Examination of Witnesses (Questions 20-34)
MICHAEL COOGAN,
DAVID ORR,
JOHN STEWART
AND DR
PETER WILLIAMS
16 DECEMBER 2008
Q20 Mr Betts: On the issue of housing
associations could they not be approached in a different way?
What you were saying about the issue there was just assuming housing
associations carry on with the same allocation policy they have
always had. The problem is that you allocate one of these inner
city flats to someone, they then lose all their needs points on
the list, go to the bottom and then cannot get into something
else. Could we not let the property to someone who is not quite
at the top of the needs list and not dock any of their points
for moving in there? They will keep the same number of points
and hopefully in two or three years' time they will be moved on
to somewhere else. Use it as an interim staging post rather than
simply assuming the same letting system will carry on for these
properties as they would for other properties that you hold.
Mr Orr: In theory yes. In practice
the whole process is very constrained by the way that the present
rules operate about nomination arrangements and allocations policies
and lettings policies and because of that, precisely because of
that, we have suggested to the Communities and Local Government
Department that the Housing Reform Green Paper, which is promised
for the new year, should have a fundamental re-examination of
these relationships. Housing associations are not sufficiently
in control of their own destiny when it comes to making those
decisions.
Q21 Mr Betts: In the meantime a bit
of lateral thinking between local authorities and the housing
associations could probably allot some of these properties for
use, at least in the medium term, before this Green Paper comes
out and is implemented.
Mr Orr: It could do. The thing
we have been trying to stress throughout is that in this market
the way we have been doing things is not working. So we need to
think differently about how we nominate, how we allocate, how
we build, what the funding packages look like. Flexibility is
going to be absolutely critical.
Q22 Emily Thornberry: We stopped
earlier when you were talking about the behaviour of lenders and
funded housing associations and probably quite a few of you want
to say something about that. Shall I just leave it as a general
question?
Dr Williams: I think David was
making the point that the funding market has been massively constrained
for all lending to housing associations. There was deep competition
for lending to housing associations in previous decades and the
margin over LIBOR for lending to associations had got down to
0.2% to 0.3%, so ample funds and a very low rate and very generous
terms. The market now is much more constrained. The number of
lenders to the association market has fallen severely and those
five or so lenders who are active at present are being very selective
in what business they are doing. There is simply no open access
market available at the moment and the terms have gone up. You
are now looking at somewhere between 1.5% and 3% over LIBOR. You
have lenders with significant constraints in terms of the term
they wish to offer that lending for and the amount they are prepared
to lend per organisation. What has to be understood of course
is that because their cost of funds has gone up so sharply, the
existing back book of mortgage loans to housing associations is
fundamentally unprofitable. It is losing money compared with what
the money is currently costing. The upshot is that lenders are
seeking to re-price their existing back books with their existing
customers when opportunities arise and those may arise for all
sorts of technical and practical reasons. So there is a complete
re-working going on at present.
Q23 Emily Thornberry: One hears rumours.
Is it threatening the existence of some fairly well-known housing
associations?
Dr Williams: That would be too
strong. I do not think so. Lenders themselves obviously have an
interest on both sides: they want the organisations to continue
to exist because they have loans outstanding to it. It is not
threatening in that sense but clearly again it is back to this
point about creating a new constraint, what associations can do
and the extent to which they have to re-work their existing business
plans. It is a seriously different environment where risk has
gone up. The Tenant Services Authority recently simulated an insolvency
for associations. These have been done on a periodic basis and
the TSA has new powers in terms of intervention. What it looked
like there with lenders involved in that simulation was that there
would be a workout that possibly a large association becoming
insolvent might be broken up, but certainly there was no sense
at all of ultimate insolvency and repossession by the lender.
