Mortgage Arrears and Repossessions by wev47737

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									Mortgage Arrears and Repossessions
Standard Note: Last updated: Author: Section SN/SP/4769 31 December 2009 Robert Long & Wendy Wilson 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  Introduction Advice for Constituents with Mortgage Arrears 2.1  General Advice 2.2  Lenders’ obligations 2.3  Financial assistance: social security Pre-January 2009 System Changes from January 2009 3  What has the Government Done? 3.1  Financial and Legal advice 3.2  Pre-Action Protocol 3.3  Preventing homelessness: local authorities’ duties Civil Procedure Rules Repossession and intentional homelessness Preventing Repossession Fund 3.4  Mortgage Rescue Schemes 3.5  The Homeowner Mortgage Support Scheme (HMS) 4  The impact of Government policy An evaluation to date Future policy developments 5  Private sector mortgage schemes: sale and rent-back 2  3  3  4  4  5  7  7  7  8  9  9  9  10  10  12  13  13  15  18 

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Introduction

In the wake of the global ‘credit crunch’, the number of households dealing with mortgage arrears and potential repossession of their homes has increased. A Library standard note on Repossessions and Mortgage Arrears: Statistics (SN/SG/0263) provides detailed information on trends in mortgage arrears and repossessions. A separate note on the rights of tenants whose landlords have defaulted on their mortgages is also available: Mortgage Repossession: Rights of Tenants (SN/SP/5019). In November 2009 the Council of Mortgage Lenders (CML) predicted that repossessions in 2009 would reach 48,000, this is a significant reduction on its original forecast of 75,000. The factors attributed with limiting the number of repossessions, despite rising unemployment, include historically low interest rates, increased lender tolerance (forbearance) and

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Government rescue schemes. 1 The CML is currently predicting that there will be 53,000 repossessions in 2010. 2 Statistics on the reasons for mortgage arrears over 2007/08 indicate that behind loss of income, which incorporates sickness, injury, redundancy and reduced working hours, the most significant cause of arrears is household changes such as a partner or spouse leaving or dying. 3

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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. 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.

1 2 3

CML slashes repossession forecast, 12 November 2009 Ibid CLG, Survey of English Housing 2007/08, Table S315, Reasons for Mortgage Arrears

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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 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 4

Where the loan is not FSA regulated, similar obligations still apply. If the sale results in a shortfall, the Mortgage Conduct of Business guidance 5 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. 6

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. 7 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 (this scheme discussed in section 3.4 below). 8 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.

4 5 6

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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.

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As noted above, assistance is available to people receiving Income Support (IS), incomebased Jobseeker's Allowance (JSA) or Pension Credit. The schemes are collectively known as Income Support Mortgage Interest (ISMI) or, more recently, Support for Mortgage Interest (SMI). Payments are made towards claimants’ 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 of support for mortgage interest. 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 9 , Schedule 2 to the Jobseeker’s Allowance Regulations 1996 10 , and Schedule 2 of the State Pension Credit Regulations 2002 11 . 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

9 10 11

SI 1987/1967 SI 1996/207 SI 2002/1792

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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”. 12 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. 13

Subsequently the Bank of England base rate was reduced to 0.5 per cent. However, the Government announced on 24 November 2008 that the SIR for this support would be frozen at 6.08 per cent; 14 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. 15 The 2009 Pre-Budget Report confirmed a further six month freeze for SIR at 6.08 per cent but also noted:
Once the freeze ends, the Government intends to move towards a fairer, more affordable approach, that more closely reflects mortgage interest rates. 16

12 13 14

15 16

Roof, “No more NICE guy”, July/August 2008 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 Cm 7747, Pre-Budget Report, December 2009

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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. 17 There is a time limit on SMI of two years for new Jobseeker’s Allowance claims only. Timelimiting 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. 18

Details of the changes are available on the Department for Work and Pensions’ website.

