Mortgage Arrears and Repossessions

Mortgage Arrears and Repossessions Standard Note: Last updated: Author: Section SN/SP/4769 15 October 2009 Robert Long Social Policy Section This note considers the increasing numbers of homeowners facing mortgage arrears and repossession of their property, Government response to the issue, and possible routes of action for homeowners who are struggling with repayments. This information is provided to Members of Parliament in support of their parliamentary duties and is not intended to address the specific circumstances of any particular individual. It should not be relied upon as being up to date; the law or policies may have changed since it was last updated; and it should not be relied upon as legal or professional advice or as a substitute for it. A suitably qualified professional should be consulted if specific advice or information is required. This information is provided subject to our general terms and conditions which are available online or may be provided on request in hard copy. Authors are available to discuss the content of this briefing with Members and their staff, but not with the general public. Contents 1 2 Background Advice for Constituents with Mortgage Arrears 2.1 2.2 2.3 General Advice Lenders’ obligations Financial assistance: social security Pre-January 2009 System Changes from January 2009 3 What has the Government Done? 3.1 Financial and Legal advice Some implications of Government Policy 3.2 3.3 Pre-Action Protocol Mortgage Rescue Schemes Effectiveness of the Mortgage Rescue Scheme Preventing Repossession Fund Repossession and Intentional Homelessness Private sector mortgage schemes: sale and rent-back 3.4 The Homeowner Mortgage Support Scheme (HMS) 2 3 3 3 4 5 6 7 7 8 9 10 11 11 12 12 13 1 Background In the wake of the current difficulties in the economy and the global ‘credit crunch’, the number of households dealing with mortgage arrears and possible repossession of their homes is rising and is predicted to rise further. A Library standard note on Repossessions and Mortgage Arrears: Statistics (SN/SG/0263) provides detailed figures on these topics. A separate standard note on the rights of tenants whose landlord has their home repossessed is available: Mortgage Repossession: Rights of Tenants (SN/SP/5019). A significant factor behind the current difficulties that some home owners are experiencing appears to be the proportion of their salaries that is devoted to paying for housing costs. Data from the Nationwide Building Society indicates that average first-time buyers are spending over 49% of their post-tax salary on repaying their mortgages, the highest level since 1990. The report also highlights general pressures on mortgagors’ disposable income, as well as the loss of ability to re-mortgage or spread debt on credit cards as reasons behind the increase in mortgage arrears. 1 1 “First-time buyers spend half their pay on mortgages”, Telegraph, 28 May 2008 2 2 2.1 Advice for Constituents with Mortgage Arrears General Advice The best way to tackle an individual’s debt problems will vary with each case - much will depend on factors such as the amount of debt they are in and how far down the line towards repossession their case has gone. All advisory bodies advise householders who fear they may begin to struggle with mortgage repayments to speak to the lender as soon as possible, and find out what kind of accommodation can be made regarding payment. Speaking to an independent advisory body regarding the individual case, such as the local Citizens’ Advice Bureau (CAB) is also a step worth taking as early as possible. Because of the broad variety of situations constituents may be in, it is worthwhile to list several websites and documents which give key information across the area. For the immediate reference of constituents, the Financial Services Authority published an information sheet in August 2007, No selling. No jargon. Just the facts about what to do when you can't pay your mortgage. Lenders of regulated mortgage contracts within the meaning of the Financial Services and Markets Act 2000 are obliged to issue this leaflet when they become aware of a borrower falling into arrears. The same website also offers a free online budget calculator, which some constituents may find useful. The Direct.gov.uk website has a section which offers advice regarding mortgage arrears and payment difficulties. This page also links to the National Debtline’s self-help pack on mortgage arrears and the various stages towards eviction. The CAB also has a factsheet regarding mortgage arrears which gives advice to those who have fallen behind on their payments. Shelter’s website also offers helpful information for individuals at the various stages of the repossession process. The National Housing Advice Service has an information leaflet, Worried about your mortgage? Get advice now, listing practical steps homeowners can take to address their financial situation, together with the contact details of advice services. The leaflet is distributed via CAB, Shelter, local authorities and money advisers. 