CML news & views

Before the last election, we published a Mortgage Market Manifesto. Things have changed since then. It is now even more crucial for the next government to have a clear strategy for mortgage and housing markets.

So, in two newly published documents, we set out our views on how the government can help promote home-ownership and the restoration of an efficient mortgage market – both in the forthcoming Budget and over the course of a new five-year Parliamentary term.

Our Budget submission was published on the same day that the Home Builders Federation highlighted in its own pre-election document that the UK’s housing shortage was fast approaching one million homes, while we are now building fewer new houses than at any point since the second world war.

Our submission focuses on two key areas:

• providing better support for borrowers in difficulty; and
• addressing a £320 billion mortgage funding gap.

The Budget submission augments a mortgage market briefing that we have produced for Parliamentary candidates in advance of the forthcoming election. It reinforces the messages in the Budget submission about the funding gap and providing help for borrowers in difficulty.  But additionally it calls on the next government to:

• reform the tax system to help restore the number of housing transactions – also currently believed to be at a post-war low;
• ensure that reforming mortgage regulation does not inhibit market recovery; and
• simplify low-cost home-ownership schemes to encourage their wider take-up by lenders and borrowers.

The original Mortgage Market Manifesto, published six years ago, charted the emergence of the modern UK mortgage market and set out proposals for its development following the 2005 general election. Our current Budget submission and briefing document for Parliamentary candidates together comprise a new, post-credit crunch manifesto for the mortgage market over the lifetime of the next Parliament.

Bridging the funding gap

When wholesale funding markets stopped functioning in 2007, a gap began to open between banking system assets and the funds needed to support them. This gap has been filled temporarily through the Bank of England and Treasury special liquidity (SLS) and credit guarantee (CGS) schemes.

Currently, these two initiatives provide support totalling some £320 billion – equivalent to 25% of the UK’s stock of residential mortgage lending. 

The SLS is due to expire between April 2011 and January 2012, and re-financing to replace the support it provides presents a major challenge to lenders. There is a similar, though less immediate, concern over the closure of the CGS between 2012 and 2014.

The Bank of England has re-iterated that the SLS will not be extended beyond its current term. While the new discount window facility is designed to support liquidity of an ongoing basis, there is so far no indication of any broader plans for supporting funding during the period of transition when the SLS and CGS expire.

Lenders want a private sector solution to the funding gap. But the key goals are to ensure that the transition from support by the Bank and the Treasury to provision by the private sector is as smooth as possible and that, going forward, the UK has an adequate supply of mortgage funding that is robust enough to withstand future shocks.

In the forthcoming Budget, we hope there will be a further update on an announcement made in the pre-Budget report in December about ongoing work to support mortgage funding. Looking further ahead, we need to see over the lifetime of the next Parliament a co-ordinated approach to improve the operation of funding markets.

We call on the next government to:

• set out, as a matter of urgency, how it plans to manage the closure of the SLS and CGS while ensuring that the banking system has the funds it needs – and that there is an increase in the number of active lenders – to maintain lending to individuals and firms;
• set up an expert group with representatives from the tripartite authorities and the industry to oversee this process;
• encourage the development of a base of cash investors, particularly from domestic institutions, channelling funds into UK residential mortgage-backed securities rather than overseas, where the benefit is lost to national consumers and businesses; and
• avoid imposing unnecessary controls and restrictions – including through reform of mortgage regulation – that deter new firms from entering the market.

Supporting home-owners with financial difficulties

Since January 2009, income support for mortgage interest (ISMI) has been made more widely available for households that lose all their income. The government reduced the waiting time for ISMI from 39 to 13 weeks, increased the capital limit to £200,000, and has maintained the standard rate used to calculate ISMI at 6.08%.

There is a strong case for reform of ISMI over the longer term. We recognise that reform could increase the cost of providing support to home-owners in difficulty at a time when spending cutbacks overall are inevitable. But we have suggested the possibility of mitigating this by making enhanced state support a second charge on the property. That would enable more effective, and better targeted, help to be provided to borrowers in difficulty at the time of need, with the cost recovered at a later stage.
 

We call on the next government to:

• consider reform of ISMI to make it more widely available at the point of need for households experiencing payment difficulty due to a loss of income, offset by taking a second charge on the property.

