Examination of Witnesses (Questions 20-38)
MR ANDREW
HEYWOOD, MR
DAVID ORR,
MR JOHN
STEWART AND
MR JOHN
HERON
1 JUNE 2009
Q20 Dr John Pugh: Could you just
enlarge on that point?
Mr Stewart: Sure, I do not want
to give a lesson in development economics, and maybe you already
know it, but essentially what happens is if the government increases
the cost base for the industry with a requirement, whether it
is for building roads or providing affordable housing or funding
infrastructure or putting in high levels of the Code, without
a compensating increase into the sales value that you can get
for those dwellings, so for example if you are funding offsite
infrastructure, that does not enable purchasers to pay more for
the dwellings, so if you increase those regulatory and policy
costs, they have to come from somewhere and of course they come
out of land values because in the way it is calculated land value
is a residual.
Q21 Chair: Hang on a minute, in any
normal industry they might come up with efficiency savings. Is
it not a fact that house building costs in the domestic sector,
if I can put it that way, have increased at a vastly faster rate
than building in the commercial sector and the house-building
industry seems to have not made much of an effort to become more
efficient?
Mr Stewart: I am not aware of
that cost differential, but I would not accept that house builders
are not efficient. There is a key driver in private housing development
and it is your quest to buy land. When you are a housing developer
you only survive if you can buy land. If you cannot buy land,
clearly you cannot build any houses and you cannot sell anything
and you do not have a business. If you are to buy land, virtually
all land is sold competitively, even public sector land is sold
competitively, so there is always an incentive on a house builder
to keep costs down in order to generate a higher land value to
outbid the competitors, so the idea that house builders are inefficient
and could cut their costs significantly, I am sorry, I just cannot
accept that. If they could they would have done it because they
would be able to outbid their competitors.
Q22 Chair: What if house builders
were not developers but just built houses instead of the current
model, which is exactly as you say and which does not seem to
be delivering?
Mr Stewart: I do not think that
would make any difference because the developers employ sub-contractors
and effectively house builders. Most of the developers do not
actually have a very large labour force of their own—they
subcontract that out to contractors who are builders—and
of course the contractors bid for that as well, so there is always
a pressure on costs there. If you bid too high and your costs
are too high of course you do not get the project and you do not
have a business either. There are competitive pressures here which
ensure that the house builders are efficient and that the contractors
who do the work for them are efficient as well.
Q23 Dr John Pugh: Just going back
to the original question.
Mr Stewart: I am sorry.
Q24 Dr John Pugh: I took you away
as much as anybody. What I really wanted to know is if the Section
106 agreement is not doing the job, is there any tool around or
any device that the government can use to make up for that deficiency
as it currently exists?
Mr Stewart: There are some tools
talked about. It depends whether you mean private or public. It
is difficult to envisage an obvious private sector substitute
for that land value, where would that money come from? It is a
funding thing, so for example if the house builder cannot fund
affordable housing requirements now because the land values are
so low, how else would affordable housing be funded? If the state
does not fund that directly, it is difficult to know where else
you would find that money. There are some schemes being promoted
with the idea of funding local infrastructure. Tax increment financing
is one scheme—and I am not an expert on that at all—that
is talked about. Essentially it comes down to if those requirements,
whatever they may be, whether they are affordable housing, infrastructure,
higher levels of the Code, if they cannot be funded out of the
development, essentially out of the land value, there has to be
some other way found to fund them and it is not an easy one to
answer, I quite agree. Until land values recover very significantly,
we cannot go back to the old model, so the old model is broken
because of what happened in the market. The old model was not
inherently at fault but it just does not work any more because
of what has happened in the market and what happened to house
and land prices.
Q25 Neil Turner: We had Dr Williams
of the IMLA at our previous session and he was commenting on the
fact that lenders had renegotiated the cost of the loans to housing
associations because they were losing money on the existing terms.