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3.1

What has the Government Done?
Financial and Legal advice

In addition to improving the financial safety-net available to householders in receipt of certain benefits (see section 2.3 above), the Government has moved to strengthen the financial advice available to mortgagors. On 9 May 2008 the Government announced a series of measures to further strengthen support for home owners. As well as announcing that £9 million would be made available in

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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. HC Deb 6 November 2008 c703w

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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. 19

Referring to Government monitoring of the situation, the then Under Parliamentary Secretary of State at Communities and Local Government (CLG), 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. 20

Additionally, in an Opposition Day debate on Repossessions and the Housing Market held on 2 April 2008, then 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 said it would provide up to £12 million to fund the scheme over 2009. 21 On 22 June 2009 the Housing Minister, John Healey, announced the doubling of funding for free, on-the-spot, legal advice in courts for people facing repossession or eviction hearings. 22 On 30 June it was reported that the Minister had announced plans to set up a new 'central team' to fast-track help for urgent home repossession cases. 15 December 2009 saw John Healey extend the availability of free advice for families facing the threat of repossession with the announcement of an extra £4m in funding for debt advice agencies and 80 court desks across the country. 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:

19 20 21 22 23

CLG, “Strengthening support for home owners in current market conditions”, 9 May 2008 HC Deb 24 June 2008 c264W HC Deb 2 April 2008 CLG, “Extra legal help for struggling homeowners”, 22 June 2009 CLG, “John Healey extends debt advice help for homeowners”, 15 December 2009

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…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 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 From 1 October 2009 the steps set out in the Mortgage Pre-Action Protocol that a lender should take before starting a possession claim for mortgage arrears were expanded. The Protocol has also been amended to include a checklist for lenders to evidence their compliance. 3.3 Preventing homelessness: local authorities’ duties

Civil Procedure Rules The Civil Procedure Rules Part 55 have been amended to require mortgage lenders to notify local housing authorities that possession proceedings relating to a mortgaged property within their area have commenced. 26 These changes came into force on 1 October 2009 – announcing the amendments the Department for Communities and Local Government said:
Housing Minister John Healey has announced a change to the court rules coming into effect on 1 October. Lenders will have to inform local authorities when they commence repossession action against homeowners in their area. The change will mean that local authorities can take action to help those at risk of losing their home rather than waiting for homeowners to make contact. The government has written to all council leaders to say that when they hear from a lender that a resident is facing repossession they should make contact and offer help and advice. Help could include referring them to free debt and legal advice, offering assistance with making benefit claims for Support for Mortgage Interest or assessing t hem for the mortgage rescue scheme. 27

CLG has also issued non-statutory guidance to local authorities on potential courses of action to take when notified of repossession action by a lender. A copy of this guidance is accessible online. 28 Repossession and intentional homelessness In implementing their duties toward homeless households under Part 7 of the 1996 Housing Act local authorities are obliged to have regard to the Homelessness Code of Guidance for Local Authorities which is published jointly by the Department of Health and CLG. The latest version of the Code was published in July 2006. In August 2009 CLG published a supplement to the Code which provides guidance on how they should exercise
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26 27 28

HC Deb 22 October 2008, c10WS Civil Justice Council, New Pre Action Protocol Launched for Mortgage Possession Cases, Press Notice, 22 October 2008 http://www.justice.gov.uk/civil/procrules_fin/contents/parts/part55.htm#IDALUI5B http://www.communities.gov.uk/news/corporate/1346541 CLG, Lender notification of repossession proceedings to local authorities, September 2009

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their homelessness functions and apply the various statutory criteria when considering whether applicants who are homeless, having lost their home because of difficulties in meeting mortgage commitments, are intentionally or unintentionally homeless. 29 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:
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. 30

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. 31

3.4

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. 32 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
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30 31 32

CLG, Homelessness Code of Guidance for Local Authorities: supplementary guidance on intentional homelessness, August 2009 Preventing Repossession Fund, press release at info4local.gov.uk HC Deb 26 June 2009 col 1198W “More homes at risk as mortgage rescue fails”, Guardian, 30 July 1992

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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 aimed to assist up to 6,000 households over the next two years. (The Government estimated that this enhancement, by preventing this number of households from being repossessed, wouldl have a monetised benefit of £390 million.) 33 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.

