Mortgage Arrears and Repossessions by zhangyun


									                  Mortgage Arrears and Repossessions
                  Standard Note:    SN/SP/4769
                  Last updated:     9 June 2011
                  Author:           Robert Long & Wendy Wilson
                  Section           Social Policy Section

This note considers the position of homeowners facing mortgage arrears and potential
repossession of their property, Government response to the issue, and possible courses of
action for homeowners who are struggling with their mortgage payments.

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.

1       Introduction                                                                     2 

2       Advice for Constituents with Mortgage Arrears                                    3 
        2.1  General Advice                                                              3 
        2.2  Lenders’ obligations                                                        4 
        2.3  Financial assistance: social security                                       5 
               Pre-January 2009 System                                                   5 
               Changes from January 2009                                                 7 
               Changes in June 2010 budget & Spending Review                             8 

        2.4  Other financial and legal advice                                            9 
        2.5  Pre-Action Protocol                                                        10 
        2.6  Preventing homelessness: local authorities’ duties                         11 
               Civil Procedure Rules                                                    11 
               Repossession and intentional homelessness                                11 
               Preventing Repossession Fund                                             12 

        2.7  Mortgage Rescue Schemes                                                    12 
        2.8  The Homeowner Mortgage Support Scheme (HMS)                                14 

3       The impact of Government policy                                                 16 
               An evaluation to date                                                    16 
               Possible future policy developments                                      18 

4       Lenders’ obligations after repossession                                         22 

5       Private sector mortgage schemes: sale and rent-back                             23 

1        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. Legislation has been passed 1 to
strengthen the rights of tenants whose landlords have defaulted on their mortgages, for
further information see Library Research Paper, Mortgage Repossession (Protection of
Tenants etc) Bill (RP 10/05) and guidance produced by Communities and Local Government
(CLG), Guidance to the Mortgage Repossessions (Protection of Tenants etc) Act 2010.

     In force on 1 October 2010

In November 2009 the Council of Mortgage Lenders (CML) predicted that repossessions in
2009 would reach 48,000, this represented a significant reduction on its original forecast of
75,000. In fact CML members repossessed 46,000 homes in 2009. 2 The factors attributed
with limiting the number of repossessions, despite rising unemployment, included historically
low interest rates, increased lender tolerance (forbearance) and Government rescue
schemes. 3

The CML predicted that there would be 39,000 repossessions in 2010 (a reduction on its
previous forecast of 53,000). 4 In February 2011 it reported 36,300 repossessions by first-
charge mortgage lenders in 2010. 5 In 2011 the CML is predicting an outturn of 40,000
repossessions and 180,000 mortgages in arrears. However, uncertainties are highlighted
which may impact on these forecasts:

        Uncertainties clearly remain not only if interest rates rise, but also because
        of recent developments such as the reduction in the rate at which Support for
        Mortgage Interest is paid (down from 6.08% to 3.63%), the impact of changes to the
        court process in possession cases in the courts in Scotland, and the reduction in the
        price that will be paid for properties acquired under the mortgage rescue scheme
        delivered through local authorities. The CML will be monitoring developments closely. 6

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. 7

2       Advice for Constituents with Mortgage Arrears
2.1     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.

    CML Press Release, 11 February 2010
    CML reports a decline in arrears and repossessions, 12 August 2010
    CML, 24% fall in repossessions and 13% fall in mortgage arrears in 2010, 11 February 2011
    CLG, Survey of English Housing 2007/08, Table S315, Reasons for Mortgage Arrears

The same website also offers a free online budget calculator, which some constituents may
find useful.

The 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
On 24 November 2008 the then 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. 8

On 28 November 2008 the Financial Services Authority (FSA) wrote to the chief executives
of all mortgage lenders to ensure that customers facing arrears were treated fairly. The chief
executives had to communicate conclusions and any actions their firm proposed to take to
the FSA by 31 January 2009. 9

On 25 June 2010 the FSA set out strengthened rules to ensure there are proper protections
in place for vulnerable customers in arrears on their mortgages:

        The FSA has also confirmed its plans to make all mortgage advisers and those who
        arrange non-advised sales personally accountable. They will be required to
        demonstrate they are ‘fit and proper’, helping to clamp down on mortgage fraud and
        enabling the FSA to monitor individuals in the mortgage market.