Can you tell us whether or not that situation still exists, has
it improved, and are associations now getting the loans that they
need at a rate that they feel is okay?
Mr Heywood: Yes, interestingly,
in spite of a lot of anxiety during 2008, new lending to housing
associations actually went up quite significantly in 2008 over
2007. I think it was a combination of factors that meant that
actually social housing lending, if you like, did disproportionately
well in a very difficult market. I think it is partly the fact
that regulation maintained itself, and there was confidence that
the new TSA regime going forward would actually deliver on its
legal requirement to ensure financial viability and that was important.
Repricing, which may not be popular, was key in that it meant
lenders' enhanced funding costs and the increased risk profile
of housing associations was actually reflected realistically in
pricing. It meant that there was at least one new entrant into
the funding market of housing associations at a time when generally
people had been moving out of mortgage markets. That is not to
say that there are not going to be some difficulties going forward
and there will be some changes, probably shorter maturities for
lending for instance to housing associations, which will pose
challenges and which we will have to look at, but nevertheless,
the raw figures are reasonably encouraging.
Mr Orr: Perhaps I could give a
slightly different perspective!
Mr Heywood: I thought you might!
Mr Orr: That is obviously the
way it looks from the lenders' world. Of course the core fact
in there is true—housing associations were able to continue
to borrow new funds in the course of the last year. I think our
frustration and our difficulty has not been about the borrowing
of new funds, where we understand that prices have changed, and
it is of course still worth mentioning that base rate is half
a per cent and the cost of new borrowing in real terms is around
seven per cent, so the gap between base rate and the cost of borrowing
is six and a half per cent, that is quite a significant change
from the levels of just two or three years ago, but even if you
accept that the price of money in this market has changed, it
remains a considerable frustration that lenders are seeking to
reprice existing lending on almost any pretence whatsoever. I
think this came as a surprise to the housing association world
and I think we probably reacted to it in a rather naive way to
begin with. I think a number of housing associations are now challenging
some of the more flamboyant requests for repricing from some of
the lenders and, as a result, there are more rational decisions
being made. For too many of the lenders now the price of new borrowing
is the new borrowing plus repricing the existing lending and,
whether or not that is legitimate, one of the consequences of
it is that there is less capacity for new development, and in
an environment where capacity for development has been significantly
shrunk as a result of the market difficulties that we were talking
about earlier and the absence of a steady supply of mortgage finance,
it means that if we are to continue to develop, then the proportion
of public subsidy continues to increase, and this is cause and
effect. If the cost of private money goes up but the price remains
fixed then the gap has to be made up from somewhere else. That
gap can come from reduced land costs or reduced build costs or
additional public investment. I think the market is changing and
that there is the beginning of a more mature renegotiation between
borrowers and lenders, but there is still a considerable degree
of anxiety about the extent to which lenders are seeking to reprice
existing loan books in a way which has bordered on the unreasonable.
Mr Heywood: There is in a sense,
I think, a degree of failure to come to terms with the change
in the balance of the market. For many years it was effectively
a borrowers' market and lenders were continuously being beaten
down to levels of sometimes 20 basis points over Libor for instance
and losing out on deals because somebody was going even lower.
With funding at more like, shall we say, a couple of percent over
Libor at the moment (Libor of course is elevated but that is a
reflection of global risk really) we are in a situation where
people can actually justify internally funding housing associations
rather than going out and lending on straight commercial lending.
That is crucial in a situation where banks are rebuilding their
capital and trying to maintain sufficient liquidity. People cannot
at the moment subsidise housing associations by lending at rates
which do not reflect funding costs, and, remember, that can include
rollover funding costs on existing loans. Whilst I would not attempt
to justify individual negotiations one way or another, I think
it is important to say they are negotiations and that in fact
overall the results have been positive. At the end of the day,
development has to be based on the genuine costs, and that includes
the finance costs, and we live in a world where finance costs
and funding costs have gone up.
