with the lender and agreed to debt re-scheduling;
• an assessment of other options that might be more suitable, including, for example, selling the property and living somewhere cheaper; and
• a process for establishing that the property is clear of any legal charge that would prevent it from being sold.

A historical perspective

While mortgage rescue is being adapted to current market conditions, it is not, in itself, a new idea. In the early 1990s, the government was keen to promote it as part of its response to the payment problems being experienced by mortgage borrowers at that time.

Under the scheme available then, lenders provided low-interest loans to HAs so they could buy properties from households facing possession. Former owners were then able to stay in their homes as tenants. The aim was to set up a scheme that would help up to 20,000 households stay in their homes. But the target was never reached. 

There were a number of reasons for this, including concerns about security for loans to HAs, levels of rent that often exceeded mortgage payments, and the reluctance of home-owners to participate. Instead, therefore, a number of individual HAs decided to offer their own schemes, rather like the position in which we find ourselves today.

Proposals for Scotland…

In Scotland, a mortgage-to-rent scheme operated by the devolved government is already up and running. 

Under it, a social landlord can buy the home of a household facing possession and rent it back to them. The Scottish government is currently evaluating the scheme, and planning to publish its findings in the autumn. In a statement issued last week, the government said it wanted to “improve awareness of the scheme, deliver better value for money and reduce bureaucracy in the application and approval process.”

The Scottish government is also planning to a new home-owners’ support fund, worth £25 million over two years, to build on the mortgage-to-rent scheme and provide more money advice and debt support. 

The existing mortgage-to-rent scheme is mainly for those with little or no equity in their homes. But as part of the new home-owners’ support fund, the government also wants to introduce a mortgage-to-shared-equity scheme. This would allow home-owners who have built up equity in their property to release it in order to reduce their mortgage payments and stay in their home if they are facing payment difficulty.

Last week’s statement also said that home-owners that have bought a property through a Scottish government shared equity scheme will be given the opportunity to reduce the stake they hold in their home if they are in mortgage difficulty. To facilitate this, the government will buy a stake in the property back from eligible owners.

…Northern Ireland…

In Northern Ireland, home-owners are set to benefit from mortgage rescue proposals announced by the minister for social development, Margaret Ritchie, at an event we hosted in June. 

The scheme will offer two options: flexible tenure, under which buyers will be able to choose an equity-sharing option based on what they can afford, and mortgage to rent, which will be available for home-owners who can no longer afford a mortgage but have no equity in their home.

…and Wales

In Wales, mortgage rescue has only been available on a small scale up to now. 

Last year, the Welsh Assembly Government (WAG) used it to help a handful of home-buyers facing mortgage payment difficulties. But in June this year, deputy housing minister Jocelyn Davies announced plans to inject an extra £5 million into mortgage rescue. 

Conclusion

We favour more widespread use of mortgage rescue, where it is appropriate. A range of options, allowing householders either to reduce their equity stake or to become tenants, would offer a reasonably flexible range of options for borrowers. We would also like to see sufficient flexibility for home-owners to increase their equity stake again in the future, if their circumstances permit.

It is important that mortgage rescue is properly targeted at borrowers in circumstances for whom it is appropriate. Help should be available for those who can’t pay, for example, not those who won’t pay. 

It is likely that most home-owners will need independent financial advice, tailored to their individual circumstances, before being able to decide if mortgage rescue is the right option for them. 

It would be helpful if a more standardised form of mortgage rescue was available to all borrowers. At the moment, devolved administrations in Scotland, Wales and Northern Ireland are considering, or developing, different schemes – providing different levels of help to households – while in England mortgage rescue is only available from a handful of local authorities and HAs. 

More widespread availability of more standardised forms of help would encourage lender participation and could help reinforce public confidence in mortgage rescue.