2.2 Lenders’ obligations With regard to repossessions specifically, if a property is repossessed by a lender when selling that property the lender is obliged by FSA rules to: • Market the property for sale as soon as possible 3 • Obtain the best price that might reasonably be paid, taking account of factors such as market conditions, as well as the continuing increase in the amount owed by the customer 2 Where the loan is not FSA regulated, similar obligations still apply. If the sale results in a shortfall, the Mortgage Conduct of Business guidance 3 sets out requirements as to what the lender must do where the loan is FSA regulated. Although lenders have the legal right to pursue customers for payment of that shortfall for a 12-year period, lenders who are members of the Council of Mortgage Lenders (CML) agree to limit this time period. A guide to debt available on the CML’s website has more details. On 24 November 2008 the Government announced a series of measures designed to assist homeowners during the financial crisis, one of which stated: Agreement with major lenders to wait at least three months before initiating repossession proceedings, in order to explore all other alternatives. The Government has also welcomed the commitment by lenders to look at all possible options to prevent repossession, such as reducing payments and mortgage rescue schemes. 4 On 28 November 2008 the FSA wrote to the chief executives of all mortgage lenders to ensure that customers facing arrears are treated fairly. The chief executives had to communicate conclusions and any actions their firm proposed to take to the FSA by 31 January 2009. 5 In the debate on the Queen’s Speech on 3 December 2008, the Prime Minister announced a scheme to give those who lose their jobs, or take a big cut in earnings, the ability to defer mortgage payments for up to two years. The Prime Minister stated that eight major lenders had signed up to the scheme, to cover mortgages worth up to £400,000. This is intended to ensure that banks do not repossess homes where payments have been missed for six months or less (discussed in section 3.4). 6 2.3 Financial assistance: social security In terms of assistance with mortgage costs, there is a scheme to help families who are out of work and receiving Income Support, income-based Jobseeker’s Allowance or Pension Credit. This scheme only covers mortgage interest payments, and (for most claimants) is subject to a loan cap and only available after a certain ‘waiting period’ on benefit. An overview of this scheme is given below. For full details see the Standard Note SN/SP/737, Means-tested benefits: help with mortgage costs. Assistance is available for people receiving Income Support (IS), income-based Jobseeker's Allowance (JSA) or Pension Credit. The schemes are collectively known as Income Support Mortgage Interest (ISMI). Payments are made towards mortgage interest payments and are generally made direct to lenders. The Library Standard Note SN/SP/737 outlines the rules on the types and amount of mortgage costs which can be met and the waiting periods for help; and gives recent trends in recipients and costs. In September 2008 the Government announced changes to the system 2 3 4 5 6 Council of Mortgage Lenders website, arrears and possessions section From the Financial Services Authority “Real help now to support homeowners through difficult times”, Department for Communities and Local Government, 24 November 2008 “FSA asks mortgage firms to review arrears and possessions practice”, Financial Services Authority, 28 November 2008 Department for Communities and Local Government, “New scheme to help people at risk of repossession”, 3 December 2008. The eight lenders are HBOS, Nationwide, Abbey, Lloyds TSB, Northern Rock, Barclays, RBS, and HSBC. 4 of support for mortgage interest, so below are the details of both the previously existing system, and the changes adopted from January 2009. Pre-January 2009 System The detailed rules of the scheme are contained in Schedule 3 to the Income Support (General) Regulations 1987 7 , Schedule 2 to the Jobseeker’s Allowance Regulations 1996 8 , and Schedule 2 of the State Pension Credit Regulations 2002 9 . While the schemes covering the three benefits are broadly similar, there are some differences in the rules. Members seeking information on the detailed rules for recipients of a particular benefit should consult the relevant regulations and/or guidance. There are caps on the size of mortgage on which interest payments will be taken into account. Interest in excess of a £100,000 loan limit is not generally eligible. This ‘cap’ was introduced in stages. For people who have been eligible for IS/JSA since 11 April 1994, the limit is £125,000. For those eligible since 2 August 1993, the limit is £150,000. For those eligible before 2 August 1993, there is no limit. In addition, even if the mortgage is less than this, help can be restricted if housing costs are considered to be excessive by reference to size of family and local housing costs. Deductions may also be made if there are ‘nondependants’ living with the claimant. Who exactly counts as a non-dependant varies according to the benefit the claimant receives. People over 60 can get their assistance right away. For those under 60, a waiting period applies, according to the following criteria. For