Westminster Hall
Tuesday 30 June 2009
[Mr. David Amess in the Chair]
Repossession and Mortgage Arrears
Motion made, and Question proposed, That the sitting be now adjourned.—(Mr. Blizzard.)
9.30 am
Dr. Vincent Cable (Twickenham) (LD): I am glad to have an opportunity to return to a subject on which I have introduced several debates in the last few years, including one six months ago and an Opposition day debate a year ago. The subject is immensely important because, of all the victims of recession and economic crisis, the people who have the greatest difficulty are those who lose not only their job, but their home, with all the consequences that has for family distress, local homelessness and the availability of emergency and social housing.
Two things have happened in the last six months that merit a return to the subject. First, the Government have introduced a wide range of measures, many of which we on these Benches, and indeed other hon. Members, called for. Citizens Advice, Shelter and other organisations acknowledged that such measures have had a positive impact. A lot has been done in the form of the pre-action protocol, the income support for mortgage interest scheme, the mortgage protection scheme and the home owners mortgage support scheme. I propose to review the progress of those schemes.
From the outset, I acknowledge that many initiatives have been introduced. However, some have been more successful that others. The mortgage protection scheme has not been particularly successful. I understand that the latest monthly figures on that so far rather embarrassing scheme were due to appear this morning; in fact, I think they were to be published at midnight. If I were a conspiracy theorist, which I am not, I would wonder why they did not appear before this debate. We shall no doubt hear how that scheme is progressing. There is a lot to report, and I hope that the Minister will be able to update us.
The other reason for reviewing the matter after a period of months is to take a rain check on what is happening with underlying trends as the schemes affect repossession and its consequences. In the short run, there is some good news in that the Council of Mortgage Lenders has revised downwards its estimate of the number of people whose homes are likely to be repossessed this year from, I think, 75,000 to 65,000. It acknowledges that that is at least partly because of the intervention of Government schemes. There is also a worry that although such schemes are stabilising the position in the very short term, we are storing up even bigger problems for next year and the year after.
In periods of recession, many things happen on a time lag; for example, unemployment lags behind the economy in general. Unemployment continues to rise, and the problems of repossession and arrears lag behind unemployment, so we are dealing with something that
has a very long fuse. Many people who deal with housing needs are worried that the problem will worsen badly next year and the year after. There are several reasons for believing that, one of which is that, even if the economy were to recover in a conventional sense, we would expect interest rates to rise. The fact that we have historically low interest rates—at least at base rate level—is one of things that is alleviating the problem at the moment. That is not something on which we can continue to count.
In addition, what seems to be happening through the pre-action protocol and other interventions is that many of the problems are being dammed up. Good practice and forbearance by the courts and mortgage lenders are rightly keeping some of the problems at bay, but eventually they will have to be dealt with. There will be a flood of repossessions when the delays are worked through. The Government’s schemes are temporary, and there is a concern about what will happen when that period ends.
Some interesting and slightly worrying analysis has been conducted by a Mr. Shepherdson, who is the former chief economist at HSBC. He believes that, taking all those factors into account, repossessions may well be running at more than 100,000 a year by 2011. There is a worrying level of delayed reaction. It is useful to have this debate at this stage because we can flag up that problem in advance and be clear about whether the Government have thought through their emergency actions and what has to happen next.
Bob Spink (Castle Point) (Ind): The hon. Gentleman has raised a crucial matter and he is absolutely right: it is timely that we consider it now because of the importance of a stitch in time. It is right to try to prevent avoidable repossessions—in the interest not just of individuals and their families, but of society as a whole. The Government have introduced some schemes, but pre-repossession protocol is only a discretionary requirement on judges. Does he agree with me and the content of early-day motion 34 in saying that we should encourage the Government to put that protocol on a statutory footing, so that we know it exists and judges will have to obey it? That will mean that we can avoid repossessions where possible.
Dr. Cable: I agree with the hon. Gentleman. I hope that I have signed his early-day motion. If I have not, I will do so. He makes a good point, to which I will come shortly. It is true that the majority of judges seem to be taking the matter seriously, but not all are. There are many gaps in the protocol, and I will elaborate on that in a few moments.
