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 lenderthe
Lloyds Banking Group, Northern Rock, the Royal Bank of Scotland,
Bradford & Bingleyhas 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 schemesa 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 supportsomething we discuss in greater
detail belowthe 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
143
Q 302 Back
144
Q 16 Back
145
FSA, 'FSA statement on securitisation, 22nd June 2009 Back
146
Q 268 Back
147
These comprise: (1) dependent children, (2) pregnant women, (3)
vulnerable due to old age, physical/mental disability/other special
reason. Back
148
Ev 66 Back
149
HM Treasury, Budget 2009 Building Britain's future, HC
407, April 2009, p 104, para 5.69 Back
150
Qq 64-66 Back
151
Q13 Back
152
Q 161 Back
153
Q 274 Back
154
HM Treasury, Pre- Budget Report 2008 Facing global challenges:
Supporting people through difficult times, Cm 7484, November
2008, p 96 Back
155
Ev 57 Back
156
Ev 49 Back
157
Q 290 Back
158
Q 286 Back
159
Q 287 Back
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