Helping the market to transact

The introduction of higher rates of stamp duty over the years and the failure to index the thresholds for duty in line with house price inflation have significantly increased the amount of money raised by the government. In the first ten years of a Labour administration, revenue from stamp duty increased tenfold.

The rapid growth in tax paid on house purchases reduces the ability of people to move around in response to employment opportunities and the needs of the wider economy. There is also a direct conflict between taxing first-time buyers through stamp duty and providing government help targeted specifically at them.

Despite the long-term growth in revenue over time, the yield from stamp duty is currently significantly reduced because of the low level of property transactions. This point in the cycle therefore represents a good opportunity to reform stamp duty radically and to complement measures to encourage first-time buyers and support home-ownership more widely.

We believe that taking stamp duty at the highest marginal rate on the whole of the price paid for the property creates market inefficiencies and should be reformed.  Levying stamp duty like income tax, with higher rates only applying above the threshold, would result in less distortion of property prices near tax thresholds, improved housing and labour market liquidity and a more stable tax base over time.

We call on the next government to:

• reform the existing structure of stamp duty in favour of a graduated tax, similar to income tax.

Regulating for the future

We must not forget that the mortgage conduct of business regime, which brought statutory regulation to the whole market for the first time in 2004, has largely been a success. Similarly, the UK mortgage industry has delivered significant benefits to consumers, at least until funding became scarce and the economic downturn worsened the position of some borrowers. Before the credit crunch, the vast majority of lenders provided a range of valued products and services and acted responsibly in a highly competitive environment.

An FSA review on the future of mortgage regulation is now under way. While the industry recognises the need for change, the aim should be to encourage a return to competitive conditions. We must avoid inadvertently perpetuating a malfunctioning market in which there is a smaller number of active lenders, fewer intermediaries offering advice, and a funding shortage resulting in mortgage rationing, particularly for those without a large deposit. Regulatory reform must not unintentionally constrain a mortgage market recovery.

We call on the next government to:

• avoid knee-jerk regulatory reactions to the problems in the banking system, globally and in the UK, and in response to mortgage market developments during the recession.

• keep the reform of mortgage regulation as simple as possible and not try to fix what is not broken.

• make sure that all of the positive features of the UK mortgage market are retained as much as possible – a vibrant and competitive market, encompassing different business models, catering for a wide range of customers, and having the ability to innovate and adapt to changing circumstances.

Simplifying low-cost home-ownership

Low-cost home-ownership schemes have the potential to increase demand in the housing market and extend owner-occupation. They can also be targeted at the glut of newly-built property and can provide help for would-be first-time buyers, currently excluded from the market.

Lenders prefer low-cost schemes based on shared equity – that is, where the purchase is funded by a combination of a conventional mortgage and an equity loan – rather than shared ownership, where the borrower takes out a mortgage to buy a leasehold in a share of the property and continues to rent the rest of it from a housing association or local authority.

Expanding Homebuy Direct – a shared equity scheme designed to help first-time buyers of newly-built property – would encourage more lenders to invest in the necessary systems, processes and training to participate in the scheme, and would provide more help for the beleaguered house-building industry.

At the moment, however, there are too many similar schemes with similar branding. There are at least five Homebuy options, for example, with the differences between them being relatively small, but significant. This complexity discourages lenders and confuses buyers, and the problems are exacerbated when the numbers for individual schemes are small. 

We call on the next government to:

• expand low-cost home-ownership, particularly Homebuy Direct.

• simplify and reduce the number of low-cost home-ownership schemes to encourage lenders to participate, and move progressively from shared ownership and towards shared equity models.

Conclusion

We recognise that the next government will have to make difficult choices when it undertakes its first comprehensive spending review. There is, however, a strong case for prioritising spending on housing in the coming years.  It can drive economic recovery, and failing to spend on housing contributes to a range of social problems that the new government will also want to address.

The next government will have to resolve some major challenges between the growth in demand for housing, constraints on the finance to deliver it, the repayment of £300 billion of lending support between 2011 and 2014, and the reduction in public spending as the fiscal debt is addressed. 

Lenders are keen to contribute to the funding of all tenures, but it is not clear at this stage how the competing policy pressures can be reconciled. The chancellor should address this in his forthcoming Budget, and each political party should outline in its manifesto for the forthcoming election a strategy for resolving the conflicts in housing funding over the lifetime of the next Parliament.