Mr Coogan: The other thing to
say is that within CML we have a social housing panel which meets
regularly and which is meeting more regularly in this current
environment because we need to keep in touch with what individual
organisations are doing which may trigger events and we need to
make sure that events are managed if they do arise, which at the
moment they have not. The important thing is that it is a regular
dialogue and you should know there is a regular dialogue between
the larger associations and lenders and Government to ensure that
we are avoiding any potential problems and that has been supplemented
with the new regulatory structure.
Mr Orr: That is all true and it
is all very helpful. There is real discussion going on which is
where we need to be. However this conversation so far has been
focusing on associations' need for new borrowing and Peter is
absolutely right that the cost of that new borrowing is much greater,
it is more constrained. I think though that we understand the
reasons for that. What are more problematic are other aspects
of lender behaviour which are causing real problems for housing
associations. The best way to illustrate this is to give you an
example. This is a very straightforward example. A housing association
which had a group structure with three different organisations
in its group decided, for reasons which were primarily to do with
improving its corporate governance but also generating efficiency
savings, that it wanted to collapse that governance structure
so that there is one organisation with resident panels, a different
model but saving about £300,000 a year and the £300,000
could be invested in better services, neighbourhood support services,
new development, whatever. Their core lender said that if they
did that, it would regard that as a significant event in the terms
of the loan agreement and re-price the entire loan book at a cost
to that organisation of £1.9 million a year. The impact of
that is that nothing happened; there was no change. So £300,000
of efficiency savings are not being generated, a more rational
governance structure has not been put in place and the bank has
gained not a single penny piece from its behaviour. That is true
in issues like that, it is true when it comes to organisations
talking about mergers, it would be an issue if a rescue package
were to be organised and I think that there is a real danger that
the value of public investment in saving banks is not being used
effectively because it is leading to long-term costs for businesses
like housing associations because of the way that banks are behaving.
We had a private conversation recently with one of the CLG ministers
where chief executives of housing associations were saying that
their main business risk now is lender behaviour, not in terms
of new development but in terms of existing facilities.
Mr Stewart: This is equally a
problem in the private sector. There are many smaller private
house builders who have gone out of business. I heard a story
recently of a company which had had a 60-year relationship with
its bank and went back to renegotiate its loan facility which
was a regular thing. The terms were so onerous after 60 years
that the owners of the company said they wanted no debt and they
scaled the company down. That is all about capacity and that kind
of thing is going on across the private sector; it is not just
in the RSLs where it is happening.
Dr Williams: By way of explanation,
clearly in the example David has quoted of the loan agreement,
it is within the legal framework of the loan agreement that that
lender was able to do that. It reflects the lack of competition,
the fact that lenders are not looking for business and it reflects
the fact that there are losses on those existing loans which they
are seeking to re-price to make profitable. Clearly there is a
wider issue here which David and John have referred to about the
support the Government have given lending institutions, some of
whom are active in the RSL market and in the small business market.
That is about liquidity and solvency and not an infusion of funds
to on-lend, although I know there is a debate about this. Fundamentally
that was to support those banks rather than create a lending capacity.
The lending capacity is assumed to flow later and that money of
course is not there yet.
Mr Coogan: It is called credit
crunch advisedly. We have seen the home owners, in terms of access
to funds, small businesses, housing associations, developers,
if there is less money available and it is more expensive the
banks pass that on because they do not have access to cheaper
funds elsewhere. Crosby has not been implemented. That all starts
to build up into a picture, which is where the credit crunch hits
across every sector.
Q24 Emily Thornberry: We have some
other questions we want to ask you, particularly about the viability
of housing associations. It is really a straightforward question
and you have touched on it anyway. It is about the importance,
in the circumstances, of increasing grant rates. You have talked
about changes in tenure and how that can help cross-subsidise
now, but are you also calling for a change in the formula when
it comes to grant rates?
Mr Orr: Yes and no. My anxiety
here is that we have assumed that there was one broadly successful
model for housing association development and that the danger
for us is to say that it used to be 40% grant rate and we now
need some other figure as the grant rate. That is the wrong answer.