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. 34

On 22 October 2008 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 2008 and also that the scheme would be enhanced to cover vulnerable families at risk of repossession because of additional loans secured on their home. 35 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”; 36 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.” 37 This is relevant only to the Mortgage to Rent rescue scheme.

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“Homeowners Support Package: Impact Assessments”, Department for Communities and Local Government, September 2008, pg 19 “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 c1120W

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3.5

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. Under the scheme, those eligible can defer the interest on their mortgage payments for a period of time. A press notice from HM Treasury on 10 December 2008 set who qualifies for this assistance:
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; * 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. 38 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.
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HM Treasury, “The Homeowner Mortgage Support Scheme”, 10 December 2008

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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. 39

Full details on the scheme can be found on the Department for Communities and Local Government’s website. It was reported after the April 2009 announcement that the larger banks taking up the scheme were those that are owned or controlled by the state, and that those outside of Government control have not taken part. 40 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. 41

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The impact of Government policy

An evaluation to date As noted in the introduction to this note, the Council of Mortgage Lenders has attributed its revised forecast on repossessions over 2009 (down from 75,000 to 48,000) to historically low interest rates, increased lender tolerance and Government rescue schemes. 42 There is a correlation between rising unemployment and repossession rates but this appears to have been “cushioned” by low interest rates.

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41 42

HC Deb 21 April 2009 5WS “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 CML slashes repossession forecast, 12 November 2009

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There is a view that lessons from the recession of the early 1990s have been learnt and that lender forbearance has been crucial; there is little point in lenders pursuing repossessions and releasing a number of properties onto an already depressed housing market. The mortgage rescue scheme has received criticism that it is falling short of the Government’s target for helping people stave off repossession. 43 The number of households accepting an offer made through the scheme from January to September 2009 was 92, with 74 of that number being accepted in the April-June period. In response to the slow start to the scheme noted in earlier figures, in May 2009 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 expressed disappointment with how the scheme had operated so far. 44 Shelter would like to see the rescue schemes simplified and the funding extended. 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. 45 On 9 December 2009 John Healey revealed that only 15 homeowners had had need to make use of the formal Homeowners Mortgage Support Scheme, however, many more households have negotiated flexible repayment packages with their lenders. According to lenders and money advice agencies both the Mortgage Rescue and HMS schemes have been key in encouraging home owners to seek early help, enabling them to reach agreements with their lenders and to stay in their homes:
Mr Healey also published new figures that show lenders are going that extra mile to ensure repossession is always a last resort and that thanks to backstop schemes supported by Government or put in place by lenders themselves thousands of families are receiving crucial help to make their monthly mortgage payment affordable until their income recovers. 135,000 families now have formal repayment agreements on a flexible basis, 74 per cent more than a year ago. Today's figures show that 6,000 of these are on terms equivalent to the Homeowners Mortgage Support (HMS) scheme standard and only 15 have so far needed the formal backstop of the HMS scheme. The Pre Budget Report also confirmed that thanks to the Government's comprehensive package of support for people struggling with their mortgages over 330,000 families have been helped so far during the recession. This includes tighter rules so repossession is always a last resort, tougher tests for lenders in court so they must prove they have exhausted every possible option before taking repossession action, £130m for debt and advice services and the targeted schemes such as Mortgage Rescue and HMS. 46

Research undertaken by the Chartered Institute of Housing’s consultancy arm, ConsultCIH, which was published in October 2009, looked at hundreds of repossession orders made in

43

44

45 46

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 CLG press notice, “Action by government and lenders keeping families in their homes,” 9 December 2009