The other trend to which it is worth referring is the growth in negative equity. In a perverse way, that is helping to alleviate the problem of repossessions because, as long as banks and other lenders can see that there is negative equity, they are less likely to repossess property on which they will make a loss. In the short term at least, market forces alleviate the problem, but negative equity is a major issue that is growing.
Some interesting figures produced at the beginning of last week by the credit agency Fitch estimate that currently about 10 per cent. of home buyers are in negative equity, and in some parts of the country—the midlands and city centres such as Birmingham, Manchester and elsewhere—the figure is probably up to 30 per cent.
That is according to a narrow measure, which does not take any account of sub-prime lending. A wider measure that takes account of negative equity in relation to actual loans suggests that 15 per cent. of loans are in negative equity. That is at a time when the housing market has not yet adjusted to the level that many analysts and, I think, the Government themselves consider likely: a 30 per cent. fall from the peak. On average, we are currently talking only about a 20 per cent. fall. The market suggests that it is likely that negative equity could well increase in severity. When that happens, further problems will build up.
The figures that I have mentioned exclude the extreme problems of the sub-prime mortgage market, which we have in this country as well as in the United States. Analysis by organisations such as Shelter and Citizens Advice suggests that there are probably about 750,000 sub-prime mortgages out there. Some 20 per cent. of the borrowers of those mortgages are seriously struggling. I was horrified to see that 40 per cent. of all sub-prime borrowers resort to other forms of borrowing, such as credit cards, to maintain their mortgage payments. A big, subterranean arrears problem is building up which is not captured in the figures of the more reputable mainstream lenders.
David Taylor (North-West Leicestershire) (Lab/Co-op): I congratulate the hon. Gentleman on securing this important debate. Sub-prime lenders have been particularly active in recent years in encouraging people to exercise their right to buy in relation to local authority or housing association property. Many hundreds of people face repossession, and the irony, or even tragedy, is that the local authority whose house they once rented has no statutory obligation to rehouse them when they are repossessed because they are considered to be intentionally homeless, not having exercised due caution in applying for loans that they could not afford.
I agree with every word that the hon. Gentleman has said so far. Does he believe that the Government or local authorities could do more in such cases, which could add up to a couple of thousand of the 100,000 cases of people losing their home that he predicts in the next year or so?
Dr. Cable: The hon. Gentleman is right, and I will go on to deal with that a little more when I speak about the mortgage rescue scheme. The way in which the schemes are currently defined suggests that local authorities are required under the Government rules to house only those people who are homeless in a narrow sense. As he implies, and he is absolutely right, many councils apply homelessness rules in a restrictive way because of their desperate shortage of housing stock. Indeed, many people who bought their home from the council will now find themselves homeless, unable to live in the home that they once rented. That is a double tragedy that we have all seen in our constituencies.
Mr. Philip Hollobone (Kettering) (Con):
I congratulate the hon. Gentleman on his wonderful speech, which I am following closely. I am particularly grateful to him for mentioning the curse of negative equity. I want to highlight the fact that there are regional variations in
the figures. There are real problems in areas such as the east midlands, where my constituency is located. The Fitch numbers that he mentioned show that 15 per cent. of home owners in the east midlands, and as many as 24 per cent. in the town of Northampton, are suffering negative equity. In many such constituencies, unemployment is now 80 or 100 per cent. higher than it was 12 years ago, so there is real pain and hardship in blackspots across the country.
Dr. Cable: That is certainly true, and many of us are aware that unemployment levels have doubled or more in our constituencies—albeit from a low level, but the increase has been alarming. The hon. Gentleman is also right that towns and cities in the east midlands are often the most affected. He mentioned his constituency but I believe that Northampton, Peterborough, Derby, Nottingham and Lincoln, for reasons that are not totally clear, appear to be affected worse than other parts of the country. I would guess that there was a temporary over-supply, and that private developers were too aggressive and underestimated the potential extent of a downturn in the market. He is right to draw attention to local variations.
Perhaps I could proceed from that point to review each of the elements in the Government’s intervention one by one. As I acknowledged at the outset, they have cumulatively had an impact and have generally been welcomed by people who deal with homelessness and the consequences of repossession.
The pre-action protocol was something that my colleagues and I specifically called for more than a year ago. I recall asking the Prime Minister about it in the Chamber. The Government have delivered a programme that gives the courts guidance to ensure that mortgage lenders take proper account of the circumstances of the borrower. It requires lenders to look at other options, involves financial advice and treats repossession as a last resort.
