House of COMMONS









Tuesday 16 December 2008



Evidence heard in Public Questions 1-92




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W B Gurney & Sons LLP, Hope House, 45 Great Peter Street, London, SW1P 3LT

Telephone Number: 020 7233 1935


Oral Evidence

Taken before the Communities and Local Government Committee

on Tuesday 16 December 2008

Members present

Dr Phyllis Starkey, in the Chair

Mr Clive Betts

Andrew George

Emily Thornberry


Memoranda submitted by Council of Mortgage Lenders, National Housing Federation, Home Builders Federation and Intermediary Mortgage Lenders' Association


Examination of Witnesses

Witnesses: Michael Coogan, Director General, Council of Mortgage Lenders, David Orr, Chief Executive, National Housing Federation, John Stewart, Director of Economic Affairs, Home Builders Federation and Dr Peter Williams, Executive Director, Intermediary Mortgage Lenders' Association, gave evidence.

Q1 Chairman: May I welcome you to this session and just explain that flu is raging through Parliament so it is partly responsible for the absence of some of our colleagues. The rest of us are here, moderately healthy and keen to question you on the issues relating to the credit crunch and housing. I should like to start off by focusing on the current delivery of new-house build and the relationship to the targets which the Government have set themselves over the medium and long term and to get your estimates of where you think house building is at the moment and how difficult it is going to be for the Government to deliver on their long-term target of 70,000 affordable homes a year.

Mr Orr: First of all thank you for inviting me to come along to give evidence. The first thing to say about the targets is that we in the National Housing Federation were very strong supporters of the scale of new development implied by the targets. It is very important to recognise that, in the midst of all the other turmoil in the financial markets and the impact that has had on housing and particularly owner occupation, housing need has not gone away and housing demand has not gone away. We are enthusiastic supporters of the target of 70,000 new homes a year. The way that housing associations have contributed to meeting that target has been through a combination of public investment, private borrowing and sales-based cross-subsidy. If you take the sales-based cross-subsidy out of the equation, you have to replace that. We think we can deliver a very high proportion of that number of homes provided we can replace that sales-based cross-subsidy. There is more land available, we have sites which have the capacity to be started, but we cannot do it based on an assumption of a significant volume of sales. It needs to be re-profiled so that it is more about rent with a more varied rent offer including market rent, intermediate rent and the prospect of rent then becoming a leap into a purchase. It will require a different degree of support from Government, perhaps equity investment by the Homes and Communities Agency or a higher proportion of grant funding or land becoming cheaper or more easily available. We are in a position now where we have a very detailed conversation with the HCA and with Communities and Local Government officials. It is difficult and unless changes are made very quickly the programme for next year will be very thin indeed, but I am increasingly optimistic that we reach those agreement with Government and the Homes and Communities Agency.

Q2 Chairman: That is very helpful. Before we explore all of those in detail, do any of the rest of you have any comment on that?

Dr Williams: The NHF point is well made. The question of whether the cross-subsidy model is completely broken is a point of emphasis and David actually said that; he made the point that it would be more varied, more complicated going forward. We cannot assume the simple read-across from low-cost home ownership cross-subsidising renting. There is no doubt that puts a constraint on the development programme. However, I want to raise a more serious constraint on targets which are still valid and they are for the long term and much of that turns on capacity which I am sure John will talk about. The big question is resolving whether there will be a long-term credit constraint. If the mortgage market is simply to be based on deposits, this is problematic at least until securitisation markets re-open. Crosby has recommended that they should be re-opened and that Government should provide a guarantee but the proposals as set out at present are quite limited. We can perhaps come back to that. So there is an issue there about the capacity of the funding market ultimately to support the volumes that people are talking about in total. We were expecting lending volumes to be lower next year; clearly new development is only a small part of that but it will be a factor and that will mean that some people find access to the market more difficult. The final point I just make from this is that in all of this clearly what we are re-writing is the landscape of housing tenure in the UK ultimately through the credit crunch and perhaps we might come back to that. It ultimately means a smaller home-ownership sector and a larger set of rented sectors.

Mr Stewart: I very much support Peter's comments about Crosby. The new home sector - I am thinking particularly of the private side - is dependent on the housing market as a whole; it is about ten per cent of the market so if the market is down then house building comes down as well. The underlying targets, the wider targets, the two million and the three million, not just the affordable housing targets, remain just as valid because they are about people and housing need and housing demand. The fact that supply will be down over the next two or three years, possibly longer, does not change the fundamental fact that those people exist, they need homes, they need adequate housing. I do not think we should lose sight of the fact that the targets are still as valid today as they were 12 to 18 months ago. We very much support the Crosby recommendations and we are concerned that the Government waited until the Crosby report and then said they were going to wait yet again until the Budget. We were very surprised by that. The Treasury must have been well aware of what Crosby was thinking about. He had already done his interim report earlier in the year. We were very disappointed when they put off a decision until the Budget, which will presumably be March or April. We think urgency is important.

Mr Coogan: The first thing to say is that you do need targets. The timeframe in which you achieve your objectives is obviously more challenging in the current environment. The Crosby report and recommendations which were touched on were first put to Government in autumn 2007, so we, like others, are frustrated that they are not yet implemented. We do have a rationed mortgage market and that does mean that the money will either go to home owners or private renting or social housing and we do not yet know how that is going to play out into the future. We need to make sure all of the sectors are appropriately funded, but the pie is smaller.

Q3 Chairman: May I take up a couple of points which have come up there and I am sure we will explore the others in the rest of the session? The first is this issue about demand and need. Clearly demand, as expressed by people with money to buy, has fallen off. Are you all saying what Dr Williams was saying which was basically that the underlying need remains the same and is not affected by the credit crunch or by the economic downturn?

Mr Stewart: I would certainly support that view. There is a subtle distinction between need and demand of course. What matters to a private house builder is effective demand, not just a desire of someone to buy and it is the effective demand which has fallen so sharply. From our evidence - and we do not have hard statistics on this, certainly what house builders tell us is that the number of visitors to new home sites is down by a certain amount whereas the number who can actually buy is down significantly more than that. We have taken that to mean there is still, even given current circumstances, strong demand for housing but many of those people who would like to buy are unable to at the moment; they have not gone away, they are still there.

Mr Orr: I would say that it is probably the case that the need is increasing; it is not just remaining stable but is increasing. It is increasing because we continue to create new households for a whole variety of different reasons at a rate much greater than the replacement rate in the economy. The kind of indicators of that are that the one in 12 people in England on social housing waiting lists is, according to the LGA, likely within a couple of years to become one in ten and that seems right to us; that is certainly what we understand. The level of overcrowding in London is growing, the number of three-generation households is growing, these are measures of unmet housing need and those measures are going to grow. So there is an absolute requirement in this market in particular to think flexibly about how we can respond to that challenge and ensure that we continue to develop new homes.

Q4 Chairman: Just to clarify, are you saying that overall need is increasing or that the type of need is shifting from ownership into rental or social rental? If it is that, is there also going to be increasing demand for private rental?

Mr Orr: It is both, clearly both. One of the potential benefits of the re-thinking that we are having to do is that it may allow us to create a much more varied rental market in the economy than we have had until now. Actually we have needed that for some time. Our market has been able to accommodate people who can afford to buy and people who are on very low incomes accessing social rented homes, but there has not been anything in between. This gives us an opportunity to think much more creatively about what a fully functioning rental market would look like.

Mr Stewart: It is an important distinction. There are those who will always require social housing and there will be those who will always be able to buy in the open market even in today's market. There is a large intermediate category, which I suspect at the moment is extremely large because many of those people who even theoretically could buy just cannot get access to a mortgage. We would certainly support a healthy private rented sector and we are working with others to try to help that along. There is no way that we can say that the nature of the credit crisis has reduced the demand for owner occupation, for example. It is still there, it is just that there is this artificial constraint on whether people can actually achieve what they aspire to.

Q5 Mr Betts: In terms of this development of a different rental provision, are we talking here, as some of the of the British Property Federation have been arguing for, about people coming in and investing for the long term in the private rented sector, not the buy-to-let sector but actually developing their own products and then letting them and managing them and seeing them as a long-term asset to hold? Is this the sort of arrangement you are looking for?