        Customers in arrears must be treated fairly by firms and the following key areas have
        been confirmed;

        •    Firms must not apply a monthly arrears charge where an agreement is already in
             place to repay the arrears;

    “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

         •   Payments by customers in financial difficulties must first be allocated to clearing
             the missed monthly payments, rather than to arrears charges, which can be repaid
             later; and

         •   Firms must consider all options for borrowers. Repossessions should always be
             the last resort.

         A new rule has also been introduced requiring firms to record all arrears handling
         telephone calls and to keep the records for three years. 10

Lenders must also adhere to the Pre-Action Protocol which sets out clear standards that
judges expect of lenders bringing repossessions cases to court (see section 2.5 below for
more information).

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, income based
Employment and Support 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.

As noted above, assistance is available to people receiving Income Support (IS), income-
based Jobseeker's Allowance (JSA), income based Employment and Support Allowance
(ESA) or Pension Credit. The scheme is 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 Labour 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 11 , Schedule 2 to the Jobseeker’s Allowance Regulations 1996 12 ,
and Schedule 2 of the State Pension Credit Regulations 2002 13 . 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

     See FSA Policy Statement 10/9: Mortgage Market Review - Arrears and Approved persons - Including
     feedback to CP10/2
     SI 1987/1967
     SI 1996/207
     SI 2002/1792

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 their 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 SMI. Additionally, homeowners can continue to
receive SMI for the first four weeks after staring full-time work.

It is worth noting that in the last recession (early 1990s) only 25% of home owners in arrears
were eligible for SMI. Peter Williams, executive director of the Intermediary Mortgage
Lenders Association, writing for Roof Magazine, has said of the current system: “we have a
20th century benefit system operating in the 21st century”. 14

It is possible that people receiving SMI 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 (SIR) 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 summarises 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

     Roof, “No more NICE guy”, July/August 2008

         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. 15

Subsequently the Bank of England base rate was reduced to 0.5 per cent. However, the
then Government announced on 24 November 2008 that the SIR for this support would be
frozen at 6.08 per cent; 16 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. 17 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. 18

The new Government announced cuts to SIR as part of the June 2010 emergency Budget -
this is discussed on page 8 of this note.

Changes from January 2009
On 2 September 2008 the then 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 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. 19

There is a time limit on receiving 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 then 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
         income-related 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

     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
     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.

         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. 20

Changes in June 2010 budget & Spending Review
It was announced in the June 2010 Budget that from 1 October 2010 the standard rate of
interest (SIR) used to calculate SMI payments, frozen at 6.08 per cent since late 2008, would
be based on the average mortgage rate published by the Bank of England, which will initially
be 3.63 per cent. After that, changes to the standard rate will be triggered when the standard
rate and the Bank of England published average mortgage rate differ by at least 0.5 per cent.

Detailed information on this change can be found in Library note SN/SP/5818 Support for
Mortgage Interest: the standard rate from 1 October 2010.

The Department for Work and Pensions (DWP) estimated that just over half of claimants
would continue to have their eligible mortgage interest met in full following the change to the
SIR. In its Equality Impact Assessment on the change from the standard fixed interest rate
of 6.08 per cent the DWP stated:

         By setting the standard interest rate at the Bank of England published average
         mortgage rate (3.67% in April 2010), we estimate that just over half of all support for
         mortgage interest customers (around 115,000 people) will continue to have their
         eligible mortgage interest outgoings fully met by their benefit awards. Most customers
         receiving a shortfall under this arrangement (around 110,000 people) would still have
         the lion’s share of their eligible housing costs met by support for mortgage interest,
         creating only a relatively small level of arrears, and based on conversations with the
         Council of Mortgage Lenders we would expect lenders to demonstrate forbearance in
         the vast majority of these cases. 21

As part of the March 2011 Budget the Government announced the extension of the
temporary reduced waiting period for new working age claimants to access SMI (13 weeks)
and the increase in the limit on eligible mortgage capital to £200,000 up to January 2013.

