House of Commons - Mortgage arrears and access to mortgage finance

Mortgage arrears and access to mortgage finance - Treasury Contents

4 Government support for households in mortgage difficulties

Overall Government strategy

76. We have already outlined a number of measures that the Government has introduced to support households in mortgage difficulties and to limit repossessions, including a new mortgage pre-action protocol introduced by the Civil Justice Council which makes it clear that repossession should be used as a last resort. Other measures announced by the Government include:

agreement with major lenders to wait at least three months before initiating repossession proceedings; and
a £10m package to increase the provision of legal and debt services to households in difficult financial circumstances.

77. Additionally, through the course of the current economic downturn, the Government has introduced a number of new schemes to support homeowners in mortgage difficulties as well as amending policies which were in place prior to the current recession. Budget 2009 outlined the Government's approach in this area, stating that "the Mortgage Rescue Scheme (MRS), and Homeowners Mortgage Support Scheme together with changes to Support for Mortgage Interest (SMI) will help to ensure that homeowners who experience a temporary fall in income, lose employment, or are otherwise vulnerable, are able to remain in their home".[131] We discuss the success or otherwise of these, the Government's three flagship measures, directly to support homeowners in difficulty in greater detail below, as well as the coherence and overall Government strategy in this area.

78. Lord Myners, the Financial Services Secretary to the Treasury, stressed that any assessment of policy in this area must take place in the context of the wider macroeconomic environment and Government measures to support the wider economy.

It is through ensuring through fiscal policy that there is demand in the economy which supports employment and an accommodating monetary stance, and certainly one of the things which is clearly different this time in this mortgage cycle from previous ones is that we have much lower interest rates at the moment than in previous times of increase in arrears and foreclosure.[132]

79. Kay Boycott praised the Government's response to problems in the housing market, saying that Shelter recognised that policies to help homeowners had "been put in place quite quickly, certainly versus the last recession". However, Ms Boycott also argued that the introduction of new schemes and the modification of existing ones demonstrated that adequate "long-term safety nets were not in place" prior to the current recession.[133] A similar point was also made by the CML who stated that "it would be difficult to attribute success to any of the Government schemes to help homeowners facing difficulties before the financial crisis", and bemoaned the fact "engaging with Government on the ineffectiveness of the safety net prior to the financial crisis was challenging".[134] Kay Boycott also expressed concern about the "lack of consumer awareness around all these schemes", saying that "every time an extra scheme is introduced it adds to consumer confusion about which scheme you are talking about", and urged the Government to increase publicity to raise public awareness of the options open to them.[135]

80. We welcome the measures which the Government has introduced to support homeowners in mortgage difficulties. However, the need for the introduction of a large number of new initiatives as well as the amendment of schemes in place before the current crisis suggests that adequate safety nets for homeowners in mortgage arrears and/or at risk of repossession were not in place prior to the current recession. We recommend that the Government re-examine its longer-term strategy towards supporting homeowners in mortgage difficulties to ensure that adequate mechanisms to support homeowners are in place even once the current downturn has ended. A part of any review of strategy should be an examination of the adequacy of existing insurance models to protect mortgage holders against adversity and the potential of alternatives.

Homeowners Support Scheme

81. The Homeowners Mortgage Support Scheme (HMS) was launched in April 2009.[136] Its objective is to "enable households that experience a significant and temporary loss of income as a result of the economic downturn to defer a proportion of the interest payments on their mortgage for up to two years". The deferred interest payments will be rolled up and added to the principal, with the borrower paying this off when their financial circumstances improve, with the aim of maintaining an affordable monthly payment by extending the term of the mortgage. The Government will guarantee the deferred interest payments in return for banks' participation in the scheme.[137]

82. Every Government-backed lender—the Lloyds Banking Group, Northern Rock, the Royal Bank of Scotland, Bradford & Bingley—has signed-up to the HMS scheme. Other high street lenders, including Barclays, HSBC, Nationwide and Santander, have agreed to provide comparable or equivalent arrangements to their customers, but will therefore not enjoy the security of the Government guarantee. The Government estimates that lenders covering approximately 80% of the mortgage market will be providing what the Department for Communities and Local Government described as "enhanced support to their customers".[138]