So far, there are some positive indications about the operation of the programme. The majority of judges appear to be taking it into account. There is feedback from a survey done by Shelter and Citizens Advice that more than half the mainstream lenders have adjusted their lending behaviour to take account of the improved court procedure, although, regrettably, only 20 per cent. of sub-prime loans invoke such a response. Having said those positive things about what has happened so far, it is fair to acknowledge that there are serious limitations on the scheme. Many of us hope that the Government will build on what they have already done.
First, lenders do not respond at all in a significant number of cases. That is particularly true in the sub-prime area, but not exclusively so. There appears to be no provision to deal with lenders who are wilfully non-compliant. Some lenders take no notice whatever of guidance from judges. They press for repossession and make no effort to help their struggling borrowers. What is probably required is a fresh round of guidance from the Government on how to deal with non-compliant behaviour by lenders. Perhaps the Minister in his reply could give us some indication of whether there will be any follow-up action.
Under that general heading, there is an acknowledgment that the pre-action protocol has exposed serious weakness in mortgage law in some key areas. Colleagues and
others may wish to develop that point. There are two problems in particular. One is the extent to which a large number of borrowers are now exposed to repossession as a result of second charges, many of them for fairly trivial amounts of consumer borrowing, yet they face the loss of their home. The lack of protection in that area is palpable.
Then there is the kind of case that many of us are encountering in our constituencies in which there is default on a buy-to-let mortgage not by the resident but by the property owner. Large-scale default is taking place in the case of buy-to-let mortgages, and many tenants are being thrown out of their property at short notice. The Government have given some indication that they are preparing to legislate to provide more protection. It would be useful if the Minister were to give some indication about how and when that is due to happen.
My hon. Friend the Member for South-East Cornwall (Mr. Breed) suggested in the context of the Banking Bill a particular formulation for a new legislative framework to help buy-to-let tenants. Have the Government had an opportunity to review it, and how do they react to it as a legislative proposition?
To summarise, the initiative has been welcome, but there are severe limitations, and, of course, it has built up a pipeline of arrears cases without necessarily solving them.
Secondly, we move on to the mess of the mortgage rescue scheme, which is probably the least successful of the Government initiatives. The concept is an attractive one: enabling people to stay in their home as tenants or in a shared ownership arrangement. That is much preferable to existing rent-back arrangements in which some private landlords behave in a somewhat disreputable way towards people who have entered informal rent-back arrangements that are not properly regulated.
In theory, the Government’s scheme is attractive and we should welcome it. When it was introduced, we were told that it had the potential to help some 6,000 people. At the end of April, only two applications had been approved, which I know is a source of some embarrassment. Is the Minister in a position to tell us what the number is as of this morning? Numbers were supposed to have appeared today.
There are two big problems with the scheme as the Government are currently administering it. One is extreme complexity. All the financial advisers who have guided people with arrears problems into it have reported that whereas a private rent-back arrangement probably takes about a week to set up, which may be because some operators cut corners, the Government’s scheme appears to involve a five-month process, which is extraordinary. It is excessively legalistic, and I wonder what the Government are doing to streamline the exercise.
The other problem area is the one that we have already heard about from the hon. Member for North-West Leicestershire (David Taylor), which is that many families are excluded by a tight definition of homelessness. I have written to the Minister for Housing about a particularly bad case in my constituency of a father who has predominant responsibility for a daughter, but in the messy, complex arrangements that now exist for families that are breaking up, not full responsibility. He is not
protected under the council’s—ultimately, the Government’s —definition of homelessness. What are the Government doing to make their definition of accessibility to the scheme more flexible? Clearly, there have to be some limits, but can they be applied more sensitively to make people in real need eligible for the scheme?
Mr. John Leech (Manchester, Withington) (LD): I congratulate my hon. Friend on securing the debate. Does he agree that to gauge the effectiveness of initiatives such as the mortgage rescue scheme, we need to ensure that the Government hold accurate records? The Minister for Housing assured me, in a written answer on 17 June, that only one household in Greater Manchester had been ineligible for the mortgage-to-rent and shared equity option, yet when I spoke to a person in Greater Manchester who is dealing with inquiries, I was assured that the vast majority of people who have inquired about eligibility have been told that they are not eligible for the scheme.