A DWP research report published in November 2010 concluded that the temporary additional
SMI measures had been successful in avoiding repossessions but noted that there is scope
for improving delivery of SMI. The two-year cut off for JSA recipients will, the report suggests,
lead to these people “seeking to exit owner-occupation by selling their home, or ultimately
facing repossession.” The report concludes that the two-year period “may be too short a cut-
off period given the current state of the housing and labour markets.” 22

     HC Deb 6 November 2008 c703w
     Department for Work and Pensions, Equality Impact Assessment Support for Mortgage Interest, August 2010
     DWP Research Report 711, An evaluation of the January 2009 arrangements for Support for Mortgage
     Interest, 2010

A further evaluation of the January 2009 and October 2010 changes (published in May 2011)
noted that the rather less generous system was already having an effect on lenders’

         •   The October 2010 reduction in the SIR from 6.08 to 3.63% was detrimental to
             borrowers with many lenders reporting an increase in borrowers with shortfalls on
             their accounts.

         •   The communication by DWP, JCP and PDCS to recipients of SMI about the 2010
             SIR change was judged by lenders, money advisors and key players to be late,
             poorly expressed and counterproductive.

         •   Lenders are increasingly showing signs of reconsidering their approach to
             forbearance as arrears mount.

         •   The impact of the 2 year limit on SMI for JSA recipients is now materialising with all
             parties seeing little scope for any action other than repossession. 23

2.4      Other 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 Labour Government moved to strengthen the financial
advice available to mortgagors.

On 9 May 2008 the then 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
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. 24

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

     DWP Research Report 740, An evaluation of the January 2009 and October 2010 arrangements to support for
     mortgage interest, 2011
     CLG, “Strengthening support for home owners in current market conditions”, 9 May 2008

         third of that in 1991, when they reached 75,500—even with two million more
         homeowners today. 25

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. 26

On 22 June 2009 the then 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. 27 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. 28

An extension to the campaign to promote free help and advice was announced on
25 January 2010:

         ...the Minister today announced a new advertising drive and local mortgage help
         events in 56 repossession hotspot areas. And he also announced local promotion of a
         special helpline and website in an additional 30 hotspot areas with high risk of
         repossession. 29

It was expected that the new Government would not continue to fund the Financial Inclusion
Fund, which provides for around 500 advisors in England and Wales to give free advice,
beyond March 2011 30 however, £27 million of funding over 2011/12 was confirmed on
12 February 2011. 31

2.5      Pre-Action Protocol
On 22 October 2008 the then 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

         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. 32

     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
     CLG, John Healey extends Government help to tackle repossessions, 25 January 2010
     BBC, Debt advisors stop taking cases as funding ends, 1 February 2011
     BIS, Funding of debt advice programme secured, 12 February 2011
     HC Deb 22 October 2008, c10WS

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.” 33

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. For example, the submission of a claim for Support for Mortgage Interest (SMI,
see section 2.3 above) is now an event which requires a lender to actively consider delaying
issuing proceedings.

The Civil Justice Council began a review of the Mortgage Pre-Action Protocol (as part of a
review of all the approved pre-action protocols that relate to housing cases) in 2010.

2.6      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. 34 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. 35

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. 36

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
their homelessness functions and apply the various statutory criteria when considering

     Civil Justice Council, New Pre Action Protocol Launched for Mortgage Possession Cases, Press Notice, 22
     October 2008
     CLG, Lender notification of repossession proceedings to local authorities, September 2009

whether applicants who are homeless, having lost their home because of difficulties in
meeting mortgage commitments, are intentionally or unintentionally homeless. 37

Preventing Repossession Fund
In May 2009 the Labour 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. 38