Dr Williams: Many buy-to-let investors are long-term holders. To characterise buy-to-let investors as here and gone is not at all what the survey evidence would support. Buy-to-let investors by and large are long-term holders. Clearly there is the opportunity to open up a wider investment market, pension funds being one obvious category. There is also an opportunity for housing associations to be, potentially short term but in some cases maybe long term, themselves owners of private rented housing that is renting for the private market as opposed to the social rented market. So there is potential for a diversity of providers. If I may, just to reinforce a point I wanted to make, we should not assume that because prices all increase affordability increases because clearly we are facing a situation where we have tightening access to credit, the terms of credit are much tighter and in some cases, if you use the example of the non-prime market, the credit simply is not available, so there is virtually no mortgage provision in some parts of the market. That impacts upon a number of people including right-to-buy purchasers, foreign nationals, relationship breakdowns and a number of people who would otherwise have entered and accessed the home ownership market will need to go somewhere else.

Q6 Mr Betts: May I come to my second point? You are talking about the fact that long-term demand and the desire to be owner-occupiers for many people who cannot afford it at present probably has not gone away. Is there not a potential major problem coming at some point in the medium term if the credit squeeze relaxes before the industry gets itself back in the capacity to start building again? We could actually see home prices, having gone down very rapidly, starting to come back very rapidly because of the shortage which has built up and because people have begun to be able to buy again.

Mr Coogan: We do have some risks here but clearly it depends on the timeframes of both the slowdown and the bounce-back. We are in a situation where the demand is out there but it is being curtailed in terms of home ownership because of house price falls. If there is not sufficient supply you will come back to the point where there is more demand in individual areas and that starts to stop the slowing down of house prices and starts turning it round. I do not think it will necessarily bounce back very fast but that is one of the questions because it is unclear at the moment where we are going in terms of the recession, the timeframe, how long house prices will keep falling or when they may start to go back up. Clearly if you do not have the infrastructure ready to have the supply of houses to meet the demand you do have a potential underpin for house prices and create some of the pressures we have seen over the last ten years.

Mr Stewart: Definitely the capacity will be there for another spike in house prices because we have a long-term under-supply in this country, which Kate Barker recognised in her report and we have been arguing that long before Kate reported. That situation will worsen over the next few years because the housing numbers will fall below what had been assumed would happen, but it critically depends on what happens in the mortgage market. If the mortgage market were to go back to where it was, then clearly you would have capacity for a big increase in house prices, but that is unlikely to happen in the short term. We must not forget that last time we had a crash in the housing market it finished in 1992 and it was 1996 before we finally began to see some recovery. It will be several years before that could happen but fundamental to it is that that is a problem which is there; the under-supply has not gone away and in fact has probably got worse.

Dr Williams: We do not know post the crunch what the regulatory response will be in terms of constraints on mortgage lending by regulators, international, European and UK. Lending risk appetite is massively depressed, as you might expect, and will be diminished for a long time. Overlaid on top of that will be the question of the regulatory response which we do not know at this stage.

Mr Stewart: May I just add that I think that is absolutely critical. A lot of this is premised on nothing being done. The Government have taken action and we welcome what has been done so far but if Crosby were implemented and if it worked, we would hope that could cause a fairly quick turnaround. If Crosby is not implemented, then the situation will be much worse. The Government have in their power measures they could introduce which probably all of us would believe would have a significant impact.

Q7 Mr Betts: Is Crosby felt by all of you to be absolutely key to the recovery?

Mr Coogan: The prognosis that if we have a net lending negative figure next year the market would shrink is a view that he has expressed that we would not disagree with in the current environment. That does mean therefore that there are fewer lenders available to lend, less money available to lend to those you want to lend to and your choice is where to lend. Do you lend to home owners, do you lend for private rental, do you lend to social housing? Those choices will be more difficult, the pie will be smaller but it is in an environment where the customers also are less likely to come to you and ask to borrow.

Mr Orr: It is also the case for us that the availability of mortgage funding is absolutely critical. The incidence of people looking for shared ownership purchases is higher this year than it was last year. Housing associations are seeing more and more enquiries about different kinds of shared ownership. However, the rate at which these become completions is absolutely tiny. In some cases it is because people are saying that they think this property may still go down in price so they are not going to buy, but in the big majority of cases the transaction fails because of the non-availability of mortgage finance.

Q8 Emily Thornberry: You were talking about differential rents and certainly it is something which within inner London we are very conscious of. The average two-bedroom social rented housing in Islington is £80 a week whereas in the private sector it is £300 a week. However, we have many people from the housing waiting list who end up in the private rented sector but being paid for by housing benefits and obviously therefore getting caught in the classic poverty trap we have always wanted everyone to avoid. The idea of differential rents and different types of rents, intermediate rents and everything else, opens a political spectre which is quite frightening. How would you distinguish between those who are given the social rent and those given the intermediate rent and those given a private sector rent? The idea of the housing associations in particular going in wholesale to an entirely different type of rented system is something which is a really big nettle for us to have to grasp. I wondered whether you could talk any more about that.

Mr Orr: There is no way around this. If you have different kinds of renting offers, then the determination of who gets them is going to be income dependent. If you have an intermediate renting offer, and intermediate at present is defined as being 80 per cent of market rent, then that is likely to have the same kind of income cap on it as the low-cost ownership initiative of various kinds. So if you are earning above an income cap then you would not be eligible for that and inevitably intermediate rent would come with a degree of eligibility criteria because there is a degree of subsidy implied in it. Market rent of course is different because if you are paying what is in the market, then that is open to anyone who wants to be able to access it. Is it appropriate for a housing association to be doing this? Some already are of course. Is it appropriate to be doing it in the volumes that may be necessary? There are some very important questions for housing associations and local authorities and others about how we retain mixed income communities. The way that we have tended to do that has been through a focus on tenure. If we are not going to be able to deliver mixed tenure development for the next few years, then we do need to deliver mixed income developments. Market rent with an opportunity but not an obligation to buy is one option. Intermediate rent leading to a shared ownership opportunity is another possible way. We have to think creatively about it. One thing housing associations can bring to the table is pretty widespread expertise in property maintenance and housing management.

Dr Williams: I do think it would be unwise if associations en masse thought they could enter the private rented sector. The business schools there are quite different; the competition is complicated, not least because there are large numbers of home owners renting out their properties as well, so it is a very uncertain base in terms of the price to be achieved. It is clearly very appropriate for some who have the expertise and competence but the idea that the sector as a whole makes a major entry into the private rented sector would probably be inappropriate.

Q9 Emily Thornberry: Also do you not have an obligation as social landlords to have properties of a particular type. You have higher standards, larger rooms, better insulation, these sorts of things.

Mr Orr: Yes; absolutely.

Q10 Emily Thornberry: Would you be able to rent in the private sector?

Dr Williams: That is why I suggested that it is an intermediate hole for some associations. In other words, you recognise exactly the point you are making and David was agreeing with which is that you are not going to make all of those high standards without a lot of retro-fitting and all the rest. You therefore hold them as private rented property for a period and then potentially take the decision whether to exit that in the recovery or whether to sustain and support them and potentially even move them into social housing.

Mr Orr: Yes, but you do have to approach that from the end which says how do we improve the environmental and space standards of our housing stock more generally? I do not think it would be appropriate to use the present market as an excuse for moving backwards from some of the decisions we have taken about environmental and space standards.

Q11 Emily Thornberry: You were talking earlier about housing associations delivering housing based on public investment, private borrowing and cross-subsidy from sales and the sales aspect having dried up. Are you saying that private borrowing is not drying up?

Mr Orr: No, I am not saying that. There was a spell three or four months ago when it was virtually impossible for housing associations to access new borrowing. They are able to access new borrowing now but at different cost. The price of money for new development has increased significantly which obviously has an impact on the relationship between public and private investment within a fixed rent envelope. There is a much wider range of issues about lender behaviour which impacts on housing associations' business than purely new borrowing for new development. In a way that is the easy bit.

Q12 Chairman: On the point Mr Orr was making that we should not use the recession as an excuse to reduce environmental and space standards, Mr Stewart do you have the same view or not on that point?

Mr Stewart: This is a difficult one because I know David makes this point. The inference often is that somehow standards in the private sector are inadequate, which I would strongly dispute. The OFT carried out their study recently and I doubt the OFT came in thinking that the industry was absolutely squeaky clean.