loans taken out before 2 October 1995, a claimant gets an amount included in the assessment of there Income Support or income-based JSA entitlement of: • • • nothing for the first eight weeks of the claim; 50 per cent of mortgage interest for the next 18 weeks; and full mortgage interest after 26 weeks. For loans taken out after 1 October 1995, a claimant gets: • • nothing for the first 39 weeks of the claim; and full mortgage interest after 39 weeks. It is also the case that, in certain circumstances people who stop claiming Income Support or income-based JSA but who claim again at a later date do not have to serve the full waiting period again before they can be entitled to ISMI. Additionally, homeowners can continue to receive ISMI for the first four weeks after staring full-time work. It is worth noting that in the last recession only 25% of home owners in arrears were eligible for ISMI. Peter Williams, executive director of the Intermediary Mortgage Lenders Association, writing for Roof Magazine, has said: “we have a 20th century benefit system operating in the 21st century”. 10 7 8 9 10 SI 1987/1967 SI 1996/207 SI 2002/1792 Roof, “No more NICE guy”, July/August 2008 5 It is possible that people receiving ISMI payments will suffer a shortfall if their mortgage lender does not pass on cuts in interest rates. Since November 2004 help with mortgage interest payments has been based on a standard interest rate set at 1.58% above the Bank of England base rate. A Library Standard Note on means-tested benefits: help with mortgage costs (SN/SP/737) discusses the subject. The following response to a Parliamentary Question from 22 October 2008 explains the rules: Kitty Ussher: From December 2004, the standard interest rate (SIR) used to calculate support for mortgage interest payments in income support, income-based jobseeker’s allowance and state pension credit was changed to respond to changes in the Bank of England base rate. The SIR is the Bank of England base rate plus an additional 1.58 per cent. This is more representative, transparent, easier to understand and easier to administer than the previous method, which was based upon an average of building society interest rates. The additional 1.58 per cent. recognises the fact that lenders’ interest rates are set at a higher rate than the base rate and to ensure that no-one lost out when the method of calculation changed. DWP no longer needs to wait for the collation of statistics by the Financial Services Authority and the official publication by the Office for National Statistics of the average building society interest rate. Nor does it need to lay regulations to change the SIR. As soon as the Bank of England announces a change which triggers a move in the SIR, action is taken to amend the relevant departmental computer systems. This has reduced the implementation time by approximately four weeks compared to the pre-December 2004 arrangements. Changes are normally implemented in about five weeks from the Bank of England’s announcement. The SIR is currently 6.58 per cent. The Bank of England announced a 0.5 per cent. cut in the base rate on 8 October. This will mean that the SIR will reduce to 6.08 per cent. in about five weeks’ time. 11 Since the above Question the Bank of England has cut its base rate by a further 1.5%. However, the Government announced on 24 November 2008 that the SIR for this support will be frozen at 6.08 per cent, 12 and the Budget on 22 April 2009 confirmed that the SIR would remain at 6.08 per cent for a further six months before being reviewed. 13 Changes from January 2009 On 2 September 2008 the Government announced reforms to the system of financial support for mortgagors to more accurately reflect the value of people's property and reduce the waiting time before help from Support for Mortgage Interest (SMI) kicks in. The initial announcement stated that, as a temporary measure, from April 2009 the 39 week waiting period before help towards a mortgage is paid would be cut to 13 weeks for all new working age claims. In addition, also as a temporary measure from April 2009, the capital limit on loans upon which SMI is based would be increased from £100,000 to £200,000 for new working age claims. 14 11 12 13 14 HC Deb 22 October 2008 cc401-402w “Real help now to support homeowners through difficult times”, Department for Communities and Local Government, 24 November 2008 HM Treasury, Budget 2009: Building Britain’s Future, p 104 Originally this was set to rise to £175,000. The increase to £200,000 was announced in the Pre-Budget Report on 24 November 2008. 