These loans were to range from £1,000 to £3,000 per household, and to be capped at
£5,000. They were administered by local authorities. The following response to a
Parliamentary Question sets out how the funding was 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. 39

2.7      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. 40 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

     CLG, Homelessness Code of Guidance for Local Authorities: supplementary guidance on
     intentional homelessness, August 2009
     CLG, Press Release, “Preventing Repossession Fund”, May 2009
     HC Deb 26 June 2009 c1198W
     “More homes at risk as mortgage rescue fails”, Guardian, 30 July 1992

circumstances allow. Individual local authorities can provide more information about these

On 2 September 2008 the Labour 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, would have a monetised benefit of £390 million.) 41 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. 42

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. 43

Communities and Local Government produced a helpful booklet about mortgage rescue
schemes which can be accessed on the Department’s website, About the mortgage rescue
scheme: Government mortgage to rent. In the 2009 Budget the then Government
announced that it would be “widening the eligibility criteria for the Mortgage Rescue Scheme
so that households in negative equity are not excluded”; 44 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.” 45 This is relevant only to the Mortgage to Rent rescue

     “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

An evaluation of the mortgage rescue scheme and Homeowner Mortgage Support Scheme
(see section 2.8 below) was commissioned by CLG in 2009. The researchers published an
interim report on 23 July 2010. 46 The researchers reported strong support for the mortgage
rescue scheme but made some recommendations in terms of value for money for the

         There was wide support from both partners and borrowers for the Mortgage Rescue
         Scheme (MRS). It provides relief and security for borrowers facing homelessness and
         has aided market confidence. Between January 2009 and March 2010, 629 borrowers
         accepted an offer through the scheme. Over 20,000 households with mortgage
         difficulties have received free advice and assistance from their local authority. There
         was a widespread aspiration from partners for MRS to become a permanent feature of
         homeless prevention. 47

The new Housing Minister, Grant Shapps, confirmed that the mortgage rescue scheme
would remain in place but would be refocused to deliver improved value for money with a
reduction in the grant rate paid to housing associations and tighter caps on property price
and repair costs. 48 In October 2010 CLG was allocated a further £221 million to continue the
scheme until spring 2013.

Figures published on 10 February 2011 showed that the mortgage rescue scheme had
helped 4,247 households receive help and advice from their local authority in the last quarter,
with 2,015 homeowners having completed the full process since the scheme's launch in
January 2009. 49

The National Audit Office (NAO) published an evaluation of the mortgage rescue scheme on
25 May 2011. This report is critical of the scheme, arguing that in the early stages it did not
provide value for money. It is acknowledged that many of the defects have now been
addressed. 50

Information on the mortgage rescue scheme (including how to apply for it) can be found on
the Directgov website. 51

2.8      The Homeowner Mortgage Support Scheme (HMS)
During the debate on the Queen’s Speech on 3 December 2008 the then 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 could defer the
interest on their mortgage payments for a period of time. A press notice from HM Treasury
on 10 December 2008 set out who qualified 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;

      Evaluation of the Mortgage Rescue Scheme and Homeowners Mortgage Support: Interim report
     CLG Press Release, Grant Shapps outlines Government support for struggling homeowners, 20 July 2010
     CLG, Press Release, No room for complacency despite fall in home possessions, 10 February 2011
     HC 1030, Session 2010-2012, May 2011

         * 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

         * 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

The scheme was to be open for a window of two years, subject to review. 52

On 21 April 2009 the scheme was formally announced in a statement to Parliament by the
then Secretary of State. 53

Full details of the scheme can be found in a CLG leaflet, Guide to Homeowners Mortgage
Support. It was reported after the April 2009 announcement that the larger banks taking up
the scheme were those owned or controlled by the state, and that those outside of
Government control had not taken part. 54

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 were
maintained, giving an opportunity for homeowners to stabilise their finances.         The
disadvantages centred on the situation homeowners would be in on leaving the scheme: they
would 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. 55

As noted above, interim findings of an evaluation of the mortgage rescue scheme and HMS
were published on 23 July 2010. 56 The researchers found less support for HMS than the
mortgage rescue scheme:

         Support for Homeowners Mortgage Support (HMS) remains muted amongst lenders
         and advisors as it is seen as administratively burdensome, narrow in its applicability
         and potentially debt-inducing. Some lenders offer comparable forbearance schemes,

     HM Treasury, “The Homeowner Mortgage Support Scheme”, 10 December 2008
     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
     Evaluation of the Mortgage Rescue Scheme and Homeowners Mortgage Support: Interim report

         which can be more advantageous to borrowers and more widely available. Between
         April 2009 and March 2010, 32 borrowers were entered on to HMS arrangements by
         their lender, compared to over 30,000 borrowers who were entered on to lenders’ own
         concessionary forbearance arrangements.

         However, most partners consider HMS, alongside other Government measures, to
         have significantly influenced the extent of lenders’ own forbearance policies. Thus
         HMS has indirectly benefited many more borrowers than have been entered on the
         scheme. Partners wish to retain HMS until the threats to arrears and possessions from
         rising interest rates and unemployment have abated, although support for the
         scheme’s long term continuation is weak. 57

On 20 July 2010 Grant Shapps announced that the HMS would remain in place “as a
backstop scheme that may be needed if interest rates rise.” The scheme closed at the end of
the 2010-11 financial year. 58

3        The impact of Government policy
An evaluation to date
As noted in the introduction to this note, the Council of Mortgage Lenders attributed the
36,300 repossessions by first-charge mortgage lenders in 2010 – against an initial forecast of
53,000 – to historically low interest rates, increased lender tolerance (forbearance) and
Government rescue schemes. There is a correlation between rising unemployment and
repossession rates but this appears to have been “cushioned” by low interest rates.

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 received early criticism that it was falling short of the Labour
Government’s target for helping people stave off repossession. 59 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 at that point. 60 Shelter would like to see the rescue scheme simplified
and the funding extended. An Inside Housing article in August 2009 further reported that the
number of housing associations involved with the scheme meant that the capacity of the
scheme was limited; it also suggested that the majority of applicants could not afford the
shared equity option, potentially making the scheme more expensive than anticipated. 61

     CLG Press Release, Grant Shapps outlines Government support for struggling homeowners, 20 July 2010
     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

The problems experienced in the early stages have been confirmed in the National Audit
Office report of May 2011. However, as noted earlier, this report acknowledges that many of
the defects of the scheme have now been addressed. 62

As a result of CLG commissioned research published in July 2010, Evaluation of the
Mortgage Rescue Scheme and Homeowners Mortgage Support: Interim report, the new
Government said it would reduce the grant rate paid to housing associations under the
scheme and that councils will be able to offer the scheme alongside associations. Between
January 2009 and March 2010, 629 borrowers accepted an offer through the scheme.

On 9 December 2009 John Healey (then Housing Minister) revealed that only
15 homeowners had had need to make use of the formal Homeowners Mortgage Support
Scheme, however, many more households had 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. 63

The evaluation of mortgage rescue scheme and HMS published on 23 July 2010 also
referred to the small numbers assisted by HMS but there was agreement that these schemes
had significantly influenced lenders’ own forbearance schemes. The interim report concluded
that there was a case for continuing both schemes until the housing market has
recovered. The Mortgage Rescue Scheme continues but the HMS closed at the end of
March 2011.

Additional research commissioned by the National Housing and Planning Advice Unit,
Modelling and forecasting UK mortgage arrears and possessions (NHPAU): Summary, was
published on 20 July 2010. This research concluded:

         Lenders’ forbearance policies and more generous income support to those in
         difficulties with their mortgage appear to have had a notable effect in lowering
         possessions. It follows that changes to these policies would cause a significant
         increase in possessions.

