Housing and the Credit Crunch - Communities and Local Government Committee Contents


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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