At the moment what we have to be focusing on is what we need to
do to allow this development to take place? How do we need to
restructure it? What kind of investment needs to come from Government?
What can housing associations bring to the table to do that? One
of the great advantages that they have is the creation of the
Homes and Communities Agency because it has a much wider range
of investment powers than the Housing Corporation had. It leads
to the possibility of perhaps the Homes and Communities Agency
taking an equity investment in a development which allows some
risk sharing in a way that has not been possible in the past.
The answer to the fundamental question you are asking, about whether
we need a greater degree of public support to allow development
to happen in this market, given the lack of sales cross-subsidy
and the increasing cost of private money, is yes, although, if
we are able to access land much more cheaply than we have been
doing that rebalances the equation back in the other direction.
I really do think that the most critical thing at the moment is
an ability to think flexibly and creatively.
Q25 Emily Thornberry: Is your flexible
and creative and pragmatic thinking going to result in us having
less social rented housing?
Mr Orr: I hope not. We talked
earlier about targets and it seems to me that the most important
target at the moment is to build as much as we can.
Q26 Emily Thornberry: But social
rented housing.
Mr Orr: Social rented housing
has to be at the centre of the offer because we do not have enough
of it at present. We have not had enough of it for a long time,
it has become residual housing for those reasons, so the building
of good quality, affordable, rented homes has to be at the centre
of what we do.
Q27 Andrew George: I want to broaden
this out to something you were all agreeing on earlier which is
this intermediate market, that people will be buying at the top
and people at the social end will be finding rented accommodation.
I particularly wanted to ask Mr Coogan what he and his members
can do to assist at this particular time during the credit crunch.
What can you do to assist those who are trying to develop the
intermediate market? Here is an opportunity, there is a gap, and
with private investment, with developers contributing and housing
associations.
Mr Coogan: I would agree with
the short-term prospects which David highlights because of the
financing constraints we have all alluded to. For the medium term
and longer term we need to try to think ahead as to what we should
try to have as a normal market beyond the next year or so. What
we are looking at in the context of intermediate tenure is much
more flexibility between tenures as something we should try to
encourage and shape so that people can become part home owners,
full home owners, become part home owners again and go in their
lifestyle through different stages, moving between types of tenure
more easily than they currently do; people being able to stay
in their homes as tenants rather than simply as owners as an avoidance-of-repossession
vehicle. We need to do it in a number of ways. Fundamentally behind
your question is how much money is going to be available and that
is the question we need to try to work with Government to improve
the current prospects.
Q28 Andrew George: Also what restrictions
do you and your members place upon those? With a lot of these
developments there is a planning restriction, a local reserve,
a quite understandable covenant in order to ensure that it remains
within the intermediate market and often your members will not
accept that.
Mr Coogan: They are certainly
being asked to agree to a whole range of different arrangements
in different local areas which adds to their work loads and complexity
of process but that is the past. You asked me about the future
and trying to improve the arrangements in which we look to try
to get more fluidity between tenures, to make sure the social
housing sector is big enough, to make sure those who aspire to
become home owners can but do not feel they have to do it at an
early age because they have a private rental sector option when
they are young. What we are looking for is a system which would
enable us to learn from some of the past experiences that the
current business models do not work, you cannot cross-subsidise
social housing with private sector sales and look at what money
is going to be available for the different sectors going forward,
working with Government to try to get a longer term strategy to
deliver that.
Q29 Andrew George: Are you persuaded?
