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Memorandum from The Council of Mortgage Lenders (CML) (CRED 30)
Executive summary
Mortgage market developments post-credit crunch
· The mortgage market has become dysfunctional, and this underlies the problems the government's housing policies are designed to address. It also puts in place a limit on the effectiveness of those policies in the absence of effective measures to promote a fully functioning mortgage market. · The
· Demand in housing and mortgage markets has also been dropping away as consumer confidence has ebbed and perceptions of likely future falls in house prices have encouraged a cautious attitude.
What more needs to be done?
· Given
the above conditions, efforts to maintain housing supply targets, promote the
viability and activity of housing associations and to protect homeowners may be
of limited effect unless the underlying problems affecting the funding of the
mortgage market are addressed. The
Housing supply targets
· The
commitment of the Council of Mortgage Lenders (CML) members to all tenures
enables the CML to look at housing issues in the round − not simply
focussing on home ownership. · The government should update its long- and shorter-term projections as to sustainable levels of home ownership in the light of current market difficulties and likely longer-term trends in the post-recession environment. · Government targets for increasing housing supply are unlikely to be met within projected timescales given current financial and economic difficulties.
Social housing and low-cost home-ownership targets
· While the National Affordable Housing Programme is currently on track, new-home starts will tail off rapidly given the difficult market conditions and constraints on housing association funding due to the credit crunch. · Lenders are increasingly concerned that borrowers accessing shared ownership should have a stake in the property rather than borrow 100% of their share. Demand from borrowers for this product is also falling away due to uncertainty over house prices. · The current development model of cross subsidising development for social rent from open market sales is not deliverable in present circumstances and risks prejudicing the viability of some developing housing associations. Government could sanction a move towards a new model focussed on building for market, intermediate and social renting, with appropriate levels of grant and/or other support.
The private rented sector
· The private rented sector should not be neglected in discussions about housing supply and tenure. It has a vital and expanding role in the tenure mix. · The Rugg review of private rented sector housing, commissioned by government, provides a sensible focus for future development of the private rented sector based on incentivising investment by both large and small landlords through tax and other measures and avoiding excessive regulation.
The financial viability and ongoing business of housing associations
· The CML welcomes the establishment of the Tenant Services Authority (TSA) and is in close dialogue with the TSA and the Housing Corporation (HC)to ensure that heightened risks to housing association financial viability are identified and addressed. · There is a need to ensure that the TSA and the new Homes and Communities Agency (HCA) work together effectively to ensure both financial viability and sustainable business growth in the current challenging times.
Measures to help existing and prospective homeowners affected by the credit crunch
· Lenders see repossession as a last resort. All first charge lenders are subject to regulatory rules and treating customers fairly principles overseen by the Financial Services Authority, industry guidance on arrears management, consumer information on what to expect during the collections process if arrears build up, and a pre-action protocol on possession cases. These measures provide a series of checks and balances to help existing homeowners in difficulties. · We welcome the reforms of Income Support for Mortgage Interest to be introduced in January. However, the changes should be made permanent, and need to be extended to more vulnerable borrowers who still do not have an effective safety net. Coverage for around 10,000 potential claimants does not go far enough in an environment of rising unemployment. · We are working closely with the government on development of its mortgage rescue scheme which is to be launched in January. Once the scheme is up and running the government should consider expanding the scheme to help more households. · The government should use the current stamp duty holiday to consider wider long-term reform of stamp duty, which is a barrier on transactions and mobility. · We welcome the government's help for first-time buyers through increased shared equity schemes. However, the current proliferation of schemes needs to be simplified to ensure maximum participation by consumers and lenders.