Q13 Chairman: We are not suggesting they are inadequate, but it is the case, for example, that on the code for sustainable homes housing associations are required to deliver to a higher standard than is obligatory in the private sector. That is what we are talking about, for example.

Mr Stewart: Okay, yes, I understand that. The reason that the ten-year programme was originally agreed between private sector and Government was because it was felt that was feasible from a technical point of view, from a point of view of research and development, consumer satisfaction and particularly from developing capacity within the supply industries. The idea that you could apply code 3 immediately across the entire output, put aside the credit crunch, was just unrealistic; it just could not have been done practically.

Q14 Chairman: But you are not saying that the credit crunch means you should delay it still further.

Mr Stewart: It depends; it very much depends. In our submission there is a very big issue about the degree to which land value can fund policy and regulation.

Q15 Andrew George: May I come back to the issue of targets? I just need to understand where you are with this. As I have always understood it, the three million by 2020 target is merely a means to an end, the end being meeting housing need. We are in a different environment now. There has been a credit crunch, the supply side is drying up to an extent we can tell and you are concerned still about meeting that particular target. I am sure Mr Orr's organisation is obviously very concerned about those in social housing need, but if the end - because the three million is merely the means - is meeting housing need, I do not hear anything you are saying which reassures me that you have any understanding of what the current level of need is. That is surely what we should be targeting, not simply numbers.

Mr Stewart: I am not sure I quite understand your question. House builders can only build what they can sell, whether to a housing association through a 106 agreement or to the private buyer. House builders do not relish the thought of cutting back on staff and cutting a back on capacity and not building. If today they could be building 50 per cent more than they are, they would be doing that. The problem is an artificial constraint on whether people can buy or not. That does not affect the fundamentals of population and household formation and so on. So the need and the aspiration for housing are still there. Households still need a dwelling. You could debate about which exact households.

Q16 Andrew George: Are you saying that you agreed with the three million figure only because it sounded a nice high number for you?

Mr Stewart: No, no. We agreed with it because it was a sensible number, because we believed it was based on hard evidence inasmuch as any projection is hard evidence.

Q17 Andrew George: So what is the evidence now then?

Mr Stewart: It will not have changed. The only way that figure could change significantly, given that most of the people who would have formed the households over the next 10 or 15 years are here today, they are living today, they are my kids who are growing up and so on, would be if there were a very significant change in inward and outward migration over the next 10 or 15 years.

Q18 Andrew George: Or through second homes or less churn in the market. There are lots of lifestyle choices.

Mr Stewart: Second homes is a very small component, tiny, it does not make a significant difference. Empty housing is very small in the context of this. These are tidal forces we are talking about and unless we assume that migration changes significantly, those households and those people will be there. Some of those households will not be able to form if the dwellings are not there. Children will not be able to leave home, people who get divorced will have to go back and live with Mum and Dad. Those kinds of things will happen. The people will still be there.

Dr Williams: Do not forget that the three million is also about affordability. The three million is about slowing the increase in house prices, the proving affordability so that demand can become effective. We have rehearsed already a number of reasons why that is more difficult but it is not just about a need-based measure.

Q19 Chairman: May I just mop up one or two little queries we have from your evidence about unsold new private homes? There seems to be disagreement between you as to quite the volume of unsold private homes, why they were not being bought by anybody, including housing associations and also the issue of land prices where there seemed disagreement. Unsold private homes first.

Mr Stewart: That affects our members. I was not aware that there was disagreement. There are no figures on that in this country unfortunately, unlike the United States. We do not have figures for stock levels so we do not know the numbers of unsold stock. Certainly from talking to the house builders - and we are in very close touch with them - a few of them have reported numbers but we have no industry figure. One suspects that it is quite a large number. The Government have implemented a number of measures. There is the so-called clearing house which was £300 million for RSLs to buy up unsold stock. I appreciate there are some concerns that RSLs are expected to meet code 3 and higher space standards than the private sector can offer and there is some degree of flexibility. I know that there has been success in that. I do not think the numbers have been published but I understand that there has been some success there. The house builders themselves are gradually clearing the stock. The key thing about stock from an economic perspective is that as long as you have stock outstanding you tend not to start new dwellings. So the whole process tends to grind to a halt; which is why starts are so volatile because they reflect what is happening to stock. Once you have cleared those then house builders will be ready to start new sites or new properties. A lot of sites have been not started or have been mothballed while they are trying to clear current stocks.

Mr Orr: It is the case that we do not know exactly what the numbers are. It is also the case that there is evidence of significant numbers in particular places of one- and two-bed city centre apartments which are lying unsold and housing associations have been invited to buy those. These properties are generally not suitable for social housing and the reasons are to do with standards. In the private sector a two-bed apartment may well be bought by a couple, two people, who will live there for four or five years and sell it to a similar household. If you are running a social housing organisation, the expectation and the expectation from local authorities making nominations to it will be that a two-bed apartment will be occupied by three or possibly four people and possibly for the next 20 years. That is a huge maintenance cost on properties which are too small to be able to accommodate that properly, but it is also a huge personal cost on the people who actually live in those homes. Generally in social housing we house people who are on very low incomes, so if they are not environmentally sustainable, you trap people in pure poverty as well. These properties are not suitable for a social housing purpose. The challenge for us is to identify what purpose they are suitable for in a market in which individuals are not prepared to buy them and lenders are not prepared to lend on them. That is where it is right that we should be looking at market rent and much more short-term use so that we can at a future point revert to the original expected use, but if we buy them for social housing, they do not revert to that original intended use, which is why housing associations are not really in the market to buy them in bulk.

Dr Williams: I chair a housing association. There is a point about the capacity of associations. Clearly associations are having to re-work their business plans significantly at present, reflecting the credit crunch, reflecting the loss of receipts from low-cost home ownership, reflecting uncertainty about values. There is an issue again about choices and whether associations devote resources to buying up unsold stock from the market with all the weaknesses David rightly pointed to or pushing on with existing development, some of which had been assumed to be cross-subsidised by other things they were doing. It is not a free ride here about associations just waiting to step in and buy things up. They too have capacity constraints and we have already alluded to fairly significant funding constraints.

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 per cent to 0.3 per cent, 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 per cent and three per cent 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 the 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 per cent 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 per cent 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 per cent that the first-time buyers buy. The Government have put in 15 per cent and the developers are putting in 15 per cent. 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 two per cent 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 per cent 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.

Mr Coogan: 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 ten per cent 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.

Memoranda submitted by Department for Communities and Local Government and Housing Corporation


Examination of Witnesses

Witnesses: Rt Hon Margaret Beckett MP, Minister for Housing, Richard McCarthy, Director General, Housing and Planning, Department for Communities and Local Government, Sir Robert Kerslake, Chief Executive-designate, Homes and Communities Agency and Peter Marsh, Chief Executive, Tenant Service Authority, gave evidence.

Q35 Chairman: You obviously received the intelligence that we are a bit short on numbers owing to flu and other commitments but it has allowed us to focus our efforts much more on teasing out the information we require so you may regard this as a mixed blessing. May I start by taking up the issue of government housing targets and the ability to meet them? I do not really want to re-open the debate we had with you last time as to whether it is a target or an ambition to reach the three million. I am much more interested in whether, within that overall number target, there is some re-thinking in current circumstances about the balance between homes for rent, for shared ownership and for market housing.

Margaret Beckett: It depends a little, as so often, on how you define your terms. How I would put it, rather than saying that at this moment there is a big re-think going on, is that although we have just commissioned or are about to commission some more research into housing need which may cast light on this issue, there is a consciousness that it is possible that there will come out of it perhaps a slightly different balance between people's approach in terms of whether they want home ownership or whether they want to rent, wherever that be. However, having said that, my impression is that at the moment there continues to be quite a strong demand for home ownership, including for the shared equity schemes that we are continuing to run or are beginning to promote and so on. It may be that actually the underlying desire towards ownership on some scale is so great that there will not be that much of a difference. It is too early to tell but that is exactly the kind of thing which I hope will come out of the research we are commissioning into what housing need is and how it is expressed.