Q26 Neil Turner: Mr Orr, you seemed
to indicate that the housing associations were taking a little
bit of time to come to terms with the new situation. Are you happy
now that they have a strategic approach rather than just muddling
through?
Mr Orr: I think, like every sector
in the economy, the scale of the financial collapse and the impact
that has had has taken us all a bit of time to understand and
to be clear about. I think that we, along with the Homes and Communities
Agency and the Tenant Services Authority, have worked quite creatively
to ensure that we are engaging more strategically, and there is
no question that the flexibility that the Homes and Communities
Agency was able to bring to the market has been of considerable
assistance. However, inevitably, for individual housing associations
their boards are having to look at their long-term viability and
are making decisions about present activity and the impact that
that has on future viability. In this particularly difficult environment
where the cost of money is going up in real terms, certainly in
relative terms, it has meant that, in the absence of Section 106
and the problems of the lack of mortgage finance, some housing
associations are making strategic decisions not to develop, even
though if you were looking at a national strategy you would want
there to be more development. This is really being caught between
a rock and a hard place; boards wanting to meet their purpose
and build new housing for people who are in housing need, but
being deeply anxious about the long-term viability consequences
of it.
Q27 Neil Turner: There was a suggestion
that up to six housing associations were at risk. Have you any
update on that?
Mr Orr: As far as we can tell,
I have no expectation of seeing any housing association on the
point of collapse, but it has been a difficult environment. People
have been stretched trying to work their way through. I think
the thing that is very important for the Government to understand
from our sector's point of view is that there is a core business,
which is a rented housing business, which means that there is
a relatively secure income stream that protects that core business,
but there has been a huge amount of capacity sucked out of housing
association accounts over the last 12 or 18 months and the opportunity
cost of that is very substantial. If you lose £100 million-worth
of revenue capacity, that is in excess of £1 billion-worth
of investment capacity. If you are not bringing that £1 billion-worth
of investment capacity then the matching £1 billion that
was coming from government disappears or has to be re-profiled
and used differently. For us there is some anxiety that in a deflationary
environment, if there is an expectation that rents should be cut
(and there are some indications that the Treasury would want to
see that happening in the event of there being deflation) the
capacity consequences of that would be very considerable. Just
to give you one example of it, housing associations invest just
short of £200 million a year of revenue finance in a huge
range of neighbourhood support services, things that make a really
profound difference at a very local level. Two per cent deflation
and a two per cent rent cut would take that amount of revenue
support out of the sector completely. It does not mean to say
that that work would dry up but it does mean to say that funding
for doing it just becomes much, much more difficult. This is not
just a question about day-to-day income streams, it is about the
opportunity cost following lost capacity.
Chair: Can we move on to repossessions
and Mr Clive Betts.
Q28 Mr Betts: What is the current
estimate of repossessions that are actually taking place?
Mr Heywood: The current CML estimate
for 2008 as a whole is 75,000, but I should say in light of the
experience in the first quarter and the feedback that we get from
our members, and more generally, we are going to look at that
figure again, and there is the possibility that that will be revised
and the likelihood is, if it is revised, that it will be revised
downwards. We have exceptionally low mortgage rates at the moment
partly to thank for that and the fact that the recession and unemployment
has not yet kicked in. We also have high levels of lender forbearance,
supported by the FSA guidance and the requirement to treat repossession
as a last resort.
Q29 Mr Betts: We have clearly got
a Code of Practice in force about how lenders should respond in
these situations. Are we quite content that all lenders are following
the terms of the Code of Practice? I think there is probably a
bit of concern that perhaps the more established lenders might
be okay and doing the business but sometimes lenders in the sub-prime
second charge loans markets are perhaps a little more intent on
trying to push for their money as quickly as possible?