Introduction
1. The
CML welcomes the opportunity to submit evidence to the Communities and Local
Government (CLG) select committee. The
CML is the representative trade body for the residential mortgage lending
industry. Its members account for 98% of
the assets of the Mortgage market developments post-credit crunch
2. The mortgage market has become dysfunctional, and this has significant implications for the government's housing policies. Therefore, an analysis of current mortgage market conditions is necessary, together with an indication of the scope of measures needed to promote a fully functioning mortgage market. Without such measures, the actions of CLG can, even if well intentioned and carefully targeted, be only peripheral to the key consequences of the credit crunch and their impact on the broader economy. 3. The
global financial market turmoil, triggered by deep concerns about the viability
of sub-prime loans in the 4. The
dislocation of wholesale funding markets, in particular securitisation, has
adversely affected the availability of funds to support residential mortgage
lending. Securitisation markets expanded
strongly between 2000 and 2007, driven by investors' search for yield and the
increasing ability of issuers to create financial products tailored to
individual risk profiles. 5. The effective closure of these structured finance markets to UK mortgage lenders is one manifestation of the more generalised and global hoarding of liquidity by banks and other institutions, associated with concerns about the value of mortgage-related assets, the need to refinance maturing wholesale funding, bad debts and solvency of banks and other leveraged institutions. 6. The
majority of the problems being experienced in the 7. The consequence in the last 12 months, and ongoing, has been significantly fewer funds to underpin new mortgage lending, higher funding costs for mortgage lenders, and higher prices for and/or reduced access to finance for many borrowers. Despite the announcement of the bank recapitalisation programme, these trends will not reverse overnight to re-create funding capacity at near 2007 levels. 8. Unfortunately, while the slowdown in our housing and mortgage markets in early 2008 reflected the shortage of mortgage supply, more recent evidence shows that demand has been dropping away because of other factors. Ability to pay, perceptions over job security, prospects of further falls in house prices, and falling consumer confidence have all started to impact on households' appetite to buy. Anecdotal evidence also suggests that demand has suffered because of potential buyers' perceived or actual difficulty obtaining mortgage finance. In other words, the reduced availability of mortgages has led some buyers to give up looking. 9. While
these supply and demand trends persist, real damage is being inflicted on the Chart 2: Number of mortgage approvals 10. Mortgage approvals for house purchase are already running at around one third of last year's levels (see Chart 2), and it seems likely that 2008 will mark a post-war low for property turnover, relative to the size of the private sector housing stock (owner-occupied and private rental). Current indications also suggest that first-time buyer numbers, strongly affected by lenders' imposition of lower LTVs requiring larger deposits, may struggle to hit 200,000 this year - the lowest level for at least 40 years. 11. House prices are already down around 15% from last year's peak, and could fall by 25% peak-to-trough in the view of the Nationwide's Chief Executive in a recent interview with the BBC. 12. This scale of fall would precipitate the return of widespread negative equity, with 1.7 million borrowers affected according to Standard & Poor's[3]. Under such circumstances, significant numbers of households are also likely to find that their positive equity cushion has shrunk considerably or become negligible, both discouraging house moves further and reducing households' coping strategies should they experience an adverse change in circumstances such as unemployment or sickness. It also diminishes an important potential source of funds to help first-time buyers pay their deposits as home owning parents have become a key source of help with their offspring's deposits. 13. Indeed, while financial market uncertainties continue, there is a strong likelihood that property sales will continue to weaken. Distressed sales may account for a higher proportion of turnover, raising the prospect of house prices "over-shooting" in a downwards direction. 14. Recent months have also seen a surprising weakness of remortgage activity (given the large numbers scheduled to come off various short-term fixed rate deals), while the latest Bank of England figures revealed an unexpectedly sharp reversal in housing equity withdrawal. All of these indicators illustrate how borrowers are being adversely affected by the more restricted product offers now being made by mortgage lenders, squeezed household finances and a general ebbing away of confidence. 