Q36 Chairman: May we just concentrate on the short term as opposed to the medium term. In the short term it is quite clear that demand that can be expressed as opposed to demand which is related to need is extremely constrained as regards ownership and therefore presumably the demand is being expressed as rental, either in the private sector or social rented. What about short term shift?

Margaret Beckett: We think there is a relatively strong response, for example to the HomeBuy Direct programme which we gave the latest details of yesterday. It is an ongoing thing but yes, I do not dispute that at present there is a considerable demand for rented property and rented property of a good enough standard in particular.

Sir Robert Kerslake: I am happy to add a few thoughts on the short-term position. Your phrase "effective demand" is absolutely right. The constraints at the moment are twofold: one is the ability of purchasers to access mortgages and the other is the ability of developers, whether they be housing associations or others, to access investment finance to deliver houses for sale where there is a sales risk. In a sense the sales side is being squeezed in both directions is the way I would describe it. The reality is that what we are doing is to try to address that issue in two ways. One is to make it easier for people to access mortgages, and that is in effect what HomeBuy Direct does, by being a second charge behind the mortgage that makes it more possible for people to access mortgages. The evidence, as announced by the Minister yesterday, is that there is a good deal of interest in that scheme from the sector, from house builders and others. On the other side, in terms of development of schemes, what no doubt you will have picked up from the Nat Fed is that there is a certain amount of reluctance on the part of housing associations to take forward schemes which have significant sales risk. What we are seeking to do is to be flexible, to recognise that short-term reality and enable them both to do social rented and rent-to-buy so when the market does lift the opportunity is there to purchase.

Q37 Mr Betts: Is there not an immediate problem? We do not know quite when the market will lift. We have, as we all recognise because people are not able to access home ownership as easily as they might have done a year ago, an increasing demand for social housing and we all see that in our surgeries as Members of Parliament. We have housing association schemes not going forward potentially because they simply cannot stack up the numbers now and with not being able to sell they need to cross-subsidise. We have 106 schemes grinding to a halt as well. Is the reality not that, despite what the Government have done already, we need a substantial increase in government funding for social rented housing if we are going to bring the two together, the increasing demand for social rented housing and the fact that the supplies in various forms are drying up?

Margaret Beckett: We have brought forward funding.

Mr McCarthy: You will be aware of the £400 million we announced.

Q38 Mr Betts: On top of that. That is not going to deal with this gap, is it? It is going to get wider rather than narrower even with that funding.

Mr McCarthy: The best priority must be for us to maximise the opportunity we have now to spend the money brought forward, now some £0.5 billion for social rented housing, because remember the PBR announced further additional money brought forward to support the social rented programme along with the decent homes programme. The first job that the HCA has to do with housing associations and others is actually maximise those social rented homes and we can new build with the money brought forward and were more money to be made available I am sure we would spend that further.

Q39 Mr Betts: How many extra units is the money which has so far been provided going to create?

Mr McCarthy: You will remember that the money we announced in September that £400 million should deliver a further 5,500 homes so you can proportion that up. You will be aware that we also have to deal with some of the funding pressures which now exist in our funding system with less subsidy from 106 agreements and the staircasing concerns.

Margaret Beckett: The initial thinking was that that £550 million might bring us forward about 7,500 units.

Q40 Mr Betts: Is not the reality that we are next year going to get fewer section 106 properties provided and that that reduction is likely to be bigger than the 7,000 which is going to be provided by the half a billion pound extra funding. That is the reality.

Mr McCarthy: It is not going to be that number but it is going to impact on supply which we have been quite open about and we are trying to maximise the benefits we have of lower property values and lower land prices which are now feeding through into the system and will ultimately impact on the supply costs alongside the fact that the cross-subsidy that we have referred to has substantially disappeared from the delivery side.

Q41 Mr Betts: What I am trying to get at is whether this half billion is the finality as far as Government are concerned or whether it is still a work in progress with further thought being given as to whether more needs to be done to sort out what is a major problem.

Margaret Beckett: On the one hand we have the £550 million that we brought forward already for build but also of course we have the money which was made available to ourselves to buy unsold stock which was suitable for social housing. As I understand it, the latest figures from November are that about £120 million of that money has been disbursed and has purchased about 3,800 new units. We are not saying this is enough by the way. What we are saying is that there is a substantial amount ongoing and we are always in the market for fresh offers of finance should any be made available.

Q42 Chairman: May I just pursue this money bit? Is the £400 million which was the September housing rescue money brought forward or extra money?

Margaret Beckett: Money brought forward.

Mr McCarthy: Money brought forward.

Q43 Chairman: Brought forward from what?

Mr McCarthy: From the social rented programme into the social rented programme; from 2010-11 into this and next financial year.

Q44 Chairman: And the extra £575 million?

Mr McCarthy: That was a mixture of money brought forward, again from our 2010-11 programme; £150 million of that is money brought forward from social rented housing into the social rented programme.

Margaret Beckett: A lot of it is money brought forward.

Q45 Chairman: So the question, looking over the long term, is, if you have brought it forward, how are we going then, assuming things start looking up, to deliver what we were supposed to be delivering in 2010-11 or 2011-12?

Margaret Beckett: You put your finger on a very good question but you asked us, in answering your question, to concentrate on the short term.

Q46 Chairman: What is the answer?

Margaret Beckett: The answer is that at present we have brought forward a lot of funding which we were anticipating using in 2010-11 and that issue will have to be dealt with as we get nearer to that time.

Q47 Chairman: One point which was made by our previous witnesses was that the new HCA has a lot of money from EP and the Housing Corporation. Could you be bringing forward some of that?

Sir Robert Kerslake: That in effect is the money which is being referred to. The Housing Corporation's principal programme was the national affordable housing programme and that is what the Minister is referring to in terms of the money brought forward.

Q48 Chairman: So there is no more hiding around the place.

Sir Robert Kerslake: There is no new money. Money in relation to HomeBuy Direct is money redirected, but other than that it is money brought forward.

Q49 Emily Thornberry: Who is going to deliver the social rented housing? Will you be relying primarily on housing associations to do that? If so, we have already heard evidence today that, given the sales-based cross-subsidy has pretty much dried up and there is difficulty with private borrowing, there seems to be some talk about changing the type of housing which is being delivered in terms of what rented housing housing associations might be delivering to us. What I want to raise with you is exactly what the definition of social rented housing might be and might we be getting more intermediate housing for rented housing which is going to end up with an element being bought. There are lots of different elements in that question but that is the nub of the evidence which was given before and raised a number of concerns.

Margaret Beckett: May I begin with the issue of whether they are mostly RSLs? As I think the Committee are aware, we are in the throes of preparing to change the regulations so that local authorities can benefit from new build and also so that they can be eligible for and comply for social housing grant. We are changing that balance but obviously that will take some time and, as I am sure the Committee are well aware, the amount of new build that local authorities have been engaged in, which has mostly not been directly built but commissioned by local authorities, has been quite small of recent years. It is quite likely that we will go on looking to RSLs for most of the build, if only because, the reason that that direction was pursued in the first place, which was that if you can bring in private sector money as well - and I take the point entirely about sales, about section 106 and so on changing the picture but it does not obliterate the picture completely - the likelihood is that we will look to that model, partly because they have been doing it and are geared up to do it, partly because it will bring in other money and that gives you more for the amount of public funding available and so on. With regard to changing type, I am not quite sure what you are pursuing here but we are encouraging RSLs to look more at the larger homes and in fact we have set a target for more larger homes. With regard to the issue of changing definition, people are looking, for example some RSLs are looking at the moment, if they have unsold stock, at making them available for intermediate rent so they get an income flow and if that is part of a rent-to-buy scheme then in the longer term that can be an option to purchase and the potential for that money to come back to the RSLs. There is quite a lot going on.

Mr McCarthy: The intermediate rent options are all within the funding envelope that we have for our low-cost home ownership intermediate housing. The money which is set aside for social rented housing remains focused on social rented provision. What we are doing is to continue to develop a range of intermediate options which reflects the changing market conditions. There is no shift in policy or intent about how the social rented programme is spent and it is really important that we are very clear with the Committee.

Q50 Emily Thornberry: It is very important that is made clear because the idea that there is a series of different types of rented accommodation is worrying. We need to have a guarantee that the proportion of social rented housing will remain.

Margaret Beckett: Absolutely.