83. We were told by a number of organisations, including Which? and the BSA, that it was too early to judge the success of the scheme given that HMS was only introduced in April 2009 and that figures on participation would only be published later in the year.[139]

84. We asked witnesses about how the 'equivalent' schemes introduced by some lenders compared to the Government's Homeowners Support Scheme. Ms Boycott told us that it had been very difficult for Shelter "to get hold of the data that allows us to do that direct comparison and it is certainly very difficult for us then to communicate to our advisors".[140] We also asked witnesses about the 20% of lenders who were not participating in HMS nor offering their customers any equivalent scheme. Kay Boycott said she wanted to see "all lenders signing up or providing equivalent schemes—a point which was echoed by Which? who argued participation should be made "compulsory", especially given that non-participants included "a disproportionate part of the sub-prime market where consumer detriment is likely to be greatest".[141] We asked Lord Myners what the Government was doing to ensure the remaining 20% of the market was covered. He replied that the Government was "actively in discussion with them" and agreed that it was important to increase participation amongst this group because "that is where the majority of the problems lie".[142] However, Lord Myners told us that compelling lenders to participate in HMS was "extraordinarily difficult", and that the Government would try and increase participation through engagement, discussion and encouragement.[143]

85. We welcome the introduction of the Homeowners Support Scheme (HMS) which has the potential to provide valuable assistance to homeowners in mortgage difficulties. We recognise that it is too early to make an assessment of how many homeowners have benefited from the scheme and therefore whether HMS can be judged a success. That said, increased disclosure of the details of equivalent schemes operated by some lenders is important, not least so that consumers and advisors have a clearer idea of the support they should be receiving from lenders. Finally, firms representing 20% of the market place are neither in HMS or offering equivalent support to their customers. Whilst there are practical difficulties around securitisation covenants for some in offering such support—something we discuss in greater detail below—the Government must make it a priority to increase participation. Raising participation is especially important as evidence suggests that it is largely sub-prime or specialist lenders who are not participating in such schemes and these are precisely the firms whose customers are most likely to be in mortgage difficulties. Whilst we hope that persuasion will be sufficient to convince more lenders to sign up, the Government should not rule out compulsion if this approach fails.

SECURITISATION AGREEMENTS, PARTICIPATION IN HMS AND LENDER FORBEARANCE

86. Dominic Lindley linked non-participation in HMS or equivalent schemes to securitisation covenants, telling us that Which? had become concerned that there were "some terms in the securitisation agreements which are actually preventing lenders from joining the [HMS] scheme or from setting up an equivalent scheme". This is because, for example, the terms of a securitisation might prevent an extension of the loan term or conversion to interest-only for a period, both of which might otherwise be legitimate means of dealing with distressed borrowers in particular circumstances. Mr Lindley stressed that lack of participation amongst such firms in HMS or restrictions on their ability to show forbearance was a particular problem given that "arrears rates among people whose mortgages have been securitised are twice those … for whom they were not securitised" with the consequence that there was "a big segment of the market outside the scheme where people are in arrears".[144]

87. Mr Lindley said that Which? had raised the issue with the FSA who had looked into the matter. Indeed, the FSA announced on 22 June 2009 that it had identified:

terms in securitisation covenants which could lead to inequitable treatment of borrowers in arrears, by restricting the scope for the lender to exercise flexibility and forbearance, for example, by prohibiting an extension of the loan term or conversion to interest only for a period.

On the same day, the FSA released a statement which said that:

We expect all customers to be treated fairly and to be offered a relevant range of options for resolving arrears. It is not acceptable for a firm to use terms included in a securitisation as justification for not treating customers fairly.