15. Given an ongoing shortage in funding sources and scale, efforts to boost or even maintain housing supply targets, to promote the viability and activity of housing associations and to assist homeowners will necessarily be of limited effect if dependent on private finance. The key issue remains that of unlocking the proven potential of the mortgage market to help the government to achieve its housing policies in this post credit crunch environment. What more needs to be done? 16. The government's announcement on 8 October of comprehensive and radical measures to support the financial system is welcome. The proposed measures address both the need to strengthen the capital position of banks and building societies and to ensure that eligible institutions have sufficient access to short and medium term funds. The co-ordinated decision by the Monetary Policy Committee to lower official short-term interest rates by 1/2% was designed to further bolster confidence. And it will be helpful if this is followed by further interest rate cuts sooner rather than later. 17. The tripartite authorities now have a clear direction of travel, and we believe that the bold measures taken were necessary to limit the downside risks to the financial system, the housing market and the wider economy. 18. A resumption of wholesale market funding continues to be the key to avoiding a vicious circle developing in the mortgage market where restricted credit availability leads to falling house prices, heightened credit risk and the further loss of investor confidence and supply of funding. 19. We believe that a further policy measure is required, specifically aimed at maintaining the supply of mortgage credit. The government showed support for the objective of maintaining the flow of mortgage credit in the Treasury statement of 13 October on financial support for the banking system. This outlined the agreement whereby banks receiving support would maintain "over the next three years, the availability and active marketing of competitively-prices lending to homeowners...at 2007 levels." We await further details on how this is being interpreted by the government, and how it will impact on the commercial position of those institutions in the short term (and it cannot guarantee that consumers will want to borrow at similar levels as we discuss above). 20. We
would advocate an additional scheme available to lenders across the board,
including those that have not required government support. This could take the form of an additional
system of guarantees specifically aimed at new mortgage lending, which was
mooted in the interim 21. Alternatively,
it would be possible to implement a policy along the lines of that announced
this year in 22. We
would welcome such a measure were it contained in the final Housing supply targets 23. While
our members have a particularly strong interest in home ownership, we recognise
that - despite its many benefits − the tenure is not for everyone all of
the time. As mortgage lenders,
therefore, they support all housing tenures in the 24. The
commitment of our members to all tenures encourages the CML to look at the
economics of housing market issues "in the round", not just home
ownership. As a trade body, we
understand that 25. In this regard, we see some benefits in narrowing the divide between home ownership and other tenures by promoting the so-called intermediate tenure where there is genuine demand. There is potential for enabling households to increase or lower their degree of home ownership according to personal circumstances[4]. Over the longer term, there may be scope for expanding low-cost home ownership, though such ownership must be sustainable over the economic cycle and particular caution should be exercised over promoting such an option at a time of rapidly falling house prices. 26. The government should update its long- and short-term projections as to sustainable levels of home ownership in the light of current market difficulties and likely longer-term trends in the post-recession environment 27. Although
housing aspirations fluctuate over time, broadly speaking reflecting the
prevailing state of the housing market, the preference of the vast majority of 28. For over 150 years, building societies and latterly other mortgage lenders have acted to help households realise their aspiration for home ownership. But, over the past decade and more, economic and social change has presented an ever more challenging environment. 29. Long before the credit crunch, the world had become a much less certain place for many (perhaps the majority of) individuals, with, for example, more widespread experience of relationship breakdowns, job changes, temporary unemployment, inadequate pension arrangements and credit problems at some point in our adult lives[5]. 30. In February 2007, the Communities and Local Government department issued a research report[6] acknowledging that higher rates of home-ownership had and would entail drawing in more financially marginal and vulnerable households with a consequent shift in the risk profile of the home-ownership base. 31. As people's circumstances become more diverse, complicated and subject to financial shocks, lenders have sought to financially include affected people by developing extensive new ranges of mortgage products. These have included remortgages, offset and current account mortgages, buy-to-let products, self-certified, adverse credit products, lifetime and Sharia-compliant mortgages. 32. For
much of the past decade, strong and continuous growth in the wider economy and
household incomes, allied with a chronic under-supply of housing provision,
meant that house prices also rose strongly.