Mr Heron: IMLA members typically
are members that have been active in sub-prime markets and it
is certainly true that, inevitably, when lending to individuals
who have got an adverse credit history that there is going to
be a higher incidence of arrears than you will see on lending
where there is no adverse credit element at all. What we have
seen over the last six to eight months, though, really is quite
a degree of innovation in the development of practice amongst
not just sub-prime lenders but lenders generally. It is not the
case that lenders just do not get it; they absolutely do. I have
never encountered the degree of thought that is going into the
means of working with customers at present in order to ensure
that more people can stay in their homes. It is absolutely true
that repossession is only being looked at as the very last resort
because if a repossession occurs in this environment it is likely
that the lender will suffer a loss and it will be increasingly
difficult for that lender to recoup the loss. The process therefore
is driven towards doing everything that possibly can be done to
keep the customer in the property. Certainly Codes of Practice
are assisting, certainly the new protocol is assisting, but, most
importantly, I think customers have also got the message in that
the most important thing for an individual to do when they are
encountering some difficulty in making their payments is to make
the earliest possible contact with the lender. In this respect,
the Government's own work through the Homeowners Mortgage Support
Scheme has been very valuable because even if that scheme itself
does not get used, customers are much more conscious that talking
to the lender is going to assist.
Q30 Mr Betts: Is there anything that
can be done to either improve the codes of practice or improve
observance of them?
Mr Heywood: I think we have had
quite a number of changes in this area in any case which have
actually improved the situation. The reduction of the period for
claiming income support mortgage interest, for instance, was a
pretty fundamental change. Whilst there are no statistics yet,
I believe, available on how many extra people it has helped, certainly
anecdotally we do hear from advice agencies and others that that
has been of very significant assistance. Then we have the Homeowners
Mortgage Support Scheme, the Mortgage Rescue Scheme, we have CML's
guidance to lenders on forbearance and handling arrears and repossessions,
but fundamentally—and I think this is really important because
you might expect John and me to support lender practice coming
from where we do—there is the FSA and a requirement on lenders
to treat customers fairly, to treat repossession as a last resort,
and they do have the sanctions to enforce that, in the last resort.
Q31 Mr Betts: In terms of the two
schemes, the Mortgage Rescue Scheme and the Homeowners Mortgage
Support Scheme, are they actually working? Are they delivering
what they intended? We were told that with the Mortgage Rescue
Scheme, I think, so far one person had got through to the other
end of it and had actually had the practical help, though there
are some more in the pipeline. Is there anything that can be done
to strengthen these schemes and improve them, or are they actually
going to deliver eventually?
Mr Heywood: I think there has
to be a degree of realism as to how long it takes for the Mortgage
Rescue Scheme to actually build up. I was involved in setting
up the Scottish Mortgage Rescue Scheme several years ago. It got
to its target, but it took a fair time. For a start, mortgage
rescue is not suitable for everybody, we are all aware of that.
Also, there are people who simply do not want mortgage rescue,
though they might be eligible for it, so you have to build up
a pool of people, you have to go through the process of actually
communicating it out to those communities, and then it takes a
while to build up. What, I think, has already happened with the
Mortgage Rescue Scheme at least is that there have been something
like 4,000 inquiries to local authorities, and the great thing
about that is, even if not all those eventually become mortgage
rescue cases, those people will almost certainly have been talking
to their lenders, and if you can get borrowers talking to their
lenders early rather than hiding from the problem, the incidence
of it being possible to help them has to increase, so that is
a good thing. I think with the Homeowners Mortgage Support Scheme,
we should expect similar benefits, and again it is much too early
to say what that is going to do, it was only launched on 21 April,
but in terms of the inquiries-generation, I suspect it has already
done a good deal.