     HC 1030, Session 2010-2012, May 2011
     CLG press notice, “Action by government and lenders keeping families in their homes,” 9 December 2009

DWP research published in May 2011, An evaluation of the January 2009 and October 2010
arrangements to support for mortgage interest, confirmed the important role played by the
extension of the social security safety net in preventing repossessions but also notes
“lenders are increasingly showing signs of reconsidering their approach to forbearance as
arrears mount.” The reduction in SIR will effect from 1 October 2010 is highlighted as an
issue as is the decision to limit to two years the period in which JSA claimants can benefit
from SMI. 64

The Labour Government said that over 330,000 households had received help and advice
with their mortgages with many using the dedicated mortgage help website launched in
September 2009:

         Nearly 88,000 people have gone to (external
         link) since its launch in September, over 26,000 of whom have used it to develop
         personal action plans tailored to their individual circumstances. This help has also
         proved valuable for those feeling the pinch after Christmas - over 17,000 people have
         visited the website since 1 January. 65

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
2008. 66 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 was
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 advice 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. 67

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. 68

Possible 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. In Modelling and forecasting UK

     This only affects new claimants after XXXXX
     CLG, John Healey extends Government help to tackle repossessions, 25 January 2010
     ConsultCIH, Analysis of Housing Repossessions in the South West, 2009
     CIH press notice, 16 December 2009
     Turning the Tide? December 2009

mortgage arrears and possessions (NHPAU): Summary the researchers forecast a rise in
repossession rates:

         Modelling of a wide range of economic scenarios suggests that it is likely that
         possession rates will rise in the next three to four years. Indeed very optimistic
         assumptions need to be made to avoid this. The combination of higher interest rates
         and weak growth in house prices in the short term would lead to a sharp rise in

The researchers call for an increase in house building “to make house prices more affordable
relative to household incomes and to dampen the cyclical trend in house prices to reduce the
risk of new crises.”

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 69 – 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.

The Treasury Select Committee’s 2008-09 inquiry into Mortgage arrears and access to
mortgage finance recommended:

         ...that the Government re–examine its longer–term strategy towards supporting
         homeowners in mortgage difficulties to ensure that adequate mechanisms to support
         homeowners are in place even once the current downturn has ended. A part of any
         review of strategy should be an examination of the adequacy of existing insurance
         models to protect mortgage holders against adversity and the potential of
         alternatives. 70

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. 71

Professor Wilcox has done some work to investigate the potential for a Housing Tax Credit
with the Department of Work and Pensions.

The National Housing Federation was critical of the Government’s decision to reduce the
Standard Interest Rate on which Support for Mortgage Interest is based:

         The Federation says that the decision will have a massive impact on disabled home
         owners across the country who receive the Support for Mortgage Interest payments.

     Take-up of MMPI did not achieve its 55% target.
     HC 767, Fifteenth Report of 2008-09, July 2009, para 80
     Developing Safety Nets for Home Owners, Steve Wilcox, Mike Dailly, Mark Stephens, March 2008

         All those affected will be at risk of falling into debt, as they struggle to keep up with
         their mortgage payments, falling into arrears, and eventually losing their home.

         Around 59,000 people with disabilities who use Support for Mortgage Interest
         payments are those with a range of health issues, who use it to help them pay
         mortgages on homes they have bought through outright sale. 72

The Treasury Select Committee’s 2008-09 inquiry into Mortgage arrears and access to
mortgage finance considered the use of a Standard Interest Rate and recommended:

         ...the Government should review the Support for Mortgage Interest (SMI) scheme as
         part of the Pre-Budget Report this autumn, and consider the costs of linking the
         scheme to either: a contribution-based Jobseekers Allowance or to the tax credits
         system. As part of that review the Government should examine: the payment of actual
         interest rates instead of the SMI standard interest rate, the issues surrounding second
         charge mortgages and what steps would be needed to lift the two year cap on SMI
         payments. 73

It is the Government’s intention, at least initially, to include Support for Mortgage Interest as
part of the Universal Credit:

         An appropriate amount will be added to the Universal Credit award to help meet the
         cost of rent and mortgage interest.

         We will consider whether changes are needed to the current approach to calculating
         help with mortgage costs to ensure it is consistent with Universal Credit principles. In
         the longer-term, we believe it should be possible to provide support more efficiently,
         and we will be exploring the full range of options. 74

Provision has been made for this in the Welfare Reform Bill which is currently proceeding
through Parliament.