Dr. Cable: I understand that in April and May there were discussions around the country involving about 800 families. Such discussions are useful because they provide a way of delaying and possibly heading off repossessions. None the less, of those 800, only a tiny fraction are considered eligible, such is the tight definition of the rules. My hon. Friend’s experience in Greater Manchester is similar to that of other hon. Members around the country. That is why I am pressing the Minister to indicate that the Government are a little bit more open to flexibility in that area.
Thirdly, the mortgage support scheme, under which various lenders help in rolling up interest—in effect, to defer arrears problems—gives families facing short-term unemployment an opportunity to ride out the recession. The problem, which is reported to us by the voluntary organisations dealing with it, is that nobody is quite sure which lenders are operating the scheme and which are not. There is a strange kind of secrecy hanging over the scheme. There are no published data on which mortgage lenders are co-operating and which are not. Perhaps the Minister will clarify the Government’s position and tell us why there is no published list.
I gather that GE, which is one of the more controversial lenders and which has not been part of the scheme, is now saying that it will be part of it, but there is nothing in writing and no indication about when that involvement is to start. In addition, some of the small building societies are not parties to the scheme. Why is the list not published? Can there not be some indication about which lenders are involved in the scheme, simply to help the various advisers in citizens advice bureaux and other places, so that they know who is co-operating and who is not? That would make their lives and those of people in arrears easier, because at the moment there is something of a lottery and a great deal of uncertainty.
Fourthly, and finally, I should like to mention the ISMI scheme—income support for mortgage interest—which everybody concerned with this business accepts has been the most successful of the Government’s initiatives. The origins of that scheme lie in the fact that despite the urgings over the last two decades, few people have been able or willing to obtain mortgage protection insurance policies. Only 17 per cent. of all borrowers are covered by insurance, which is why, in a period of downturn
such as the one we are in, large numbers of people are exposed. Bringing mortgage payments within the social security system provides a necessary fall-back for people in difficulty. There is some uncertainty about that. Perhaps the Minister will clarify the Government’s thinking. I understand that a two-year maximum is applied to the scheme. We are not yet two years into the crisis, but an awful lot of people in long-term unemployment will find themselves in severe difficulties once the scheme terminates. Do the Government have any flexibility in terms of the periods of time involved?
David Taylor: Is not the prime reason why 83 per cent. of people—to use the hon. Gentleman’s figure—do not take out mortgage protection insurance is that they read about the widely reported cases of the difficulty experienced among the 17 per cent. of people who do take out such insurance, when trying to claim on the insurance that they think they have, because of the hard-line and narrow interpretation that insurance companies sometimes place as barriers to legitimate claims made when people have problems with their mortgages?
Dr. Cable: The hon. Gentleman is quite right. An Office of Fair Trading review of payment protection insurance established that there was substantial overcharging in many cases, and poor consumer protection arrangements. The fact that people did not take out such policies is understandable.
If we in this country continue our preoccupation of ensuring that as many people as possible are owner-occupiers, perhaps we should try to ensure that in future mortgage borrowers are insured through a market mechanism of some kind. I was going to mention that later, but perhaps this is a suitable point at which to do so. Some interesting proposals are flying around. One is based on the Canadian model of pooled insurance—pooled guarantees—and another, called the home sale guarantee scheme, is being seriously considered. I hope that the Government are taking that matter seriously. The underlying philosophy of all those proposals is that an element of guarantee and insurance has to be involved in mortgages. The existing payment protection insurance schemes are not working, as the hon. Member for North-West Leicestershire rightly says.
In conclusion, I shall move on from the four schemes that the Government have introduced and look a little bit further forward and discuss how the underlying problems will be addressed. Repossession is only really a problem because of the underlying lack of available housing, particularly social housing. If social housing was freely available, repossession would not be the tragedy and disaster it currently is. Are the Government, working with the charitable bodies, doing any research at the moment on what happens to people whose homes are repossessed? I do not think that any of us know where those people actually go, although anecdotal evidence suggests that most of them go into the private rented sector, which of course presents problems of its own. Many people go into the private rented sector because they can then get housing benefit, which they found more difficult to get as owner-occupiers, but many of them are still in considerable difficulty.
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