Mr McCarthy: Yes, it is very important.

Mr Marsh: The overall demand for new housing has not changed. What has changed is people's ability to pay for it and access mortgage finance for low-cost home ownership. Therefore the discussion on increasing intermediate or rent-to-buy housing as an alternative LCHO seems to be a very sensible way of ensuring we can still build new homes which are mixed income communities. It is important to recognise that as well as money the Minister has discussed in relation to government funding there remain over the next 12 months plans in the housing association sector to draw down £5.5 billion of private finance. Of that £5.5 billion of private finance just over £5.2 billion is already in place in terms of lending agreements which have been signed. There are issues about the price of money that is being negotiated for additional funds and there are risks in relation to covenant bridges which some associations face. The overall picture of a sector that has substantial attraction to the private finance market remains sound. It is our job to ensure, working with the CML and Government and the HCA, that that is a picture which remains the case for the next six months or next 12 months. This is a sector which has traditionally acted in a counter-cyclical manner that can help meet housing need that otherwise would not be met in an outright market situation.

Margaret Beckett: What this exchange has exposed, which had not quite dawned on me when you asked your series of questions, is that in what I have said to you about the intermediate rented sector and so on, that is part of the short-term response to the short-term difficulties we are facing. There is no underlying policy change at all, which obviously is what you were exploring and I did not realise that.

Q51 Emily Thornberry: My fault because it was a very long question. It was raised with us earlier that there are huge difficulties for first-time buyers but for those who are wanting to part-own a suggestion has been made that here we have all these banks that we have essentially nationalised, are we not in a position to be able to nudge them in the direction of ensuring that those people who want to part-own are actually given that opportunity? Otherwise there is a whole tranche of funding available, to housing associations in particular, which may not be available otherwise.

Margaret Beckett: We are in continued discussion with lenders about a whole range of ways in which we can improve the situation which exists at the present time. If I may give you the example of the proposals which we announced yesterday, we had far more bids than we anticipated for that HomeBuy Direct programme, certainly 50 per cent more and nearly getting on for twice as much. To my simple mind this is actually quite an attractive proposition for lenders because what is on offer is a scheme which potentially means that they would be asked to mortgage only 70 per cent of property; up to 30 per cent can be made available through other means.

Q52 Chairman: May we just clarify? On the HomeBuy Direct, when you are talking about demand for the product, which indeed we heard from a previous witness, are we talking about the fact that developers have come forward in rather greater numbers than you expected?

Margaret Beckett: Initially yes.

Q53 Chairman: Which is good news. So that is what we are talking about. We are not talking about lenders.

Margaret Beckett: No, not directly, but, having said that, I keep hearing anecdotally throw-away remarks from people in the sector about the considerable demand there is for such products.

Q54 Chairman: From?

Margaret Beckett: From potential purchasers.

Q55 Chairman: People. Right. So we are still not talking about lenders, which I think was the point Emily was focusing on.

Margaret Beckett: There are three separate different sets of people. On the one hand are the developers who come forward with bids. Then there are the people who might want to access those bids. Thirdly there is the issue of whether the lenders will lend.

Q56 Chairman: I think Emily was asking about lenders and the suggestion which was made towards the end of the previous session that, let us not beat about the bush, Northern Rock should be instructed, nudged, pushed, into providing mortgages on shared equity because there does appear to be some evidence that there may be demand for shared equity, there may be developers keen on HomeBuy Direct and the witnesses were very positive about HomeBuy Direct. They were very positive about everything the Government have suggested, the big thing is not enough, more of it, but that banks are not keen on lending to individuals and therefore they are not taking it up and Northern Rock could and the Government are putting into it so why do they not make it?

Mr McCarthy: May I say something about the lending community? First of all, please stay just for a moment with HomeBuy Direct and the shared equity model where the 30 per cent in this case funded by the Government and by developers is for a shared equity mortgage secured by a second charge. This is important. It means that when individual prospective first-time buyers approach their lenders they will be seeking a loan-to-value ratio of 70 per cent. They will be able to access a mortgage at that ratio across the country from a range of mortgage providers. When we have shared ownership products, which is the new build programme through housing associations, the value of that programme is that it gives a cheaper point of entry. You can have equity shares at 50 per cent and lower but the legal nature of that programme is that the owner buys a proportion of the property and not the whole property. Consequently they have been traditionally seeking mortgages of up to 100 per cent on the element that they were buying. So you had reduced loans to value, much sharper loan-to-value ratio challenges. We have seen lenders withdraw from that market and we are talking to the CML and lenders about what we can do to encourage them back into lending against shared ownership products. The CML has confirmed that it will support and lenders will support the shared equity products. We may have to shift more of those into that structure but we are also looking to encourage lenders across the piece, whether the Government have an equity stake in them or not, to provide mortgages against shared ownership leases where we actually think they have very good security. There are separate issues which you have to address to the Treasury about government instructions to banks where they have an equity share. This is a very complicated area and they are not going to be wildly keen if we start speculating about what they should do there.

Margaret Beckett: I am instinctively reluctant to give instructions where there is no need.

Q57 Chairman: This illustrates a point that was made in the evidence in the previous session that part of the trouble with shared ownership products in the past has been they are unbelievably confusing. We certainly cannot grasp them and my experience with my constituents is they cannot very much either. To that extent we very much welcome the shift to equity.

Margaret Beckett: I think that there would be great merit in us trying to provide you with a very short simple note about the variety of products available. I have asked the Department to do it but I have not had chance to cast my eye over it.

Q58 Chairman: Or even to reduce the variety since it seems to be confusing people.

Margaret Beckett: I take that point completely except that each of the options which is available now has been put forward because of a perceived and identified need.

Sir Robert Kerslake: Three points really. The first is to say that the different products in part reflect the different circumstances of individuals so some are more accessible than others and whilst HomeBuy Direct is a successful product it does not work for everybody, which is why we have alternatives. The second point is just to reinforce Richard's point that the banks' attitude to the different shared ownership products in their widest sense varies between the products. They are more comfortable with the equity loan model, the shared equity, than they are with the shared ownership. We have challenged them on that but nevertheless that is where they have come from. A final point to make is that part of the reason why we went for the HomeBuy Direct model was in response to what the industry was saying to us and they in fact had been running their own schemes because they found it worked in terms of getting potential purchasers. Obviously as the credit crunch has bitten the ability to run their own schemes entirely on their balance sheets has proved quite challenging, hence the model we have now; in effect we helped them and they put resources in as well. So there is some evidence from their own track record of being able to use the shared equity model to sell properties.

Q59 Mr Betts: From the previous witnesses we got a very strong welcome for HomeBuy Direct because people saw it as a simple model which everyone could understand and seemed therefore to attract support. It would be helpful to have a note but the most important thing is not that we understand it but people out in the market understand it. I think very often the people who are trying to lend do not at present. That just comes to the final point that people do not understand. I hear what Sir Robert says about the reluctance of some lenders but they do not understand why the public puts billions of pounds into these banks and then members of the public most in need are unable to access something from them. A bit of pressure on the banks as opposed to a bit of talking to them might be welcome. It might be for the Chancellor to do that and for you to send a message to him Minister.

Margaret Beckett: Yes, there is no doubt that there is quite a lot of pressure being put on the banks.

Q60 Mr Betts: There is real frustration. I drew attention in the adjournment debate only a few days ago to Ms Wilson, one of my constituents, and the horror story she went through and is still going through of six months trying to negotiate a share ownership package with at some stage not being able to access public funds because they had run out, at other stages not being able to get a mortgage because the circumstances there kept changing and new products came and went with the organisation she was trying to borrow from and the two never came together at one point for her to be able to complete the transaction. There is complete frustration for someone who needs a home and really is in a position to pay for one.

Margaret Beckett: There is no question. I have seen a number of examples of similar circumstances where it has been very, very difficult for particular individuals. The problem is that it has been a very, very fast-moving situation and the thing has not gelled, banks have not known where they were, they were changing. It has been a very complex picture. We all share the Committee's concern that the position is not clearer and we are considering ways in which we can remedy that.