The statement concluded by saying that the FSA did "not expect to see future securitisations that contain provisions that could potentially lead to the less fair treatment of borrowers".[145]

88. We asked both the FSA and Lord Myners whether some securitisation covenants did indeed limit scope for lender forbearance or flexibility towards mortgage holders in arrears as well as participation in HMS and, if so, what they were doing to tackle the problem. Jon Pain told us that the FSA was aware of the issue and that it was looking to address this matter as part of its mortgage market review, which it expected to be completed later this year. Lord Myners expressed concern that some securitisation agreements restricted the ability of the lender or lender's agents to offer flexibility and forbearance, but pointed out that "even where there is a documentary restriction, there are waiver processes" that could be used to override covenants. He believed that future problems could be addressed by constructive engagement with the industry, but reiterated that "the FSA is very clear that in future it will not accept forms of securitisation documents which do not allow appropriate forbearance engagement".[146]

89. We are concerned by evidence we have received that certain securitisation agreements and covenants may restrict the ability of lenders to offer forbearance and greater flexibility to homeowners in mortgage difficulties and may restrict their ability to participate in HMS. To this end, we call upon the FSA to move quickly to ensure that securitisation agreements already in place do not act as an obstacle to treating consumers in mortgage difficulties fairly. Equally, we would welcome details of how the FSA intends to ensure that future securitisation covenants do not contain such provisions and the timetable to which it is acting.

The Mortgage Rescue Scheme

90. The Mortgage Rescue Scheme (MRS) has been operational in England since January 2009 (separate schemes are either in place or being developed in Scotland, Wales and Northern Ireland.). The scheme is intended to help homeowners who are at risk of homelessness as a result of mortgage repossession and who fall within a priority need category.[147] It has two elements:

Government mortgage to rent option: A Registered Social Landlord pays off the entire mortgage and the householder pays rent to the housing association at a level they can afford. This scheme is designed to assist the most vulnerable households on low incomes who are unlikely to be able to sustain a mortgage
A shared equity option: This involves a Registered Social Landlord providing an equity loan to the homeowner to enable the homeowner's monthly mortgage payments to be reduced. This option is designed to assist homeowners who have an equity share in their home and are facing a payment shock.[148]

The Treasury estimates that the MRS will cost £285m and it was envisaged that the scheme would assist 6,000 homeowners. It was announced as part of the 2009 Budget that the scheme was being expanded to help people in negative equity (where the total of their secured loans exceeds the value of their property) from 1 May 2009.[149]

91. The latest figures published by the Department of Communities and Local Government show that, to date, just six households have benefited from the MRS.[150] Sue Edwards, for Citizens Advice, acknowledged that this was "obviously quite a small number", but added that her organisation was dealing with "quite a large number of enquiries" about the Scheme.[151]

92. Ms Jackie Bennett, for the CML, said that the MRS had acted as a catalyst for homeowners in mortgage difficulties to approach their lenders. She said that homeowners who had approached local authorities about the scheme were often "people who have not been in touch with their lenders before" and that this had provided an opportunity for local authorities to get "people to engage with lenders and money advisors".[152] John Healey, Minister for Housing, defended the MRS when he appeared before us, accusing those who focused on the headline figures of six households of "looking at the wrong end of the telescope". Mr Healey told us that more than 5,000 households had received advice from local authorities as a result of the scheme and that many homeowners who approached their local authority about the MRS "were then referred to their lender or specialist money advice". He concluded "simply to look at the numbers at the end of the scheme is to omit its importance much earlier on".[153]

93. The Mortgage Rescue Scheme has directly benefited just six households, despite being designed to assist upwards of 6,000 households. We call upon the Treasury and the Department of Communities and Local Government to explain why their projections for participation in the scheme appear to be so out of step with the picture on the ground and request analysis as to whether this reflects flaws in forecasting, poor design of the scheme or lack of consumer demand. We note the comments made by John Healey, Minister for Housing, that MRS has acted as a catalyst for people in mortgage difficulties receiving advice and assistance from lenders and money advisors. This is, of course, to be welcomed, although we do question whether it is the most cost-effective way to raise people's awareness of the need to, in the first instance, work together with their lender to resolve mortgage payment difficulties.

