CML news & views

Our formal response this week to government consultation will acknowledge that the proposed home-owner mortgage support scheme is a well-intentioned move to help some borrowers in temporary financial difficulty. We will, however, emphasise that the proposed scheme is not suitable for everybody and may, in fact, only be an option for a relatively small number of borrowers who fall into arrears. No final conclusion can be reached, however, as the key element – the extent of the government guarantee – has still to be agreed.

It should not be forgotten that the scheme is intended to complement a range of measures lenders already have in place for helping borrowers in difficulty – the most important of which is encouraging a dialogue as soon as the borrower realises they may have difficulty. That may be before a payment is missed. 

The reality is that, in upholding the principles behind ‘treating customers fairly,’ lenders are already working to help keep customers in their homes where:

• the borrower is maintaining a constructive dialogue with the lender;
• full payments are likely to be restored after a temporary period of difficulty; and
• home-ownership remains sustainable in the long run.

The proposed mortgage support scheme is not a “free lunch” for borrowers. It will only guarantee interest payments, not capital. And if borrowers defer payment under the scheme, the debt simply increases and will have to be re-paid in due course.

Three key principles

Our response to the consultation will highlight three key principles which we believe are essential in determining the eligibility of borrowers for the scheme and its overall success:

• Access to the scheme must be voluntary for both borrowers and lenders.  Ultimately, lenders will have to determine whether it is suitable for individual customers on a case-by-case basis, based on an assessment of their individual circumstances and the feedback of an independent debt advisor on eligibility.
• Borrowers within the scheme would have to participate actively, and co-operate – and maintain a dialogue – with the lender.
• Appropriate debt advice will be necessary before a customer can be considered for the scheme. Advisers will therefore need to decide whether the risks of deferring interest in an environment of falling house prices is appropriate for the borrower.

For the scheme to succeed, its risks, scope and financial scale must be transparent for everyone, particularly borrowers.

Debt advice

It is crucial that borrowers understand the risks associated with any proposed scheme, and that debt advice services are capable of delivering a view on eligibility speedily so that delays do not add unnecessarily to arrears. Debt advice will need to be robust, readily available on an appropriate scale, and properly resourced and funded.

However, one of the benefits of this scheme – and of other initiatives – is that more borrowers in difficulty will contact lenders and debt advisers. It is important that they receive appropriate advice and help even if it is decided that the scheme is not suitable in their circumstances.

At this stage, however, there are a number of important – and so far unanswered – questions about the provision of debt advice to support the scheme. Will independent money advice channels be sufficient to assess and balance the risks between borrowers, lenders and taxpayers? Who will pay for the debt advice service? And if it is to be freely available – as we would want – how will the extra debt advice resources be funded?

Costs and risks for lenders

It must be understood that keeping a borrower in a property when they may not otherwise be able to stay there – which is, of course, the fundamental aim of the scheme – imposes extra costs and risks on both lenders and borrowers. 

This, in turn, has broader implications, for consumers, the government and the wider economy. In particular, the impact of the greater risk borne by lenders may result in a direct – but unintended – conflict with the government’s other key aspiration to deliver more readily available mortgage funding for consumers. If capital is tied up because of higher arrears levels, it cannot be lent to prospective borrowers.

Extra risks and costs borne by lenders include:

• The capital risk arising from an anticipated fall in house prices. Clearly, entry to the scheme does not guarantee that a borrower will be able to recover their position.  In those circumstances, the lender may therefore still end up taking possession of the property, but perhaps years later than would otherwise have been the case. In current market conditions, with house prices falling, there is a greater risk that selling the property at a later date will leave both the borrower and lender confronting a larger shortfall between the outstanding debt and the proceeds of the property sale, not all of which will be covered by the government guarantee.
• The burden of arrears built up by a borrower for perhaps several months before they enter the scheme. This period is not guaranteed by the government, so the costs and risks are borne directly by the lender – and the borrower is still liable for the debt.
• The costs and risks associated with arrears which have accumulated for longer than would normally have been allowed. That, in itself, makes it less likely that the borrower will ever be able to recover their position successfully.  So, while the scheme avoids possession in the short term, it raises the risk of it in the longer term.
• The costs for lenders of administering the scheme. These are largely unknown at this stage.

Given these additional risks and costs for lenders, we do not believe that they should be responsible for covering any of the deferred interest payments. The government should guarantee all the interest not paid by the borrower.

The scheme’s effect on new lending

Under the Basel 2 requirements, lenders have to hold far more capital for mortgages that remain in arrears for an extended term than they do for new loans. Capital holdings have to cover both the deferred interest and the principal of the loan. The scheme will therefore tie up capital that might otherwise be used for new lending, despite the wider needs of the economy and the aspirations of the government and others to make credit more widely available.

This could have a very significant impact. Estimates within the industry suggest that each mortgage held in arrears ties up capital that could finance 30 or more new home loans. For loans with a low loan-to-value ratio, the effect is even more dramatic. Because the capital requirements for these loans are even lower, industry sources estimate that holding a mortgage in arrears could tie up capital that could fund up to 80 new loans.

Clearly, lenders are already under considerable pressure – particularly from the government – to make mortgage credit more readily available. Lenders would be very concerned if the impact of a government scheme to keep people in their homes had a disproportionate effect in choking off new mortgage lending.

More effective measures to avoid possession

We acknowledge that the proposed scheme is well-intentioned in its desire to keep people in their homes. However, there are still many unanswered questions about how it could work in practice. And for a variety of reasons, we also believe that the scheme is only likely to be able to make a modest contribution to avoiding possession.

So, if the government wants to keep in check the 75,000 possessions expected this year, what else should it be doing? We believe that it should focus its efforts in two specific areas. 

The first would be to build on measures that widened access to income support for mortgage interest (ISMI) earlier this month. Despite the recent improvements to ISMI, access to help for home-owners in difficulty remains restricted, particularly where at least one person in the household remains in employment. We have argued consistently for ISMI to provide help much more readily at the point of need, with the extra cost potentially being offset as a second charge against the property.

The second option (which could complement improved access to ISMI) is to develop a much more comprehensive, government-backed sale-and-leaseback scheme. Lenders are ready to work to help develop this. 

Clearly, it could achieve the government’s objective of keeping people in their homes, albeit with a change of tenure. It would support local communities and help underpin property prices. Its other advantages are that, unlike the home-owner mortgage support scheme, it could offer help to borrowers with little, or even negative, equity in their homes. It would also provide a quicker and more certain resolution of payment problems, removing longer term risk, uncertainty and costs.