Q61 Andrew George: The environment we are in at the moment is one in which it seems everyone wants the same thing. You have a major opportunity to develop the intermediate market here. Developers are desperate to get some work and lenders want to make sure that they have a reasonably secure environment in which they can lend. The housing associations continue meeting the need which they have on their books. It seems to me that the shared equity or the shared ownership, whichever version you wish to push, seems to be one which is well worth developing. The problem at the moment seems to be, certainly from the earlier session, that the lenders still remain very nervous about this, they are very concerned about the problems of golden share, the problems of people not being able to staircase up to 100 per cent on many schemes and yet the importance of retaining the integrity of a lot of these developments is great, also of course planning permission has been passed, in order to keep land values down, in order for the schemes to stack up in the long term. You hold the card to achieve all that, both on planning and in terms of being able to enable these schemes to come forward. Can you do anything more to encourage the lenders to come in and make these schemes viable?

Margaret Beckett: It is one of the oldest clichés around, is it not? There are all these tremendous challenges but they are bringing huge opportunities. There is no doubt and we are looking constantly at how the environment is changing and what that can offer us in terms of how we can proceed in the future. Equally though I was interested on looking through the written evidence, and I appreciate you have just had oral evidence which may have produced one or two different nuances, of those who have recently been before you and looking down the checklist of things they said it would be really good if the Government did, it looks to me as though we have actually done pretty much all of them and we continue to be in the market for creative ideas which we can pursue. I cannot really say any more to you than that. It is not as simple as it initially sounds but some of it is simpler than it has been in the past.

Q62 Emily Thornberry: May I ask a question about leaseholders, the people who have bought their council flats, owner occupiers, who are now facing major bills largely as a result of the Decent Homes programmes. Are you gathering, have you been given any evidence as to whether or not they are having difficulties getting second mortgages in order to be able to pay these major bills as a result of Decent Homes work?

Margaret Beckett: I have had no direct evidence on that. I do not know whether this will come out of the research I was mentioning.

Mr McCarthy: No. Obviously this is a matter in which the Department has been engaged with you for some time and no new evidence has been presented to us at the moment about an extreme change of difficulties beyond that which you previously engaged with some of Mrs Beckett's predecessors.

Q63 Emily Thornberry: Certainly in my constituency we are currently gathering evidence and will put it before you.

Mr McCarthy: We will have to reflect on that. The important thing we have emphasised to local government is the role it can play there in assisting people with the provision of loans directly. It has the powers and we have asked local government to look carefully at those cases because it is very much about the nature of the activity undertaken by local government and we have encouraged local authorities to make mortgages available as well to assist home owners in those circumstances.

Q64 Chairman: I just want to put a question which arose out of the previous evidence session where there was a lot of talk about the need for more intermediate renting of housing association properties and a lot of housing association properties will become a kind of mix between market rent, intermediate rent and social rent. This raised for me the issue of whether there ought not to be a review of housing benefit which takes into account this new landscape, since obviously the eligibility criteria for social rent, market rent, intermediate rent in that sort of system would be affected by the housing benefit system as well.

Margaret Beckett: There are only two things I would say about that. One is that, as it happens, there is a review of housing benefit going on.

Q65 Chairman: Is it taking account of the changed circumstances?

Margaret Beckett: I doubt very much it is taking account of the kind of evidence you have just been given. I certainly and probably Peter too would like to take a look at the evidence you have been given this morning because that is not a point which has been put to me previously, though I can well imagine it is something which people are looking at.

Mr Marsh: It is fair to observe that in many areas the gap between a regulated social rent and a local housing allowance is still quite significant. Intermediate rents at or below that level will still attract housing benefit but the interplay between social rent and intermediate market rent progressing on to outright ownership is one that we need to continue to look at as the market changes.

Q66 Mr Betts: I want to look at the various elements of the rescue package. Generally speaking they have been welcomed. We asked our previous witnesses what their views were and whether anything else should be done. A universal request which came from all four witnesses was for Government to implement Crosby more quickly. They felt the delay to the Budget was really very harmful in terms of getting the mortgage market back working again. A specific request was that when it is implemented the recommendations in Crosby did not go far enough and they should not just apply to new lending now. That may be something more for the Treasury to look at but in terms of the housing market the feeling was that that was the fundamental thing you could do to get the housing market moving again.

Margaret Beckett: I completely understand the concern which has been expressed. If I heard you correctly you said that the previous evidence given to you was that the Budget was too long.

Q67 Mr Betts: Too far away. We cannot wait another four months for things to happen.

Margaret Beckett: I take the point and certainly, if they doubted it, we probably would convey those concerns to the Treasury, although I would think they are probably aware of it in their own way. All I would say is that looking at what Crosby recommended and what the Treasury has already said about it, it did not look to me like something which was necessarily going to be terribly simple to do or to do in five minutes. I understand the pressure but it might possibly be a little unrealistic to think that it is something which could be dealt with even before the Budget.

Mr McCarthy: And do remember they have to get very explicit state aid approval which they are seeking at the moment. A very significant action is recommended by Crosby that the Government are now exploring. I can tell you that they are doing that very actively.

Q68 Mr Betts: I suppose most people think that if you can recapitalise the banking system in a weekend you can probably do most things in a weekend. Could we just look at one or two other issues which came up? One interesting discussion we had was about the issue of unsold properties and the fact that housing associations sometimes think that these city centre flats, which there are an awful lot of lying around unsold, may not be very suitable because when they make an allocation to someone it is often on the basis that they have a housing association tenancy, they are off the waiting list, that is where they are going to stay for the next 15 or 20 years, which may not be the best long-term arrangement for a family. However, if we could have a more flexible approach to letting, where say a family of three or four people had a two-bedroom city centre apartment but on the basis that it might be for two or three years as an interim arrangement where they did not lose all their needs-based points which eventually would allow them to get maybe a family house which they really need, that might be something an association could look at. However, they said then they would need the Department, local authorities and associations all to change their approach to lettings and allocations arrangements to enable that to happen.

Margaret Beckett: I would want to look carefully at exactly what they said to you. I appreciate you did not say this, but I know part of the concern about RSLs buying up unsold properties has been whether the mistakes that people identified in the 1990s will be repeated. Will they buy a whole lot of completely unsuitable property which has long-term high maintenance costs and so on? All I can say to you is that my understanding is that all concerned are very mindful of learning that very difficult lesson and that they are being very careful in their approach and that the HCA is encouraging them on the one hand to be flexible with regard to what has been the long-term approach, but on the other hand also to make sure that they are taking into account whether what they had come forward to purchase was actually suitable for their needs.

Sir Robert Kerslake: The key point in terms of purchase is that it has to be the right property in the right place and at the right price. In terms of the RSL taking it on as a purchase, they have to think about the maintenance liabilities and the management of that stock for a long period of time. That is why we have been ensuring that they buy the right stock. What you are describing there is something slightly different, I would say. We just need to see a bit more of the detail of that and reflect on it.

Margaret Beckett: I should have said that there is a regional breakdown of the bids which came in, the properties which came in for HomeBuy Direct and, slightly to my surprise and pleasure, apart from in London there is a high component of houses. It was not just flats. I know the assumption has rather been that there would be all these empty city centre flats but actually there are a lot of houses. I do not know what size they are, that does not emerge here, but they are houses not just flats.

Q69 Emily Thornberry: How much stock have the RSLs bought? You were talking about the caricatures of empty inner city flats but how many empty privately built flats have RSLs actually bought?

Margaret Beckett: The clearing house purchases were running in November at 3,800. I do not know what percentage of that is city flats.

Sir Robert Kerslake: I do not know the percentage of flats and houses. Typically the flat purchases are in London and the south east, whereas the houses have been more regionally distributed.

Q70 Emily Thornberry: It is around 3,000 altogether.

Sir Robert Kerslake: That is the grand total. We can get the breakdown.

Margaret Beckett: The clearing house was for packages of 250 units. There may have been other smaller scale bids by particular RSLs which would just have come through the HCA in the ordinary way and were not part of that particular scheme.

Sir Robert Kerslake: We can give you the breakdown.

Mr Marsh: In the same way that we recognise that there is an opportunity to review the interplay between social rent and intermediate rent, shared ownership and outright sale, there is an opportunity also to look at the operation of lettings and allocations boards at the same time. That is not a short quick thing to do; it is a very difficult thing to do when we have such a constrained supply of social rented properties, which is the problem we now inherit that the money was put on the table to try to redress. It would be sensible to have that discussion in the context of local authorities' strategic housing role, which is quite separate and independent from the role of the regulator or the HCA in that regard.