Q32 Mr Betts: Have all local authorities
got their act together on this? Do we still have some black spots
around where local authorities are not really providing the advice
and assistance—
Mr Orr: It is differential, the
practice across the country varies. Some people got on to and
understood the scheme very quickly indeed and others took a little
bit longer to get there. I have two comments really. The first
is I think Andrew is absolutely right to say that we should not
assume that the only successful intervention is a full-scale mortgage
rescue. I think the fact of the scheme has meant that a good number
of people have been able to resolve a housing problem without
having to get as far as mortgage rescue, but the second thing,
and this is a very specific proposal really, is that at present
the housing association which in the end provides the rescue,
purchases the property or buys the equity share, according to
the present arrangements, has to be one of a relatively small
number of HomeBuy agents. We would argue that that should be open
to any housing association to do. I think it would make it more
flexible and potentially more local, and might allow a little
greater speed in some of the transactions.
Q33 Emily Thornberry: I apologise
for being late, but can I also ask about evictions of tenants
in social housing, if that question has not already been asked,
as I think it is probably important to understand that as well.
How are housing associations responding to presumably an increase
in non-payment of rent?
Mr Orr: I do not have the most
up-to-date figures with me, I am afraid. The evidence as far as
we have it is that, whilst there may be a small growth in the
amount of arrears, I think people understand in this difficult
environment how important it is that landlords are talking to
their tenants, and vice versa, at the earliest possible
level. I think generally over the last few years, arrears management
has improved, so we are starting from a somewhat better base,
and I cannot give you a specific answer as to whether or not there
has been any significant change in either evictions or levels
of arrears as a result of the economic circumstances, but we can
find out.
Q34 Chair: Can I just ask about low-cost
home ownership schemes? Do you think that those low-cost home
ownership schemes are achieving their aims and/or are easily understood?
Mr Orr: They are achieving their
aims. Shared ownership has been around for 30 years. There are
155,000 shared ownership mortgages out there, and there would
have been more if the size of the pot in previous regimes had
been bigger. There has been a degree of complexity about the shared
ownership model, and about products that have come into the market
and gone and come back in, and we are in danger of seeing that
happening with another product. I would ask this Committee to
consider though that, of all the products that are in the market
at the moment, shared ownership is the one that has been most
effective in providing a housing solution for people who are not
very well off but not very poor. The average income of people
who have bought shared ownership over the last four years has
been around £28,000, and none of the shared equity products
in the market deliver that. That is fine because they are designed
to do different things, but I think there has been quite a lot
of talk about whether or not shared ownership should be phased
out, and I think it would be very dangerous to do that, unless
we are very clear about how we provide a product for those people.
Mr Heywood: I am not aware of
anybody advocating that shared ownership be phased out. We have
advocated that there should be a shift in the balance towards
shared equity products and away from shared ownership, but shared
ownership will always exist, I think.
Q35 Chair: Can you explain why you
want a shift?
Mr Heywood: Certainly from a lender
perspective, shared equity works a lot better; you can bolt on
standard products. It is also less capital intensive, and that
is very important at the moment, in terms of the regulatory capital
that lenders have to hold compared to shared ownership, which
is quite heavy. It is also easier if things do go wrong from the
lender point of view, and its performance, lenders believe, generally
is better in terms of default than shared ownership, though, I
have to say, whilst the majority of lenders involved in shared
ownership would say it has a higher incidence of mortgage default
than the market generally, the losses are actually relatively
modest, so it is a kind of slightly paradoxical position.
Mr Orr: I just think that no one
has produced any systemic evidence that demonstrates that shared
ownership has a higher level of mortgage default. As far as we
can tell, it is broadly equivalent, but some of the biggest mortgage
providers in this market will tell you that they do not count
it because the incidence is so small.
Mr Heywood: Well, I can show you
some evidence, David.
Q36 Chair: I think what we would
like, Mr Heywood, is actually if you show us the evidence rather
than simply Mr Orr because this obviously is a bone of contention.
Can I just press you on the shared equity? There are arguments
that there is a big hold-up in shared equity because mortgage
lenders are not providing mortgages, and yet you are saying that
it is very attractive to them.