6 There will be a time limit on SMI of two years for new Jobseeker’s Allowance claims only. Time-limiting does not apply to existing claims or to new claims from those in receipt of Income Support, Pension Credit or income-related Employment and Support Allowance. On 6 November 2008 the Government announced in a written answer that these changes would be brought forward to January 2009: Kitty Ussher [holding answer 3 November 2008]: We share the concerns about the need for early introduction of the changes to help with mortgage costs, and therefore we have brought forward the date of introduction. We now plan to introduce the changes to Support for Mortgage Interest in January, including the reduction of the waiting period to 13 weeks. This is the earliest practicable date when we can do so. Support for Mortgage Interest is available to those homeowners who qualify for one of the income-related benefits, income support, income-based jobseeker’s allowance or incomerelated employment and support allowance. It is an integral component of those benefits. Couples are treated as a single unit in these benefits and if one member of a couple is in remunerative work of 16 hours or more, or has income which exceeds their entitlement, then they cannot receive the benefit. Only those couples who are not in remunerative work and who meet the other qualifying conditions of the benefit can receive Support for Mortgage Interest. This is intended to ensure that resources are directed to where they are most needed. Where two or more people share a household and a mortgage, but are not a couple, they can individually receive Support for Mortgage Interest for their share of the mortgage interest payments, subject to their meeting the other qualifying conditions of the benefit. 15 Details about the changes are available on the Department for Work and Pensions’ website. 3 3.1 What has the Government Done? Financial and Legal advice In reaction to the increase in mortgage arrears and repossessions the Government has moved to strengthen the financial advice available to mortgagors. On Friday 9 May 2008, the Government announced a series of measures to further strengthen support for home owners. As well as announcing that £9 million will be made available in additional funding for debt advice by third sector partners, including Citizens Advice Bureau, the Government made a commitment to: • • • expand access to free legal representation at county courts throughout England for households at risk of repossession; strengthen the National Housing Advice Service to provide a new comprehensive debt advice service; and provide more specialist training for Citizen Advice Bureau staff and local authorities on debt advice to help families get their finances back on track. 16 15 16 HC Deb 6 November 2008 c703w Department for Communities and Local Government , “Strengthening support for home owners in current market conditions”, 9 May 2008 7 Referring to Government monitoring of the situation, Under Parliamentary Secretary of State, Iain Wright, gave the following response to a Parliamentary Question on 24 June 2008: The Chancellor of the Exchequer, the Chief Secretary to the Treasury and the Minister for Housing and Planning hosted meetings with the mortgage and lending industry on 22 April and 10 June to discuss what the industry can do to support borrowers in difficulty during the current period of turbulence in global financial markets. Further meetings are planned to continue the exchange of information and agree actions. In monitoring implementation of homelessness prevention strategies, Communities and Local Government has regular contact with all English local authorities including assessment of the effectiveness of measures to minimise homelessness. Although we appreciate that repossessions have risen slightly in recent months, the rate is around a third of that in 1991, when they reached 75,500—even with two million more homeowners today. 17 Additionally, in an Opposition Day debate on Repossessions and the Housing Market held on 2 April 2008, Financial Secretary to the Treasury Jane Kennedy referred to a pathfinder project which will operate as a pilot scheme allowing everyone in the country “free, impartial, high-quality advice on money.” The Government will provide up to £12 million to fund the scheme over the next year. 18 On 22 June 2009 the Housing Minister, John Healey, announced the doubling of extra funding for free, on-the-spot, legal advice in courts for people facing repossession or eviction hearings. 19 On 30 June it was reported that the Minister had further announced plans to set up a new 'central team' to fast-track help for urgent home repossession cases. Some implications of Government Policy The Government has taken one mortgage lender, Northern Rock, fully into state ownership. (Bradford and Bingley has also been nationalised; however, the savings branch of the bank has been sold, while the Government has retained the mortgages branch.) Northern Rock was taken into “temporary public ownership” on 22 February 2008. Previous to this action, in a statement on the future of Northern Rock on 19 November 2007 the Chancellor said: “Having said that, I can tell the House that Bank of England lending is secured against assets held by Northern Rock, which include high-quality mortgages with a significant protection margin built in and high-quality securities with the highest quality of credit rating. The Bank is the senior secured creditor. The Financial Services Authority has said before, and continues to say, that Northern Rock’s main asset base—its mortgage book—is strong and sound.” 