Dr Williams: I am with the lender
category as well. The point you make about staircasing limitations
does remain a problem, there is no doubt about it, that limitations
for lenders, where authorities are imposing a cap of 80% ownership,
create problems, particularly in the environment Michael and others
have referred to of potentially increased repossessions and so
forth. Lenders have to be able to trade these properties out and
if you have a golden share that creates a real problem. We have
tried for decades to sort this out with Government. There are
simple solutions to it; we have not been able to get there and
it does need addressing. On the intermediate market more generally
for low-cost home ownership, clearly that market is widening and
deepening as we speak because people cannot access the mainstream
market. There will need to be an expansion in the market, there
is a possibility of new products coming into that market, it is
however worth saying that the way the low cost ownership initiatives
have been handled through Government has at times been deeply
confusing and it has not encouraged lenders to participate as
fully as they might. We have had a chaotic set of arrangements
with products being introduced, tampered with, changed and new
ones being introduced without any clear sequencing. Frankly, for
a consumer to try to enter the low-cost ownership market is a
nightmare, given the variety and diversity of products and the
different routes by which you might access them.
Q30 Andrew George: We can ask the
Minister.
Mr Stewart: Could I add something
positive? Yesterday the Government announced £400 million
for something called HomeBuy Direct; you have probably caught
up with that. That seems to me to meet many of the things we have
been talking about. Intermediate tenure does not have to be sub-market.
These are for first-time buyers on relatively low incomes, £60,000
household income and below; I think that classifies as intermediate.
The lenders will have a part to play in that because they will
have to fund the 70% that the first-time buyers buy. The Government
have put in 15% and the developers are putting in 15%. The fact
that the applications far exceeded the original amount of money,
which was £300 million and the developers have put in for
£400 million and were successful, suggests that there is
a real appetite for this as long as it is supported by the lenders,
which we hope it will be. We sat down with the Housing Corporation,
as it then was, and with lenders and with developers and worked
up a scheme which worked. The key thing about that particular
scheme was that we developed the land. So a purchaser walks into
a sales office on a site, they say they would like to buy and
the developer can put them in the direction of purely open market
or they can say "You are a HomeBuy Direct person" and
they go off and get qualified. I think that is a really positive
measure. We would like to see more money put that way but we should
not think it is all doom and gloom. It is pretty gloomy but it
is not complete disaster.
Q31 Mr Betts: Let us come on to what
the Government have done or could do more of. You have all said
Crosby please, as soon as possible and get that done. Apart from
that it is probably true to say that the Government efforts overall
have received general support, perhaps some elements rather more
enthusiastically than others, from different individuals. Do you
think there is anything else the Government could be doing that
they have not done so far or should they be doing more of the
same and putting more resources into what they have already done?
Dr Williams: Crosby recommendations
are fine but they do not go far enough. They are only related
to new lending, they effectively probably will be exclusive in
some ways in the structure of their operation. From an IMLA perspective
we have serious concerns about what Crosby has proposed. We welcome
it but we would like to see it go further. Your point generally
is that the Government have done a lot, a great deal. The packages
are complex, evolving, changing daily and there is more to come,
including a potential home owner mortgage guarantee scheme. All
of these things are very welcome. There is an issue at times of
confusion as to where all the parts fit. One of the things Government
have been rather late in recognising is the role of the non-prime
market, in other words, all of the specialist lending markets,
which have played an important role in the UK mortgage market
over the last decade and which are fundamentally underpinned both
by major banks and what are called non-banks, that is people who
do not take deposits. The non-bank sector has not been supported
by any of the government schemes coming through and that remains
a serious weakness. Part of the health of the housing market turns
on the relationship between prime and non prime and the non-prime
market is currently beached which will have consequences for the
prime market.
Mr Coogan: I would draw attention
to two elements. One is the financial stability measures where
they have been innovative in the recapitalisation but it has been
at a price to protect the taxpayer. We welcome the change of price
and the credit guarantee scheme announced by the Treasury because
it does free up some money towards the banks which they may be
able to lend back out. I have not seen the full details of what
the Treasury have just announced but clearly the financial stability
is key because, as banks, once you have that you can start looking
at a wider range of what you can do with your money and how you
are going to spend it. Clearly from the perspective of the economic
confidence of the market, consumer confidence is being undermined,
the market is being undermined by house price falls so we need
to see what measures can help on house price falls. I am not convinced
that the home owner support scheme will actually make much difference
to house prices. It will help to reassure many millions of customers
that if they have difficulty they may have an additional facility
to go to. We have said for some time that the two things which
will make most difference in terms of consumer confidence would
be to widen income support for mortgage interest so that it is
paid out to people where they lose partial income not the whole
of the income. The steps coming in in January are good but relatively
small scale. The last figure I saw was 10,000 households helped
out of arrears currently at £170,000 and three months plus.