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
Regulation of lenders, particularly sub-prime lenders, is viewed as a key factor in controlling

         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. 75

An FSA discussion paper published in October 2009 described some of the changes planned
to assist mortgagors whose lenders had not exercised forbearance:

     National Housing Federation, Press Release, 10 August 2010
     HC 767, Fifteenth Report of 2008-09, July 2009, para 99
     DWP, Universal Credit: welfare that works , November 2010, Cm 7957
     CLG press notice, “Action by government and lenders keeping families in their homes,” 9 December 2009

         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

         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. 76

As noted in section 2.2 of this note, the FSA issued its strengthened rules on 25 June 2010. 77
Some commentators have questioned whether the FSA is equipped to carry out the
extensive enforcement that will be required to make these rules effective.

In July 2009 the Treasury Select Committee published the report of its inquiry into Mortgage
arrears and access to mortgage finance. 78 The Committee recommended that regulation
should be extended to cover second charge mortgages. The Office of Fair Trading published
guidance on second charge lending in July 2009. 79 The Committee carried out a follow-up
inquiry in early 2010 – the written evidence submitted by a variety of organisations can be
accessed online. 80

The Treasury published Mortgage Regulation - a consultation paper, in December 2009
which set 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 ended on 15 February 2010.

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.

     FSA, DP09/3, Mortgage Market Review, October 2009
     See FSA Policy Statement 10/9: Mortgage Market Review - Arrears and Approved persons - Including
     feedback to CP10/2
     HC 767, Fifteenth Report of 2008-09, July 2009
     OFT guidance for lenders and brokers

The Ministry of Justice (MoJ) issued a consultation paper on 29 December 2009, Mortgages:
power of sale and residential property, 81 in which it sought 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, 82 the brief facts of this case, which attracted a good
deal of media attention, and the then 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

         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.” 83

Additional information can be found in the consultation paper – the consultation period closed
on 28 March 2010. At the time of writing there has been no further action.

Minimum financial threshold for orders for sale
On 5 February 2010 the MoJ issued a Orders for sale consultation paper to consider where a
debtor has defaulted on a judgment debt and has a charging order on their property, should
there be a minimum level of debt before the creditor can apply to force the sale of the
debtor’s property. Consultation closed on 30 April 2010.

4        Lenders’ obligations after repossession
When selling a property that has been repossessed the lender is obliged by FSA rules to:

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

•    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 84

Where the loan is not FSA regulated, similar obligations still apply. If the sale results in a
shortfall, the Mortgage Conduct of Business guidance 85 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.

5        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 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 were, until recently, unregulated (see below) and could 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. 86 The Council of Mortgage Lenders urged
people to be wary of such schemes 87 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. 88 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 back 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. 89 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. 90

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; a full regulatory regime took effect from 30 June 2010. The key
features of the framework of consumer protection for customers in the sale and rent back
market, scheme include:

     Council of Mortgage Lenders website, arrears and possessions section
     From the Financial Services Authority
     “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

         •   banned exploitative advertising and high-pressure sales techniques and prohibited
             the use of emotive terms like ‘fast sale’, ‘mortgage rescue’ and ‘cash quickly’ in
             promotional literature;

         •   a 14 day cooling-off period to give consumers more time to make decisions on sale
             and rent back;

         •   banned cold calling and prohibited firms from dropping promotional leaflets through
             letter boxes;

         •   rules to ensure consumers have a security of tenure for a minimum of five years;

         •   an affordability and appropriateness check across all sales to check that the sale
             and rent back deal is right for the consumer; and

         •   measures to ensure all risks are clearly signposted to the customer, via FSA
             literature and during the sales process. 91

See also: FSA Policy statement 10/8: Regulatory reporting for sale and rent back firms -
Feedback on CP10/4 and final rules

     FSA/PN/016/2010, FSA introduces further protections for sale and rent back customers, 29 January 2010


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