20 It has been reported that Northern Rock is repossessing homes at a far higher rate than the industry average. A Shelter report published in October 2008 stated: “Northern Rock repossessed 0.29 per cent of its borrowers in the second half of 2007 and 0.56 per cent in the first half of this year. That was almost four times the industry average of 0.18 per cent.” The report went on to say, in reference to the cost of repossessions to the Treasury: 17 18 19 20 HC Deb 24 June 2008 c264W HC Deb 2 April 2008 Department for Communities and Local Government, “Extra legal help for struggling homeowners”, 22 June 2009 HC Deb 12 December 2007 c371-418 8 “…what may be sensible financial management by the banks to reduce their bad debts and repay the chancellor may actually end up costing him more money. “An impact assessment of the housing market package published by Communities and Local Government in September concluded that £100–£200 million spent on mortgage rescues to stop up to 6,000 repossessions would generate £195–£390 million in benefits from reduced spending on temporary accommodation and housing benefit and increased rent and staircasing receipts for social landlords.” 21 The onus on Northern Rock to repay its debts to the Treasury, therefore, may cost the Government more money in the long run if the money used to repay these debts is generated by repossessing homes. Whilst, as the Shelter report indicated, Northern Rock has repossessed at a higher rate than the industry average in the past, this disparity has become more pronounced. The issue of restraint amongst mortgage lenders in repossessing homes was covered at a Treasury Committee evidence session on 14 October 2008, including this question directed at Professor David Miles, Professor of Finance, Imperial College London: Q68: Mr Cousins: Coming directly to this question of repossessions, do you think the focus of the Government’s thinking about repossessions should be to ask lenders to carry the consequences of not repossessing on their own books, or, on the other hand, to say that will weaken the lenders and so, therefore, we are simply dealing with a social issue which the Government should deal with in a completely different way through welfare benefits and social policy? There are two quite different approaches to repossessions. Which of them should the Government adopt? Professor Miles: I think the right strategy here is to make sure that the rules of the game that we have got already in place are abided by the players in the game. As has been mentioned a few times, the Financial Services Authority has its Mortgage Code of Conduct, and an important part of that is how lenders treat people who are having difficulties servicing the debt – falling into arrears. To my mind, the most important thing in this environment is for the FSA to try and ensure that people are playing by the rules of the game. 22 It was reported in August 2009 that state-owned Bradford and Bingley had nearly 50% more repossessed homes on its books at the end of June 2009 than it had in December 2008. 23 3.2 Pre-Action Protocol On 22 October 2008 the Chief Secretary to the Treasury announced that a new protocol for lenders regarding the repossession of homes had been agreed, this came into force on 19 November 2008: …the Master of the Rolls has approved the Civil Justice Council’s protocol for mortgage possession cases, which complements existing regulation, and sets out clear standards that judges may expect of lenders bringing repossessions cases in the courts. The new protocol makes clear that repossessions should be a last resort. Where possible lenders are expected to try to discuss and agree with borrowers alternatives 21 22 23 Roof Magazine, Taxpayer takes on role of repo man, November/December 2008 Treasury Committee, The Economics of the Housing Market, HC 1092-i, Q68 “Bradford and Bingley admits 50% rise in home repossessions”, Guardian, 15 August 2009 9 to repossession. Where a case subsequently comes to court, lenders will be expected to be able to tell the court precisely what they have done to comply with the protocol. 24 The protocol was released by the Civil Justice Council alongside this statement, and “is designed to encourage parties to exchange information at an early stage, to encourage early settlement of cases or where that cannot be avoided, more efficient case management. It does not alter parties’ existing rights and obligations.” 25 3.3 Mortgage Rescue Schemes During the previous crisis in the early 1990s, the then Conservative Government implemented several measures to alleviate pressure on mortgagors suffering with arrears, one of which involved large lenders committing to establish mortgage-to-rent schemes with the assistance of housing associations. The importance of the schemes was soon downplayed in practice, one press report estimating the number of borrowers ‘rescued’ in this way to be as low as 50. 