While the government has now recognised the 33. It has however suffered a severe setback as a result of the recent sharp cutbacks in new-build levels.[7] A number of forecasters are now suggesting that private housing starts may remain in the 100-120,000 range throughout the 2008-2010 period. Given such an outturn, the government's targets for longer-term net additions to the housing stock would necessitate a historically unprecedented recovery profile. This seems unlikely given that concerns have already started to appear about the loss of job skills in the construction sector. The inevitable conclusion would seem to be that annual targets will need to be revisited. Social housing and low-cost home-ownership targets
34. In terms of the government's house building targets for social housing, the funding market turbulence and housing market downturn has not had full impact yet on the supply of new affordable housing. The HC recently reported that the National Affordable Housing Programme (NAHP) is on track (as at the end of quarter 2 2008/9). However, it is clear that an impact on starts is showing and a recent survey of housing associations saw 54% having frozen their development pipelines which previously helped to fund social housing projects. This puts the Comprehensive Spending Review targets of last autumn (45,000 social homes a year by 2011) in doubt. 35. The delivery mechanisms for affordable housing put in place by government included extending grant funding to Arms Length Management Organisations (ALMOs) and developers, allowing local authorities to build through Local Housing Companies (LHCs) and encouraging housing associations to 'sweat their assets' and cross subsidise from build for sale. 36. The fundamentally changed market conditions coming out of the credit crunch mean that these mechanisms will no longer be as effective in delivering more affordable housing in the short to medium term. It seems clear, in particular, that there is a need for a new model and that the continual reduction of grant rates has created an over reliance on cross subsidy for both the delivery of affordable housing but also the business operating models of associations. 37. A shift to increased grant rates and from open market sales to rental is required urgently if there is to be an effective short to medium term solution to maintaining momentum in the delivery of new supply of social housing. Flexibility of tenure as well as increased public funding are crucial factors in ensuring that action taken to respond to the current crisis does not undermine the longer-term viability of the affordable housing sector and mobility within the wider housing market. 38. The housing association sector and others are already working on different models of delivering affordable housing. The CML remains keen to work closely with the sector and the new Homes & Communities Agency at an early stage to ensure that any new model does not undermine the existing (and still hugely important) funding structures for the sector. 39. On low-cost home-ownership, the CML is still being asked to persuade its members to increase appetite for shared ownership lending in this post-credit crunch environment. This is ultimately a commercial decision for members. However, it should be noted that lenders increasingly feel that borrowers should have a personal financial stake in the property. Housing associations with large numbers of unsold shared ownership properties report that the demand is falling as the uncertainty caused by house price falls continues. 40. Is focusing on increasing activity around low-cost home-ownership an appropriate response at present? The private rented sector (PRS)
41. While the PRS is not specifically mentioned in the terms of the Inquiry, it should not be neglected in any discussion concerning housing supply and tenure. 42. The PRS has, over the past 10 years, been the fastest growing tenure in
the 43. Growth in the PRS has been driven by several factors. These include: · De-regulation of the sector and notably the introduction of the assured shorthold tenancy (AST). · Social and demographic changes including lifestyle changes, increased immigration, higher student numbers and more mobility. · The development of buy-to-let (BTL), which has financed a major expansion in provision plus improvement in standards in the PRS, which are now on course to converge with those of other tenures over time.
44. The PRS is now a very different sector to that which existed 30 years ago. Yet landlords still suffer from a poor reputation that is largely unjustified but which carries the threat of further well-intentioned regulation that risks stifling the investment and enterprise that has proved so successful. Those risks are significantly enhanced against the backdrop of the credit crunch, which has, in the short term, caused a downturn in investment by BTL investors unable to access suitable mortgage products or concerned at falling prices. Institutional investors to the sector have been similarly affected. 45. Within the context of the credit crunch, it is important that government takes appropriate market-led initiatives to encourage the continued growth in the PRS and to promote further improvements in standards, building on the successes of the last 20 years since the Housing Act 1988. 46. The Rugg review of private rented sector housing[8] is a decisive contribution to the discussions surrounding the PRS. Rugg makes some key points that the CML believes should shape government thinking as it moves to include measures relating to the PRS in the forthcoming housing reform green paper: · The PRS provides good levels of tenant satisfaction, and there is no evidence that larger corporate landlords score more highly in this regard. The sector needs both large and small landlords. · The emphasis in terms of regulation should be one of effective enforcement of existing powers (notably by local authorities) rather than on additional regulation (though Rugg does advocate non-prescriptive licensing as a means to assist the authorities in enforcing existing powers). · The existing Assured Shorthold tenancy is essentially fit for purpose. · Government should focus on providing tax and other incentives to both institutional and investors and individual landlords (including BTL landlords) to further expansion and raising of standards.