Q71 Mr Betts: Is it possible to have a figure of where these properties have been bought, in which parts of the country? Are local authorities putting in bids to buy any properties?

Sir Robert Kerslake: Not that I am aware of but we will check the detail on that.

Margaret Beckett: They could, but I am not aware that they are.

Q72 Chairman: Is it not rather surprising that local authorities have not?

Mr McCarthy: I would suggest not, actually. All local authorities will have housing association partners used to acquiring properties and working directly with house builders. Where local authorities are going to be playing more of a role, as we have seen with ALMOs, is in bringing forward land that they own for development and wanting to do that in a way which retains some stock in their name and using their land to encourage investment by the HCA. That is where you are going to see the direct local authority involvement.

Q73 Mr Betts: Are we getting any bids for those?

Sir Robert Kerslake: Yes.

Mr McCarthy: We have already allocated money to ALMOs directly.

Q74 Mr Betts: Is anything happening to it? I can think of at least one ALMO allocated some money and still nothing has happened to it. One of the problems again is that many of the schemes ALMOs have been looking at depend on an element of sale cross-subsidising the house to rent so that is why they are stalling as well, is it not?

Sir Robert Kerslake: We would have the same conversation with them as we would with the housing associations about how they can adapt the schemes to get them moving. In some senses what we are trying to do is treat all investment partners in the same way whether they are housing associations, whether they are developers, whether they are local authorities. If they have schemes they cannot move at the moment because the balance of rent and sale is not right, we will talk to them about how we can adjust the balance.

Q75 Mr Betts: So they should be getting in touch with you and talking about it.

Sir Robert Kerslake: Absolutely. We have written round to all investment partners last week basically saying we will have an individual conversation with them about their schemes.

Q76 Chairman: May I just wrap up a couple of questions about the financial viability of housing associations which we seem not to have covered? First of all, what evidence is there that housing associations have in place any strategy to cope with the credit crunch?

Mr Marsh: Let us start with some numbers, shall we? There are some 250 housing associations who are engaged as part of development partnerships with the HCA. Of those 250, from our analysis of their business plans, around one in three has been historically reliant on LCHO, shared-ownership sales or other sales to contribute to their underlying surplus position. So it is one in three. Those are largely concentrated in London and the south east. There are some £5.5 billion of planned drawdowns over the next 12 months to match investment from the HCA and of that £5.5 billion £5.2 billion is already in place. Of the 80 which were reliant on LCHO shared-ownership around half a dozen at present are presenting to us more risks than are usual in the housing association sector and that is half a dozen which have risks which need to be addressed and managed in the next six months. That is six out of 250. I do not want to sound complacent as the independent regulator. I think it is important to recognise that means there are over 200 who already have strategies in place for how to manage the situation. Those strategies involve some actions which are difficult in relation to the home building targets, so it is entirely appropriate for a board to say "Until such time as we have completed our conversation with the HCA about the new deal" and that is a letter which Bob has now sent out and the conversations have started "Until such time as those conversations have been completed, we wish to hold back on our development appetite". Nobody wants the aspiration of building new homes to lead to lack of security of tenure for existing tenants. We need to look at this question as a regulator from the point of view of existing tenants and future tenants. The discussions with HCA to resolve the LCHO cross-subsidy issue are of paramount importance to give boards the confidence to then re-accelerate the development pipeline together with the conversation we have had about the other aspects of the housing offer between social rent and different forms of sale. The short answer is that there are six on our watch list which are not in intensive care but which are subject to more regulatory scrutiny than is normally the case. This means we will want to see cash flows on a weekly basis and we want to talk to the boards and we want to and are engaging with both their chairs and their lenders to ensure we understand their response to the threats posed to them. I do not really want to talk about individual cases because there are commercial issues in relation to the conversations with banks and lenders but it is important to recognise that there are 200-plus who are well placed and the fundamentals remain sound. The fundamentals are that the amount of debt compared with assets still remains at around 50 per cent, so relatively low-geared across the housing association sector overall, two in three pounds that associations receive in income funded by housing benefit, that rental stream linked to RPI. We do believe that housing associations represent a good place for long-term investment and with long-term interest rates, even with lenders' premiums being sub five per cent, given the regulatory framework that the Government established, we think this remains a safe place to invest and that is why we have observed in the last three months £600 million of bond finance being agreed between two large associations and through the Housing Finance Corporation. This situation needs to be read in a balanced perspective. A few have heightened risk but the majority are well placed to take advantage of the opportunities.

Q77 Chairman: I do not want to know the specific housing associations, but of the six are any of them large?

Mr Marsh: Yes, of the six a very small number are medium-sized to large housing associations.

Sir Robert Kerslake: This is an area where the collaboration between the HCA and the TSA has been very, very important. We meet on a regular basis to go through these issues. Our interest as the HCA is to ensure that RSLs keep involvement, keep doing development basically because the need is to keep affordable housing going and the development of new housing. There is a way in which we work with the housing associations which helps them with any issues around viability. For example, if they have significant unsold stock we can help them turn some of that into social rented and intermediate rented or rent-to-buy and that helps with their balance sheet position but it also gives them greater encouragement to do new development. There is a very close alignment here between our desire to keep development moving and the need to anticipate the issues of RSLs. You need to manage those in some difficulties which have been identified but our key task is to work with RSLs on a regular basis - that is why we are going out and meeting all of the investment RSLs - and anticipate the problems before they get to that point.

Q78 Chairman: One issue was brought up was about the banks' lending practices which was not in relation to new build but effectively in relation to re-negotiating existing borrowing wherever an opportunity arose. We were given a particular anecdote about a housing association which was trying to reduce its costs by restructuring and the bank took the opportunity to increase the bill threefold so nothing happened. Is the HCA or the TSA responsible? I see the finger is pointing at Mr Marsh. What are you doing to try to get the banks to be more helpful, particularly since they have so much of our money?

Mr Marsh: I entirely agree with you; that is the starting point. There is almost a 50:50 match between historic social housing grant and private lending and the banks are the first secure creditor and they themselves have a long-term interest in the viability of the bodies in which they have invested. In our first week, on the Friday afternoon, we held a session with the CML and all lenders, both current active lenders and lenders who have historic debt in the sector, attended that session. We talked there both about a recent issue that has been in the press around interest rate swaps, but, moreover, practices around re-pricing. Here a balance is needed and I see our role as trying to encourage and facilitate a healthy market. If a lender is making a loss on its current debt portfolio because the price of money and liquidity has changed and their current portfolio is priced at 25 or basis points above LIBOR and it is costing them triple or quadruple that to access funds themselves, we have to understand that there is a commercial pressure in a commercial organisation to find ways of reducing that loss. Our job is to try to mediate between legitimate commercial pressures, which will be applied by a bank at an opportunity that presents itself, and avoiding banks applying such aggressive commercial pressure that it becomes a disincentive for rational behaviour, whether it is a disincentive for rationalisation within a group structure that would have long-term benefits for tenants. Whether it is a disincentive to a potential rescue organisation who may want to take on a failing organisation which might find itself in difficulty, in both of those situations tenants do not benefit, lenders do not benefit longer term and neither does the housing association. We wrote to the CML last week, after productive engagements, and I am meeting with them again on Thursday evening, to continue to tread that fine line between facilitating conversations and applying pressure and, where necessary, applying pressure through the Department and Richard's colleagues, through other means the Government have at their disposal.

Q79 Chairman: What might these other means be?

Mr McCarthy: We have asked the TSA to work on a paper with some of my team so that we move from the individual anecdote to some hard evidence. We are represented, through the involvement of Mrs Beckett and me, in various engagements with Treasury with the lenders in terms of the Government's engagement with the lending community overall and our intention is to take this paper and to discuss the evidence presented to us with Treasury colleagues and potentially on through Ministers in the engagement with lenders. We need to move from individual stories to a more rounded position and that has been requested.

Q80 Chairman: Do you have any idea of timescale?

Mr McCarthy: We should have a paper this week which will allow us to engage with Treasury and lenders early in the New Year.