26 Such schemes are complex to devise and implement, and homeowners often have limited enthusiasm for them, preferring to pursue options that will keep them in ownership of their home. Prior to the ‘credit crunch’ some local authorities were operating not-for-profit ‘mortgage rescue schemes’ in partnership with local housing associations, although there were very few in existence. They often have strict rules about who can apply. Typically, these schemes involve a housing association purchasing the house – or a portion of it – and then leasing it back to the original owner, who can continue to live there as a tenant. Sometimes, it may be possible for the previous owner to buy back the house at a later date when their financial circumstances allow. Individual local authorities can provide more information about these schemes. On 2 September 2008 the Government announced a £2 billion package for housing which included an enhancement to mortgage rescue schemes, costing £200 million, which aims to assist up to 6,000 households over the next two years. (The Government estimates that this enhancement, by preventing this number of households from being repossessed, will have a monetised benefit of £390 million.) 27 The announcement, which described the scheme as “a limited scheme which cannot help those who have borrowed excessively or acted recklessly”, stated: Depending on their specific circumstances, eligible homeowners will be offered one of three products, following an assessment of their case by their local authority: • • • shared equity would help householders who have experienced payment shocks and need some help in paying their mortgage shared ownership would help those with a bigger financial gap but still able to make a contribution to monthly payments sale and rent back will help the most vulnerable on low incomes with little chance of sustaining a mortgage. 24 25 26 27 HC Deb 22 October 2008, Col 10WS Civil Justice Council, New Pre Action Protocol Launched for Mortgage Possession Cases, Press Notice, 22 October 2008 “More homes at risk as mortgage rescue fails”, Guardian, 30 July 1992 “Homeowners Support Package: Impact Assessments”, Department for Communities and Local Government, September 2008, pg 19 10 The statement also said: Our mortgage rescue scheme will help the most vulnerable households. A number of private sector organisations have proposed different schemes to help those facing difficulties. Over the autumn we will be working with the CML and private providers. We will be challenging them to develop privately-funded proposals so that mortgage rescue may be an option for other families in difficulty, perhaps because of payment shocks stemming from the end of fixed-rate terms. 28 On 22 October 2008, Parliamentary Under-Secretary of State Iain Wright confirmed that this scheme would be fully operational from January 2009. On 24 November 2008 it was further announced that more than 60 councils would be fast-tracking the scheme, and starting to take applications from the beginning of December and also that the scheme would be enhanced to cover vulnerable families at risk of repossession because of additional loans secured on their home. 29 The Department for Communities and Local Government has a helpful Frequently Asked Questions page on its website about mortgage rescue schemes, which includes the eligibility criteria for the scheme. In the 2009 Budget the Government announced that it would be “widening the eligibility criteria for the Mortgage Rescue Scheme so that households in negative equity are not excluded”; 30 subsequently a response to a Parliamentary Question confirmed that this would be the case “provided that their loan to value ratio is less than 120 per cent.” 31 This is relevant only to the Mortgage to Rent rescue scheme. Effectiveness of the Mortgage Rescue Scheme The mortgage rescue scheme has received criticism that it is falling short of the Government’s target for helping people stave off repossession. 32 The number of households accepting an offer made through the scheme from January to June 2009 was 15, with 14 of that number being accepted in the April-June period. The then Housing Minister, Margaret Beckett, defended the figures, saying she expected more households to be helped in the coming months, and that the scheme is one of a broader package of measures to help homeowners; opposition and Shelter spokesmen have expressed disappointment with how the scheme has operated so far. 33 An Inside Housing article in August 2009 further reported that the number of housing associations involved with the scheme means that the capacity of the scheme is limited; it also suggested that the majority of applicants could not afford the shared equity option, potentially making the scheme more expensive than anticipated. 34 Preventing Repossession Fund In May 2009 the Government announced the Preventing Repossessions Fund. This was extra funding, available to local authorities from June 2009, “to enable them to offer small loans to households that are now at risk because of the recession.” The announcement continued: 28 29 30 31 32 33 34 “Billion pound package for housing”, Department for Communities and Local Government, 2 September 2008 “Real help now to support homeowners through difficult times”, Department for Communities and Local Government, 24 November 2008 HM Treasury, Budget 2009: Building Britain’s Future, p 104 HC Deb 27 April 2009 vol 491 c1120-W The most recent statistics regarding the Mortgage Rescue Scheme can be found on the Department for Communities and Local Government’s website. See “Slow take-off for government’s mortgage rescue scheme”, Guardian, 29 May 2009 and “Slow start for mortgage help plan”, BBC News Online, 29 May 2009 “Mortgage rescue flounders”, Inside Housing, 21 August 2009 11 Financial assistance through small loans (where possible) allows money to be recycled to help other households in the local authority area in the future. However, final decisions on the efficient and fair deployment of this extra funding rest with local authorities. These should be based on individual local need and circumstances. 