47. The CML believes that the Rugg review provides a positive focus for future government policy for the PRS. It is also, with its emphasis on investment, very relevant in the context of the credit crunch. The PRS is vital to any discussion about supply and tenure choices. The financial viability and ongoing business of housing associations
48. The CML welcomed the government's announcement that a new independent regulator ('Tenant Services Authority') would be set up with a separate housing and regeneration investment agency, the HCA. Transitional arrangements for the set up of the Tenant Services Authority (TSA) are progressing and the continuing dialogue with the CML and its members is encouraging. 49. The housing association sector is experiencing rapidly changing external conditions which have an impact on the risk profile of the sector. Although income streams from rented property are relatively secure there are some affordable housing providers who are more vulnerable because of reliance on receipts from sales to fund their development activity and in some cases their operating costs. 50. The current risks for some housing associations should not be underplayed, with the financial strain of unsold properties as well as reduction in the ability of housing associations to borrow likely to have a high impact. The HC is keeping a close watch on the sector and the next few months will be crucial in determining that the financial viability of the sector is maintained. 51. Action taken recently by HC to strengthen the focus of regulation on financial viability has been welcomed by the CML and lenders. The level of communication with the HC around current approaches to assessing viability and risk remains essential. 52. What still represents a significant risk in ensuring the financial viability of the sector, however, is how the TSA will work together with the Homes & Communities Agency (HCA) to ensure that the separation of investment and regulation is effective in ensuring the ongoing financial viability and sustainable business growth of the sector in challenging times with heightened risk. Measures to help existing and prospective homeowners affected by the credit crunch
53. Our
latest data released in August showed no surprises in terms of the number of
mortgage arrears and possession cases in the first half of 2008. However, while both have increased from their
low base, the vast majority of the 54. We
have maintained our forecast of 45,000 total possessions, while the industry
continues to strive to keep as many people as possible in their homes. But, there is at the same time upward
pressure on our forecast of 170,000 mortgages being three months or more in arrears
by the end of the year as a result of the worsening employment figures and
broader recessionary impacts. These
numbers remain small when seen in the context of the 11.74 million mortgages in
the 55. Our current arrears and possessions figures relate to first mortgages only, not to other consumer loans secured on property, and show: · There
were 18,900 possessions in the first half of the year, compared with 13,400 in
the second half of 2007, and 12,800 in the first half of 2007. The proportion of all mortgages on which
possession occurred was 0.16%, up from 0.11% in both the first and second
halves of 2007. The possession rate now
is similar to that of the late 1990s, but remains less than half the rate
experienced in the early 1990s. · The number of households with arrears of three months or more was 155,600 at the end of the first half of the year, up from 129,600 at the end of 2007 and 120,800 at the end of the first half of last year. The arrears rate stood at 1.33% of all mortgages, up from 1.10% at the end of 2007 and 1.02% at the end of the first half of last year.
56. Lenders must, and do, see possession as a last resort. Under FSA regulation, all CML members (first charge mortgage lenders) are committed to comply with the mortgage conduct of business (MCOB) rules, and the principle that possession is only taken where all reasonable steps to avoid it have been taken. 57. On 22 October the CML published industry guidance on arrears and possessions. The aim of the guidance is to give lenders a practical guide to the requirements, and examples of good practice against which they can benchmark their own policies and procedures. It is not a definitive statement of what lenders should do in each case because arrears management processes will differ between lenders depending on their business model and customer base, and depending on borrowers' behaviour and engagement to help themselves sustain their home ownership. The guidance is a further step in strengthening the robustness of existing practices, alongside the Civil Justice Council's pre-action protocol for court cases on possession also published on 22 October. 58. Our members have committed to a package of voluntary measures which include reviewing existing arrears management policies against the CML's guidance, providing information to borrowers to explain the process and implementing strategies for assisting borrowers coming out of initial deals. We are also continuing to work with the government, regulators and advice agencies to ensure that as much as possible is done to help borrowers who may be facing financial problems, and to manage arrears effectively. 59. We welcome the announcement of reforms to income support for mortgage interest (ISMI) next spring, where the waiting time for new claims is being cut from 39 weeks to 13 weeks, and the upper ceiling for the size of mortgage that will be met is being raised to £175,000. For eligible borrowers, these reforms will make it easier for lenders to exercise forbearance until benefit payments begin. 60. In a recent Prime Minister's Question Time, Gordon Brown indicated that the changes to ISMI would be introduced in January 2009. We believe that, given the increased likelihood of mortgage payment difficulties going forward, the government should implement the proposed changes as soon as possible - and apply them to outstanding claimants, not just new ones. 61. The two-year temporary nature of the recently announced reform should also be revisited in the light of the need to avoid a sudden withdrawal of benefit to claimants and to promote stability should the economic and market downturn prove to be more prolonged than currently predicted. 62. There also remains scope for government to consider widening ISMI even further to make entitlement an individual one rather than a household one since households dependent on two incomes will see their entitlement to ISMI heavily reduced or negated through means-testing. 63. We are also working closely with the government on the development of its mortgage rescue scheme, also to be launched in January, which is intended to help the most vulnerable households that may not be able to pay off their mortgage arrears and face homelessness. The scheme will enable borrowers to become tenants of housing associations in the home they have previously owned. 64. While this is welcome, it will help only
perhaps 6,000 households over two years.