Mr Heywood: Well, as far as I
am aware, the main problem from the perspective of housing associations
is actually with shared ownership rather than shared equity. I
think there are a number of issues wrapped up in this actually
and some of them are not directly about shared ownership. There
is partly the issue that low-cost home ownership of all sorts
has been hit because mortgage lending of all types is drastically
down and, inevitably, in a declining economic situation, home
ownership at the margins becomes slightly more problematic because
the risks become higher, and the situations of those people are
probably more precarious than for some of us. That said, you also
have issues, as we have touched on already, that both shared ownership
and shared equity sometimes relate to new-build flats which are
in low demand. You have some correlation particularly with shared
ownership where you have people with impaired credit histories,
and people with impaired credit histories, regardless of whether
it is shared ownership or mainstream mortgage lending, are tending
to find it more difficult to get mortgages at the moment. However,
there are specific shared ownership issues also.
Mr Heron: It may be very boring,
but I am afraid shared ownership lending is a specialist product.
I can support what Mr Heywood says, that there is a higher incidence
of arrears on shared ownership mortgages, and we will provide
the evidence, but that is not the point. The point is that specialist
products in particular, like buy-to-let, like shared ownership,
like mortgages for individuals who have had adverse credit, are
extraordinarily difficult to fund in the present environment and
that is because, I am afraid, all roads go back to the funding
and the capital markets. If you cannot fund mortgages in the way
that we have done for the last 30 or 40 years, which is where
we are at present, and there has been no movement on that whatsoever,
then it is going to be very difficult for certain classes of customer
to get mortgages. I am afraid it is deadly simple. If there is
one critical thing that the Government could do, it would be to
look with greater urgency and with greater invention at this particular
problem: how do you support mortgage funding?
Q37 Chair: We are going to have to
draw this to a close, but I just wanted to go along each of you
and get from you—I think Mr Heron might just have given
his answer already—what one thing more you think the Government
needs to do that it has not done yet?
Mr Stewart: Well, I came along
prepared with one idea, but actually the conversation has made
me think of another one, and perhaps I could touch on that one
first because it is this mortgage-backed securities thing. My
understanding from talking to people in the industry was that
this actually was a runner, the announcement in the Budget, and
it is up and running now and I understood that this was going
to make a difference. What Mr Heron is saying is quite worrying
if it is not going to work, so, if that is the case, then that
must be the priority. Before today, the HomeBuy Direct scheme,
which is a shared equity product which the Homes and Communities
Agency jointly funds with the developer, it is very early days
yet, but there is a scheme up and running and by later in June,
we should know how well it is going, but we do not have any hard
evidence yet. What has happened there is it has had a long gestation
period and it is now beginning to gather momentum, and the concern
of some of the house-builders I have been talking to is that,
once it reaches a peak, then the money stops, so if there could
be additional funding for that, assuming our experience by, say,
the end of this month is that it is really working, so once it
has got its momentum, to actually keep that momentum going into
next year.
Q38 Chair: Mr Heron, I think you
have already given your answer.
Mr Heron: Very briefly, just create
a workable ABS scheme, and give all lenders equal access.
Mr Orr: If housing associations
are to be able to continue to provide the very high-quality services,
not just normal tenant services, but the neighbourhood support
services, and be able to continue to develop, then I am sorry,
but we cannot afford to have rent cuts if there is deflation.
We need to have a stream of specialist funding available to support
shared ownership mortgages. I do think that it is realistic to
invite one or more of the institutions that are, in practice,
owned by the public to be providing that.
Mr Heywood: Apart from mortgage
funding, which I think is a given, it is absolutely key, I actually
think the Government needs to have a fundamental review of where
it thinks the balance of housing tenure is going. The policy needs
to derive from that. I think one of the key areas that is going
to have to be funded going forwards, possibly even more important
than home ownership at the margin, is going to be the private
rented sector. I do not think that issue has yet been nailed down.
Chair: Thank you all very much.
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