We also have a mortgage rescue scheme which is designed to help
around 6,000 people who face homelessness over the next two years;
again, helpful for those particular households but in an environment
of 45,000 households small scale and unambitious. What we have
said is that you need to improve income support and you need to
have a sale and leaseback scheme on a much bigger scale than you
currently have. What that would do is enable a customer to become
a tenant instead of going through a court process. They would
need to be a tenant of a reputable landlord, who had government
support as well as lender financing and it is something we have
been urging the Government to look at very seriously. If you have
lots of cases going through the courts, lots of forced sales,
it drives house prices even further down because once you have
not sold on an estate agency board, you have not sold on auction
you are losing that much more money at the end of the process
and throughout that process the customer is stressed, has been
re-housed and the lender loses more money and the shortfall debt
is higher.
Q32 Mr Betts: That is all very well
but that is representing your members as though they are not responsible
for any of this. If I look at my postbag, it is not surprising
that bankers are now the pantomime villains of the piece, looking
at the various shows which are on around the country. Letters
basically say to me that this lot, the bankers, have messed up
their own finances and now they are messing up ours. If you look
at what is going on, the Bank of England has cut interest rates,
some lenders are passing those on to existing customers, but if
you look at new products, they are often 2% or more expensive
than existing products. Then, if you look at what is happening
to first-time buyers, because they are being required to provide
at least 20% and often much more of the cost of the property,
which they cannot afford, they are being asked to pay even higher
interest rates than other people who are borrowing money. It is
not surprising then that the whole of the house-buying market
has dried up because first-time buyers are almost being excluded
from the process? Is this not a problem you are partly responsible
for?
Mr Coogan: What you have described
are three or four problems and each of them has a different cause
and each of them has a different solution. In terms of first-time
buyers, one of the reasons why the credit criterion is tightened
is because the lenders are taking a more cautious view of their
risks than they did in 2007. They have tightened their risk attitude.
The price of money has gone up so the cost of the mortgages is
higher. The bank of mum and dad is less able to provide the deposit
than it used to be able to do because they are not producing equity
from their houses because their houses are falling in value. Overall
what we are looking for is how to manage, through the immediate
term, the problems borrowers are generally facing. That is where
we come to a rather odd thing that the Government want lenders
to help customers both reduce their mortgage price but they also
want lenders to lend more in 2009 at the 2007 levels. The money
that will do that is savers' money. If you bring savers' rates
down too far, savers stop saving. Therefore it is not intuitive
that simply because base rates fall the base rate will be followed
by lenders, not least because their cost of funds is not linked
to the base rate it is linked to LIBOR. There are complex problems,
complex solutions and each has to be dealt with one after the
other, but it is very easy to mix them all together and say it
is our fault. We are all having to deal with the consequences
of the credit crunch.
Q33 Mr Betts: What the public out
there sees is the Bank of England cutting interest rates, they
see lots and lots of taxpayers' money going in to support the
banks who promised to keep lending going at 2007 levels, yet they
cannot get a mortgage.
Dr Williams: It would be very
helpful if the Committee brought some clarity to this. There is
a great deal of confusion around this issue and some of your comments
reflect the public's view that if you get a bank rate fall you
automatically get cheaper mortgages. The cost of funds is not
priced any longer off the bank rate and that relationship has
been broken.
Q34 Mr Betts: First-time buyers are
paying more and without them in the market the whole market is
drying up.