Once the scheme is up and running the government could consider
expanding eligibility for the scheme to help more households. An obvious move would be to extend the scheme
to vulnerable households who find themselves with negative equity, as is
already the case in 65. For prospective households, the government's decision to increase the threshold for stamp duty on house purchase from £125,000 to £175,000 means that the proportion of borrowers who will not have to pay the tax when buying a home has risen from around a quarter to a half. However, there are geographical differences in the extent to which borrowers will benefit from the governments measures, as shown in the table below.
Note: Percentage of those buying on mortgage exempt from stamp duty at £175,000 threshold, based on transaction data for the first half of 2008
66. The Treasury predicted that the measure would cost more than £600 million. But we believe it may have based its calculations on the number of transactions in earlier years, when sales were much higher than is now likely in 2008/09. We estimate that the reduced number of transactions means that the cost to the Treasury will be approaching £300 million if the stamp duty holiday lasts for a year. 67. We would like the government to use the period of the stamp duty holiday to consider wider reform of stamp duty to remove the current 'slab' structure and replace it with a graduated tax that would prevent 'bunching' around the stamp duty thresholds. 68. We welcome the various government announcements of plans to provide more help for first-time buyers which include: · All first-time buyers with an income of less than £60,000 will have the opportunity to apply to buy a share of their home. · An allocation of £200 million for the HC to buy new properties on the open market, either for purchase by first-time buyers through the homebuy scheme or for social renting. · A new Homebuy Direct shared equity product available on selected new-build schemes.
69. Although these measures will have only a modest impact on the housing market, they do have the potential to widen choice for first-time buyers and Homebuy Direct does provide some protection against negative equity for buyers encouraged to use it. 70. These announcements mean that the government is now proposing a more logical approach to help for first-time buyers, providing assistance based on income rather than the occupation of buyers. The proposals will also remove the anomaly by which one group of less well-paid workers makes access to home-ownership more difficult for others earning similar salaries, but working in different jobs. 71. However, we remain concerned that the variety and complexity of low-cost home-ownership schemes dissuade both borrowers and lenders alike from participating. In addition, the schemes do not address the problem that accessing homeownership in some housing market areas is much more expensive than in others and it is not clear to what extent they will directly promote housing supply in the present environment.
A holistic approach
72. This response sets out the CML view on CLG targets and policy initiatives and contributes to an assessment of their relevance and effectiveness in a post-credit crunch environment. 73. Very importantly however, it highlights the importance of the credit crunch in causing a shortage of mortgage finance with consequent effects on both the housing market and broader economy. These factors are clearly interrelated. 74. The degree to which the CLG initiatives will achieve their objectives and the extent to which government will meet its own targets within an acceptable timescale depends very much on the restoration of confidence within the banking system leading to recovery of the mortgage market and a more positive outlook for the broader economy over the medium term. November 2008 [1] Crosby J (July 2008), Mortgage finance: interim analysis, HM Treasury [2] Goodhart C, Not the time to worry about moral hazard, Financial Times 18 September [3] Standard & Poor's RatingsDirect (30 July 2008), Risk Of Negative Equity For [4] See, for example, Anderson S et al, (February 2004), The CML mortgage market manifesto: taking the past into the future, CML [5] Samter P (February 2008), Fuzzy households, fuzzy tenures, CML [6] DCLG February 2007, Social Mobility and Homeownership: A Risk Assessment, New Horizons Research Programme. [7] Baker Tilly, Social Housing Vol 20 No 10 October 2008 [8] Rugg J. and Rhodes D. (October 2008) The Private Rented Sector: its contribution and potential, |