Q81 Mr Betts: One of the issues which came up this morning was that of repossessions and clearly many people are worried, particularly as Christmas is coming up and looking at the next year, about the possibility of unemployment. There was a welcome for two things the Government have done, both the mortgage rescue package, which will help about 6,000 home owners and stop them being repossessed and offer them some alternative form of tenure, and also the changes to the arrangements for people who become unemployed so their mortgage can effectively be paid for them more quickly, after three months rather than nine months, have been brought forward to January now. Both those were welcomed. However, two issues were raised. One was that the amount of finance for the mortgage rescue package may not be sufficient, so it may be that we have to help more than 6,000 people in difficulties. Secondly, the problem of people who do not lose the totality of their income but lose a part of it. Very often mortgages can be supported by two incomes in a family and if one person becomes unemployed that can put them in real difficulties. How can we deal with those sorts of issues which are undoubtedly going to arise in the next few months?

Margaret Beckett: First of all, with regard to the issue of the mortgage rescue scheme, I take the point about whether or not it will be sufficient. Perhaps we could bear in mind that there are basically three areas. One is that if you lose your job and there is no income coming into the family home you are eligible for the support scheme which the DWP has been running for ever but which is now a lot better. Not only is it 13 weeks in instead of 39, but also the limit of the mortgage on which you can seek assistance is now £200,000 whereas it was £100,000. Also, we had put some money in to assist with it and as a result of the bank rate coming down that money can stay there and will mean that they will continue to meet an interest charge which was perhaps slightly higher than the standard variable or the routine. Even people who are paying a higher interest charge may still get more help than they would have got initially. That scheme has improved a good deal. Then there are the people who are eligible for the mortgage rescue scheme. These are people in the vulnerable groups who would otherwise trigger the homelessness legislation where a local authority would have to find them other accommodation on the homelessness criteria if they lost their home. It is actually a more restricted group than I think the assumption there had initially been and that is partly why the costs of the scheme are as they are and it is the 6,000. It was entirely the issue of those who fall outside the criteria for both of those two schemes which led to the Government exploring, and we are working now very actively with Treasury, with the FSA and the lenders, to see what scheme can be put together mutually to help people whose income has diminished. It is not for people who are trying to get out of paying their mortgage but people who want to pay their mortgage, people who are trying to continue to do so, people who have every right to expect that in the longer term they will be able to return to paying the full amount but in the short term either one of them has lost their job or lost their overtime or whatever and they have had a sharp drop in income. That is a scheme which we think will have wider application potentially and on which we are working now with the lenders.

Q82 Emily Thornberry: Which could include leaseholders.

Margaret Beckett: Interesting question.

Chairman: Which I am sure you will be looking at.

Q83 Emily Thornberry: Which I was looking at.

Mr McCarthy: The intention is that the work on it will apply to all people who have a mortgage on their home who have an income shock and that income shock is not covered by the benefits we have of the reduction in base rate, who have a sustainable position but need some help in the short term, hence the proposal announced by the Prime Minister to assist lenders to roll up interest for a period of time.

Q84 Mr Betts: There might be some people whom you could help with this scheme who otherwise would be better off going on benefits and getting their mortgage paid by that route which would not be better in the long term for them.

Margaret Beckett: Apart from my very real concern for people who through no fault of their own would be in real difficulty but did not come within the confined parameters of the existing scheme, there was also a thought that it would be a crazy thing to have a perverse incentive for people to make themselves unemployed if they do not need to do so.

Q85 Mr Betts: Do you have any idea of the timescale for when this is going to be brought in?

Mr McCarthy: We cannot announce that yet because we are working on both the practicalities of the operation, the need to engage with all lenders, which is extremely active at the moment I can assure you and the right legal framework. I hope that ministers will be in a position to announce that shortly.

Margaret Beckett: May I just say one other thing which may or may not be in the Committee's mind. As you know, part of the concern that we had was about the impact on confidence of the fear of repossession which still seems to be extremely strong. I suspect one of the reasons for that is because, as I understand it, when we were in this position last time in the 1990s nothing or very little was done to help people to avoid repossession. There was some money to help RSLs buy up properties which had been repossessed and which were a drag on the market, which is how we got into the position of not buying necessarily suitable property, but there was nothing to help the individual or the family to try to prevent repossession. It is that sort of folk memory perhaps which is doing harm now and that is something we want to try to overcome.

Q86 Mr Betts: Do we have cooperation from the lenders now and they are being responsible, because obviously these schemes are a final safety net but in the meantime we should be making sure that people are getting proper service from the lenders, proper alternatives offered.

Margaret Beckett: I cannot recall whether I said this to the Committee last time or not, but when you realise that the average cost to a lender of pursuing a repossession all the way through is about £35,000, it seemed to us, and was one of the reasons why we felt incentivised to come forward with some of the proposals to the lenders, that it might be in their interests too to avoid incurring those costs to no useful purpose and also with the outcome of having people who are potentially good customers, who have been before and probably will be again, whom they are not supporting.

Q87 Andrew George: Is it possible for me to ask a question about another side of the same coin, that is what your market intelligence is telling you about the impact of all this on the private rented sector both from the point of view of those that are repossessed and therefore evicted as tenants of buy-to-let property or the fact that there are more properties coming into the market and therefore the impact on private rent levels.

Margaret Beckett: I do not think we have much in the way of evidence yet. Although there is this very, very high level of fear of repossession, it is only something like 0.16 per cent which has actually gone ahead. It may be a bit early.

Mr McCarthy: I can give you one very important piece of information which is tucked away in the PBR announcement which is that the Ministry of Justice is looking at extending the minimum level at which the courts will require notice to be given to a buy-to-let tenant when their home is repossessed. We are trying to focus on the tenant and not the person who was the speculator, who bought the property. We are looking to extend what is the current minimum period of two weeks to seven weeks. That is action which has been made by Government in response to looking across the piece at who could be most affected individually as an occupier in this way.

Margaret Beckett: I had not fully appreciated you were talking about people involved in such properties but part of the idea of that is not only to be fair to the tenants, who sometimes in the past have found themselves evicted completely out of the blue, but also to give space for people to focus on the facts of the case, where it may well be that the tenants have assiduously been paying their rent and therefore there is an income stream. There may be a dispute between the lender and the investor, but there is not necessarily a dispute between the lender and the tenant. That also may give scope for realising where mutual interest lies in the long term.

Mr McCarthy: We are aware of some lenders who are then at the present time sticking with the tenant and actually going long beyond that and enabling them to go on doing that.

Q88 Mr Betts: There was a story in the press a few weeks ago about a couple of lenders who were probably not quite mainstream and thought they had found a way round. They were evicting people who had not paid their mortgage without going to court by doing it rather quickly. Is there a loophole there that action has been taken to try to stop up?

Margaret Beckett: I am only aware of one case. One could not say it is a loophole. The law has not changed but the Ministry of Justice are looking at that.

Mr McCarthy: Yes, that is something they are actively reviewing. It is more complicated than the media reports would lead you to believe, but there is a surprise! They are being looked at by MoJ.

Q89 Chairman: You mentioned that land values were falling and housing associations were making use of that. Do you actually have numbers of RSLs who have purchased land at lower value and/or councils? If you do not have it now, can we have it subsequently?

Mr McCarthy: No, we will have to ask about that.

Q90 Chairman: We have quite contradictory evidence about whether land values are really falling. If land values fall too much owners do not sell. They are like home owners; they hang on to it.

Mr McCarthy: You will have a mixture of behaviours out there and there is very strong evidence from the property sector and advisors about land values falling and we can share with you the data which we can obtain. It is a hard area in which to get hard data. That is largely accepted. It will mean that in some cases land will not be put on the market to be sold.

Q91 Chairman: Precisely.

Mr McCarthy: In other cases people need to sell land because they are forced to generate cash. One of the advantages of the HCA is their ability to play into that market.

Sir Robert Kerslake: Entirely right. The key point to make is that this is a moving picture and the extent to which people are acquiring land will change over time. We may well see some of that accelerating in the next few months.

Q92 Chairman: If you do have some hard data, we would like to see it.

Sir Robert Kerslake: Yes.

Mr McCarthy: It is more about future opportunities.

Chairman: Thank you all very much indeed. It has been a very productive morning. We almost certainly will be returning to this issue in the New Year. Thank you.