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2008. 47 The research found that many households are in denial about losing their homes. Conversely, others believe the loss of their home is a foregone conclusion by the time their case gets to court. Consequently only half of households facing repossession actually attend their court hearings. The research also found that the letter of the pre-action protocol is being followed more than the spirit, and that judges are not being sufficiently proactive in seeking clarity and depth in the actions undertaken by lenders. The Director of ConsultCIH supports the extension of quality housing advise services:
In general housing advice services need to become more widely available to help people make the right decision for them in the first place – not just when things go wrong. We also need to start planning now for when the housing market picks up and interest rates start to rise. This is when homeownership will again become unaffordable for many marginal homeowners and it is presumptuous to assume that the need for good housing advice is only a temporary measure. 48

Joint research by AdviceUK, Citizens Advice and Shelter (published in December 2009) also found that a significant number of lenders are failing to comply with the pre-action protocol, particularly sub-prime lenders. 49 Future policy developments There is concern amongst advice agencies that when the markets begin to recover and interest rates rise again lenders may adopt a more aggressive approach to households in arrears. This could be particularly problematic for mortgagors who have benefitted from very low rates of interest on interest only mortgages but who have not taken account of the need to organise a repayment vehicle. It is clear that in some cases lender forbearance may be simply delaying or, at worst, exacerbating the problem. Improved financial help Lenders and advice agencies have called for improvements to the scope and timing of SMI. The attempt to encourage people to take out Mortgage Payment Protection Insurance (MPPI) is widely felt to have failed 50 – there is some support for the development of a new, unified form of housing assistance to replace the current Housing Benefit (not available to home owners) and SMI systems with a comprehensive tenure neutral safety-net. Professor Steve Wilcox of the University of York has carried out research into how safety nets for home owners could be improved by introducing a Sustainable Home-Ownership Partnership (SHOP) alongside a Housing Tax Credit:
SHOP is designed to provide pooled funding which can be accessed by borrowers in order to manage clearly delineated circumstances which have the potential to lead to mortgage arrears and possession. Under SHOP both ISMI and private insurance would be reconfigured into a single scheme, to which lenders and government as well as borrowers would contribute. ...A Housing Tax Credit could complement SHOP by protecting home-owners who suffer a reduction in income without becoming unemployed as well as providing work incentives for unemployed home-owners. 51

47 48 49 50 51

ConsultCIH, Analysis of Housing Repossessions in the South West, 2009 CIH press notice, 16 December 2009 Turning the Tide? December 2009 Take-up of MMPI did not achieve its 55% target. Developing Safety Nets for Home Owners, Steve Wilcox, Mike Dailly, Mark Stephens, March 2008

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Professor Wilcox is investigating the potential for a Housing Tax Credit with the Department of Work and Pensions. Flexible tenure There is also support for a more flexible approach to take account of market changes, for example, flexible ownership models that enable owners to staircase up and down as their income levels change. FSA regulation As noted above, regulation of lenders, particularly sub-prime lenders, is viewed as key by the Government:
But I also remain concerned that a disproportionate number of repossession cases come from specialist lenders. That is why it's vital that the FSA's tougher regulations for lenders are introduced as quickly as possible - to ensure all borrowers are treated with the same tolerance and understanding, regardless of who their lender is. These measures combined will ensure that in all cases, repossession remains the last resort. 52

The Treasury published Mortgage Regulation - a consultation paper, in December 2009 which sets out proposals to:
• • • extend the scope of FSA regulation to include second-charge mortgages; extend the scope of FSA regulation to include buy-to-let mortgages; and protect borrowers when lenders sell on mortgage books to third parties.

The consultation period ends on 15 February 2010. An FSA discussion paper published in October 2009 described some of the changes planned to assist mortgagors whose lenders who have, to date, not exercised forbearance:
7.5 It is clear that many firms have not exercised forbearance but moved quickly to repossess properties. We propose to consult on converting what is currently guidance on forbearance in the mortgage rulebook into binding rules. Therefore, instead of suggesting the range of tools that could be used to help borrowers in arrears, we will prescribe a non-exhaustive list of tools that firms must employ to help consumers in arrears, which will include the various government schemes put in place to help borrowers. 7.6 This change should help ensure that borrowers in financial difficulties are treated fairly and are offered a range of solutions to help them to manage their way out of arrears. Additionally it will also address a concern identified by our thematic work; the impact of securitisations on the treatment of customers in arrears. Although the review did not identify clear evidence of actual consumer detriment, some lenders told us that they felt constrained in the options they could offer to distressed borrowers due to restrictions set out in securitisation covenants. By making it explicit in the rules that firms must, at a minimum, be prepared to deploy a particular range of hardship tools, we shall make it much more difficult for them to conclude securitisation deals that are at odds with their duty to treat customers fairly. 53