35 These loans were to range from £1,000 to £3,000 per household, and to be capped at £5,000. They will be administered by local authorities. The following response to a Parliamentary Question sets out how the funding has been allocated: John Healey: Allocations have been made to local authorities from the Preventing Repossessions Fund based on population and levels of repossession activity. A list of allocations to individual authorities has been placed in the House Library. The fund enables local authorities to extend small interest-free loans of up to £5,000 to families at risk of homelessness through repossession or eviction. Detailed terms are set at local level. In the current economic conditions, we have acted rapidly to put in place help and support for households struggling with their mortgage at every stage: from free debt advice when problems start, to free support for cases that reach court. Advice is available to all households struggling with their mortgage, with targeted schemes for those in most need. 36 Repossession and Intentional Homelessness The Department for Communities and Local Government has published some supplementary guidance to its Homelessness Code of Guidance for Local Authorities, aimed at addressing the issue of intentionality and homelessness for people who have had their homes repossessed. The guidance sets out principles in case law relating to intentional homelessness, and then discusses some scenarios in which this might be relevant to households whose property has been repossessed. 37 Private sector mortgage schemes: sale and rent-back It is worth noting that the private sector has also developed its own “mortgage rescue schemes” in the form of “sale and rent-back” schemes. These schemes involve private companies in buying people’s houses at knock-down prices and keeping the ex-owners in situ as tenants. Although eligibility for private schemes differs, they are commonly only open to borrowers in work who have suffered a material decline in their personal circumstances, who are able to afford the rent charged. Although these schemes provide individuals with a quick and easy source of cash, they are at present unregulated and can leave ex-owners facing substantial rent charges or, ultimately, eviction, as they are offered assured shorthold tenancies with no long term security of tenure. In February 2008 it was reported that the companies offering these schemes were developing a new voluntary code of practice. 38 The Council of Mortgage Lenders has urged people to be wary of such schemes 39 and in May 2008 the Office of Fair Trading launched an inquiry into the sale and rent-back sector, prioritising the matter due to current economic 35 36 37 38 39 Preventing Repossession Fund, press release at info4local.gov.uk HC Deb 26 June 2009 col 1198W Department for Communities and Local Government, Homelessness Code of Guidance for Local Authorities: Supplementary Guidance on Intentional Homelessness “Housing sale and rent-back sector commits to new code of practice”, Independent, 18 February 2008 Council of Mortgage Lenders’ mortgage guides 12 conditions. 40 The finished report was published on 15 October 2008. In it, the OFT raised concerns about the manner in which the sector is managed and recommended its regulation to better protect customers, including an obligation on sale and rent firms to be more transparent about the terms and cost of the deal, and a requirement that homeowners are informed of the free and independent advice available to them. 41 On 22 October 2008 the Chief Secretary to the Treasury announced that the Government would be accepting the OFT recommendations in full, after consulting on bringing the arrangements within the scope of Financial Services Authority (FSA) regulation. 42 The National Landlords’ Association (NLA) has run a consultation on its draft code of practice for landlords involved in the sale and rent back sector. The consultation ran to 31 August 2008 and the NLA plans to publish conclusions in response to the contributions they have received. On 6 February 2009 the Treasury launched a consultation on strengthening protection for vulnerable homeowners, which closed on 1 May 2009. On 2 June 2009 the Government laid before Parliament secondary legislation to bring sale and rent-back agreements within the scope of Financial Services Authority regulation. 