Dr Williams: And everybody knows
that and everybody is striving to get there but there are some
practical realities. As Michael rightly says, in a sense and notwithstanding
your concern about banks—and many of us would recognise
the points you are making—the fact is that lenders are being
torn in two directions here about bringing money in, maintaining
savings rates for many people in this room and at the same time
trying to bring down mortgage rates again for many people in the
room and those two relationships are really quite difficult.
Mr Orr: I am not going to add
to what others have said but just a specific proposal for Government
which does relate to public policy and the value that Government
want to get from the money they invested in banks. One might argue
more but we have one bank which is wholly a public sector bank,
Northern Rock. We have a public policy determination by Government
to support entry level owner occupation and particularly through
shared ownership. If the Government own Northern Rock, if we own
Northern Rock, what is wrong with a policy determination which
says that on a commercial basis there should be specific encouragement
to Northern Rock to provide shared ownership mortgages? If we
were able to do that, that in itself would unlock a whole lot
of the trapped development, it would allow far more new development
to take place, it would allow us to meet a whole range of the
policy objectives we have. I understand that would mean that Northern
Rock would take longer to re-capitalise and buy itself back out
but fundamentally there is a question for Government there about
which of those priorities is the greater.
Mr Coogan: Clearly when state
aid rules applied in February when Northern Rock was first nationalised
the discussion with the European Commission was pre many countries
capitalising their banks. Therefore the state aid rules now need
to be looked at in an entirely different environment across Europe
and the European Commission has a role to play in helping to provide
more flexibility. To be fair, part of the problem the whole market
has is the speed of shrinkage of Northern Rock and potentially
Bradford and Bingley taking customers in the re-mortgage market
who would otherwise not have re-financed and that is taking some
of the money which would otherwise go to first-time buyers and
house purchasers.
Mr Orr: State aid is an important
issue and Michael is right that there is an opportunity to re-look
at this because of what has happened in the market. Actually the
2008 Housing Regeneration Act includes some kind of shared ownership
as part of social housing and there are specific determinations
for social housing in the state aid rules. This is not an insurmountable
problem.
Dr Williams: If Northern Rock
did what David is suggesting there would be an enormous concentration
of risk taken on by Northern Rock in terms of the low-cost home
ownership market. You simply cannot have a single institution
doing these things.
Mr Orr: They could do it with
RBS and Bradford and Bingley as well.
Mr Stewart: You asked what more
could be done. The absolute priority must be Crosby because if
you think of new build, it is just 10% of the whole housing market
and we cannot row completely against the tide, so we have to sort
out the mortgage market and all the issues that have been discussed
here today. On the new build sector, we are very pleased with
what the Government have done so far, but it has not been enough
and it has been too slow. We put forward a proposal roughly a
year ago for something very much in line with what was announced
yesterday and it has taken nearly 12 months for that to come forward.
It is great that the Government have taken that on board and talked
to us and we came up with a scheme that is workable, but we need
a lot more. The new Homes and Communities Agency, which of course
takes in EPs' budget and the Housing Corporation and others and
puts them all together, has a very large amount of money, £15
or £17 billion in total for three years and that money will
not all be spent because of the credit crunch. The Government
should be spending even more effort looking at how some of that
money can be brought forward and spent early, whether that is
to help us or private sector house builders. The critical thing
about house building of course is that the private housing sector
delivers the vast majority of housing in the good times. It will
continue to do so as far as we can see and capacity is being lost
every day we delay taking action either to help house builders
start new sites or to sort out the mortgage market. Jobs are lost,
capacity is lost, firms go out of business and the supply will
be even worse. The urgency has been lacking somewhat in Government
and we would like to see them give more attention, more urgently
to that.
Chairman: May I thank you all very much
indeed? This was a one-off session. It is quite possible that
the Committee may decide to come back to this in more depth subsequently
but you have given us lots of food for thought. Thank you very
much indeed.
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