52 53

CLG press notice, “Action by government and lenders keeping families in their homes,” 9 December 2009 FSA, DP09/3, Mortgage Market Review, October 2009

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Proposed FSA regulation of new lending should also have an impact on limiting the number of sub-prime mortgages offered in future. Some commentators have questioned whether the FSA is equipped to carry out the extensive enforcement that will be required if these proposals are carried forward. Review of mortgage law & the “Horsham loophole” This area is largely governed by common law in addition to the Administration of Justice Act 1970. Shelter has called for an early review of mortgage law with a view to giving courts more discretion over whether or not to grant an order for possession in the event of default by the mortgagor. The Ministry of Justice (MoJ) issued a consultation paper on 29 December 2009, Mortgages: power of sale and residential property, 54 in which it is seeking views on proposals “to amend the law in relation to residential owner-occupier mortgages to ensure that such properties cannot be sold without either a court order or the homeowner’s consent.” These proposals have been drafted in response to a specific 2008 High Court decision in the case of Horsham Properties Limited v Clark and Beech, 55 the brief facts of this case, which attracted a good deal of media attention, and the Government’s response, are explained below:
The case revolved around the mortgage lender’s use of particular contractual and legal remedies when the borrower was in arrears on mortgage payments. Of particular media interest was the lender’s use of its power of sale, whereby the property was sold to a third party to pay off the mortgage debt. According to the property law of England and Wales, and to the terms of the mortgage contract in question, the lender was able to do this without seeking a court order of any kind, and did not seek to obtain physical possession of the property before it was conveyed to the buyer. Horsham did not change the law in this area. In addition, the mortgage in question in Horsham was a buy to let mortgage, under the terms of which the borrowers were not permitted to live in the property themselves. Further, the borrowers continued to live in the property for a substantial period of time without making payments. This was not a case of a mortgage taken out for the purpose of funding an owner-occupied family home. However, in the light of the concerns expressed about the case in Parliament and the press, the Justice Secretary ordered an inter-departmental review by officials of the protections afforded to borrowers in arrears when lenders are pursuing recovery of the debt, including the exercise of the power of sale. The review concluded that the outcome of the Horsham case did not pose a threat to homeowners. It recommended that no immediate legislation was necessary in relation to the powers of lenders, but legislation to prevent a potential future occurrence of problems could be beneficial. Following consideration of these findings, the Government decided that a consultation should be held on proposals to restrict the exercise of the power of sale in residential owner-occupier cases. The intention was to close what had become known as the ‘Horsham loophole’. This decision was announced in the Consumer White Paper published in July 2009, which stated that “[w]e also intend to consult shortly on proposals to amend the law to ensure that owner occupied homes cannot be sold by lenders without taking court proceedings.” 56

54 55 56

MoJ, Consultation Paper CP55/09 [2008] EWHC 2327 (Ch) MoJ, Consultation Paper CP55/09

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Additional information can be found in the consultation paper – the consultation period closes on 28 March 2010.

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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. 57 The Council of Mortgage Lenders has urged people to be wary of such schemes 58 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 conditions. 59 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. 60 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. 61 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. An interim regulatory regime came into force on 1 July 2009, with a full regulatory regime to be put in place during the second quarter of 2010. 62

57 58 59 60 61 62

“Housing sale and rent-back sector commits to new code of practice”, Independent, 18 February 2008 Council of Mortgage Lenders’ mortgage guides “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

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