43 3.4 The Homeowner Mortgage Support Scheme (HMS) During the debate on the Queen’s Speech on 3 December 2008 the Prime Minister announced that a new scheme would be launched to assist people who suffer a temporary but significant loss of income which leaves them unable to pay their mortgage for a short period, such as being made redundant. A press notice from HM Treasury on 10 December 2008 set out the rules regarding who will qualify for the scheme: To qualify, borrowers will: * have suffered a loss of income from employment or self-employment of a scale which now makes full mortgage payments difficult, but which is not expected to be a permanent loss of income; * have been in dialogue with their lender, including over the use of existing forbearance policies, and have been making some level of regular payment; * have taken out a mortgage of up to £400k; * have savings below £16,000, (which is the same as for the existing Support for Mortgage Interest scheme (SMI)); * apply for assistance as owner-occupier - the programme will not apply to people with second homes or buy-to-let properties; * not be in receipt of SMI or mortgage rescue assistance; * have been assessed as being able to pay a certain monthly amount on an ongoing basis; 40 41 42 43 “OFT launches market study into sale and rent back”, OFT Press Release, 14 May 2008 Office of Fair Trading, “Sale and Rent back: an OFT market study”, 15 October 2008 HC Deb 22 October 2008, Col 10WS HM Treasury, “Regulating the sale and rent-back sector”, 2 June 2009 13 * have received financial advice from a party other than their lender to determine their eligibility for the scheme, including testing the long-term sustainability of their financial position, and their ability to resume full payments once their income increases; and * have fallen into arrears for a number of months during which the lender has exercised forbearance. The scheme will be open for a window of two years, subject to review. 44 On 21 April 2009 the scheme was formally announced in a statement to Parliament by the Secretary of State, beginning immediately. The statement said: From today, the following major high street lenders will offer their customers HMS: Lloyds Bank Group (which includes Halifax and Bank of Scotland), Bradford and Bingley, Northern Rock, the Royal Bank of Scotland (which includes NatWest and Ulster Bank), Cumberland Building Society, and the National Australia Bank Group (which includes Clydesdale and Yorkshire Bank). A number of other banks, building societies and specialist lenders have also confirmed today that they will offer their customers HMS as soon as possible. These are Bank of Ireland (which includes Bristol and West), GMAC, GE Money, Kensington Mortgages, Standard Life Bank, and the Post Office. Lenders offering HMS will have the security of a Government guarantee if the borrower defaults. At the same time, four other high street lenders, Barclays (including First Plus), HSBC, Nationwide and Santander (including Abbey and Alliance and Leicester) have all confirmed today they are offering comparable arrangements to their customers, while opting not to take up the Government guarantee. Customers of these institutions experiencing a reduction in income and willing to make regular monthly payments will receive a similar level of support and be encouraged to seek independent money advice. As a result of today’s announcement, lenders covering more than 80 per cent of the mortgage market will now be providing enhanced support to their customers. Borrowers will receive independent money advice as part of these changes to help them make the right decisions for their circumstances. The door will remain open for further lenders to join the scheme, and we will be working actively with the sector to enable this. HMS does not provide consumers with a payment holiday. The mortgage interest payments that have been deferred will eventually have to be paid back. Households will need to seek independent money advice before signing up to the scheme to make sure they understand the consequences of participating. We have been working closely with Shelter, Citizens Advice Bureau, Consumer Credit Counselling Service, National Debtline and PayPlan to ensure they are ready to provide advice on the scheme, including making £2.5 million available for advice agencies to support the delivery of the scheme. 45 Further details on the scheme are available on the Department for Communities and Local Government’s website. It was reported after this announcement that the larger banks taking 44 45 HM Treasury, “The Homeowner Mortgage Support Scheme”, 10 December 2008 HC Deb 21 April 2009 col 5WS 14 up the scheme were those that are owner or controlled by the state, and that those outside of Government control have not taken part. 46 In September-October 2009, the Citizens’ Advice Bureau’s Adviser magazine published an article discussing some of the advantages and disadvantages of HMS. The advantages acknowledged were protection from repossession for as long as HMS payments are being maintained, giving an opportunity for homeowners to stabilise their finances. The disadvantages centre around the situation homeowners will be in when they leave the scheme: they will owe more money than when they entered it, and if they have left the scheme, and it becomes apparent within four years that they cannot sustain their mortgage or loan payments, the home may be repossessed. 47 46 47 “Mortgage support scheme shunned”, Financial Times, 22 April 2009; “More than 500,000 homeowners not covered by HMSS scheme”, Roof Magazine, 22 April 2009 “Mortgage Rescue and Homeowner Mortgage Support, Adviser, September-October 2009 15