Support for mortgage interest

94. The principal Government scheme in existence prior to the current financial crisis was Income Support for Mortgage Interest (ISMI). This is a state benefit paid towards the mortgage interest payment, available to homeowners who are also in receipt of income support, Job Seekers Allowance or other income-related allowances. SMI is only available for loans taken out to purchase the property, or for specific home improvement. As such, borrowers who have taken out second loans for a purpose other than home improvements are not eligible to claim assistance.

95. On 5 January 2009, the Government announced reforms to SMI:

since 5 January 2009, homeowners will only have to wait 13 weeks, instead of 39 weeks, to be eligible for support. This is broadly in line with the three month limit by which time banks would consider mortgage payments to be seriously in arrears and as CML noted greatly enhanced lender's ability to show forbearance;
as a temporary measure, from 5 January 2009 the capital limit for loans on which ISMI is based was increased from £100,000 to £200,000.

These two reforms were worth £100m and were estimated to assist 10,000 claimants. This follows an earlier change announced in the 2008 Pre-Budget Report, where the Chancellor announced that the Government would "maintain the level of support at the current interest rate for the next months for existing claimants so that net support to such claimants is increased". [154]

96. The BSA told us that they welcomed the January 2009 changes to the ISMI regime, but expressed concern that the changes were not permanent and considered they did "not go far enough to make a significant difference to borrowers in financial difficulty". They advocated an overhaul to SMI, including an expansion of the criteria to make it available to all loans secured on the property and to be payable at a rate of interest due under the terms of the mortgage contract, not as a standard rate set by the Department for Work and Pensions.[155] Citizens Advice also welcomed the decision to extend SMI support, but said it was "extremely concerned about the introduction of a two year maximum period of SMI support for jobseekers allowance claimants. It argued that:

the proper way to deal with claimant responsibilities and work incentives is through the requirement for people claiming JSA to ensure they are doing all they can to look for work, rather than through an arbitrary limit on housing costs. We believe that the two year limit on housing costs for JSA claimants should be removed immediately.[156]

97. John Healey defended the two year cap, telling us that it was in place because the "purpose of the scheme was not to provide government support in perpetuity", but to help tide people through a temporary dip in their earnings.[157]

98. As noted earlier, presently support for mortgage interest is paid on income-related benefits, principally income-related jobseekers allowance, but not on contributions-based jobseekers allowance, which most people with a National Insurance record will receive for their first six months of unemployment. Sue Edwards told us that she had come across examples of people having difficulty receiving SMI because they were on contributions-based jobseekers allowance and who as a result would not qualify for SMI. We raised this issue with John Healey who told us that the Government had no plans to change the eligibility criteria for SMI at the present moment, but promised the Government was "monitoring" the situation.[158] In response to suggestions that one way forward would be to link eligibility for SMI to tax credits rather than income-related allowances, Mr Healey defended the present arrangements and cautioned against building too much complexity into the system.[159]

99. We recommend that the Government should review the Support for Mortgage Interest (SMI) scheme as part of the Pre-Budget Report this autumn, and consider the costs of linking the scheme to either: a contribution-based Jobseekers Allowance or to the tax credits system. As part of that review the Government should examine: the payment of actual interest rates instead of the SMI standard interest rate, the issues surrounding second charge mortgages and what steps would be needed to lift the two year cap on SMI payments.

131 HM Treasury, Budget 2009 Building Britain's future, HC 407, April 2009, pp 104-105 Back

132 Q 269 Back

133 Q 9 Back

134 Ev 80 Back

135 Q 10 Back

136 "New homeowners support scheme begins", Department for Communities and Local Government press notice, 21 April 2009 Back

137 "New scheme to help people at risk of repossession", HM Treasury press notice, 3 December 2008 Back

138 "New homeowners support scheme begins", Department for Communities and Local Government press notice, 21 April 2009 Back

139 Ev 58, 66 Back

140 Q 13 Back

141 Q 18 Back

142 Q 298 Back