Government should delay benefit changes for a year, lenders urge
Published: 7 August 2012 | Author: Bernard Clarke
In our response at the end of last month to a range of proposals for the introduction of universal credit, we called on the government to recognise the merits of another year of temporary benefit arrangements that would help a large number of borrowers experiencing mortgage payment problems to avoid repossession.
Both lender and borrowers have made a concerted – and successful – effort to minimise the number of mortgage possessions during the current period of economic difficulty. We acknowledge, however, that the current arrangements for paying support for mortgage interest (SMI) have also made an important contribution. Among the rules being scrutinised by the committee are those under which SMI is paid directly to the lender, which we believe is one of the key elements of its success. But our response also highlights two other features of SMI that we believe have been critical to its success – even though they are not part of the committee's remit:
- the introduction of the 13-week qualifying period as a temporary replacement for the former 39-week rule; and
- the introduction of the temporary extension to the size of loans covered by SMI from £100,000 to £200,000.
Our response urges the government to keep both of these measures in place for another year. Over the last three years, paying SMI after a three-month qualifying period and providing more generous cover have helped nearly 250,000 people stay in their homes at any one time.
Keeping possessions in check
At the height of the financial crisis at the end of 2008, we predicted that the number of mortgage possessions would rise to 75,000 by the end of the following year. But decisions by the authorities to cut interest rates aggressively and introduce better protection for borrowers through more generous entitlement to SMI meant that lenders were able to avoid possession to a much greater extent than we expected. In the end, the number of cases of possession in 2009 totalled just over 48,000 – 27,000 fewer than our original forecast. More generous availability of SMI also contributed to a decline in the number of possession cases thereafter, to 38,000 in 2010 and 37,000 last year.
Unfortunately, however, the temporary arrangements for SMI are due to end from the beginning of next year – unless the government is persuaded to agree to a further extension. As we said in our response to the government last month:
"We are confident that this result would have been materially worse had the temporary measures for SMI not been in place. We also believe that they are pitched at the right levels."
The rationale for enhanced support for borrowers has not gone away. Continuing economic and employment uncertainty, combined with the effect on household finances of higher living costs and squeezed incomes, have led us to forecast an increase in the number of cases of possession to 45,000 this year. In our response to the advisory committee, we point out that:
- The current £200,000 cap on mortgages qualifying for SMI is a more accurate reflection of today’s house prices. According to Halifax, the average house price stood at £192,000 in 2008 – just before the decision to raise the capital limit for mortgages covered by SMI to £200,000. When the lower capital limit of £100,000 was first introduced in 1995, the average house price was £62,000. The current cap of £200,000 therefore ensures that borrowers have broadly the same level of protection as before – relative to house prices and the size of their mortgages.
- The existing 13-week waiting period for SMI increases the likelihood that mortgage arrears will not become unmanageable before help arrives, and borrowers will be able to recover their financial position. That gives the lender greater scope to extend forbearance, and reinforces the logic of doing so. The obvious result is a lower number of mortgage possessions.
- Reverting to a 39-week qualifying period increases the regulatory pressures on lenders to seek possession of the property. Guidance published by the Financial Services Authority (FSA) last October warned of the dangers of extending forbearance excessively, which may not be in the interests of either the borrower or the lender. There is a risk that lenders routinely extending forbearance for nine months may be in conflict with the FSA’s guidance.
Of course, lenders understand that continuing with the existing temporary rules for SMI imposes an additional burden on public funds. Our response therefore re-iterates our support for the principle of recovering some of the extra costs of SMI through a charge on the property for some long-term claimants, and we are keen to explore this with the government.
Direct payments of SMI – and standard rates
Our response reinforces our strong support for the government’s recent decision to continue to pay SMI to lenders through the mortgage interest direct (MID) scheme. MID is wholly funded by the lending industry, so there are no costs to the government. By ensuring that benefits funded by the government are used for the purpose intended, direct payments deliver the best outcome both for benefit recipients and taxpayers.
Although SMI is currently paid at a standard rate, our response argues that paying benefits in line with individual borrowers’ actual mortgage rates would be a better approach in the long term. It would ensure there are no "winners" or "losers" in the benefit system through over- or under-payments.
Having discussed the issues with the government, we appreciate that paying SMI at the actual borrowing rate in the near future creates a number of logistical problems. At the same time, information collected from our members suggests that the government could save around £20 million a year by paying SMI at actual rates, subject to a cap. Our response therefore urges the government to consider this again at an appropriate time in the future.
Lender funding of social housing
A separate section of our response to the committee focuses on the impact of benefit reform on social housing, a sector for which our members have so far provided more than £60 billion of funding. This funding has helped provide affordable new homes across the UK, and finance significant repairs and improvements to existing housing, without having to draw on public funds. Lenders would like to continue to invest in the social housing sector, reinforcing their commitment to the funding of housing in all tenures. But we need to ensure that reforms introducing universal credit do not prejudice the ability of social landlords to re-pay the sums they have borrowed.
Our response focuses on how the government might implement welfare reform without undermining the financial viability of the sector, and the continuing confidence of the lenders that fund it. We welcome ministerial commitments that reform should not be implemented in a way that undermines the financial stability of social housing. At present, however, we have concerns, not only about individual measures proposed by the government but also their cumulative effects, as well as questions about whether the impact assessments carried out so far provide a proper understanding of the effects of some of the proposed measures and how they may interact with each other. In particular, we have concerns about proposals to:
- Reduce the range of eligible service charges for homes provided in communal buildings. We believe this could undermine the ability of social landlords to maintain blocks of flats and similar buildings, perhaps leading to deterioration in the property. This could threaten loan security or potentially expose landlords to court action that could jeopardise their income or the viability of their businesses.
- Rules about the under-occupation of property. We welcome the absence of proposals requiring landlords to undertake detailed assessments of how much accommodation is provided in individual properties and to carry out onerous and expensive surveys of their housing stock. We also want to avoid a large-scale re-designation of properties, which could have a significant effect on landlords’ income. However, we do not believe there is sufficient flexibility to allow for individual household circumstances like, for example, the extent to which students may live away from home or teenage children of the same sex share a bedroom. Deductions of housing benefit for those deemed to be under-occupying properties could also undermine the financial viability of landlords.
- Pay housing benefit directly to tenants, and make them responsible for paying rent. The government has accepted the principle that payment of mortgage interest direct to lenders provides a better outcome for both benefit recipients and taxpayers in the owner-occupied sector, but is continuing to test payments of housing benefit to social tenants in a series of "demonstration projects" across the country. These projects will run until June next year, leaving little time to implement any lessons learned if the government sticks to its timetable for introducing universal credit. We also remain allied with the many landlords, and tenant and consumer groups, who continue to support direct payment of housing benefit to landlords, particularly where tenants themselves would prefer this option.
We believe that it is essential for the government to implement welfare reform in the right way from the outset because the changes it is proposing are very significant. Policy initiatives should reinforce stability in the housing market, and the government should not risk pulling policy and funding levers without being sure about all the inter-related consequences. Policy measures should avoid potential disruption of the social housing sector and the capacity of lenders to continue to fund it.
In the owner-occupied sector, the current – but temporary – arrangements for paying SMI are helping a significant number of borrowers and reinforcing stability. They enable lenders to extend forbearance and keep mortgage possessions in check. The government should therefore consider retaining not only direct payments of SMI but also the existing, more generous cover it currently provides – at least for another year. Some of the costs of this more generous support for householders could be offset by introducing a charge on the property for some long-term claimants, and we would like to explore this option further with the government.