Water Bill

Written evidence submitted by the Council of Mortgage Lenders (WB 27)

Introduction

1. The CML is the representative trade body for the first charge residential mortgage lending industry, which includes banks, building societies and specialist lenders. Our 115 members currently hold around 95% of the assets of the UK mortgage market. In addition to lending for home ownership, CML members also lend to support the social housing and private rental markets

2. The CML was called to give oral evidence to the Committee sitting on 3 December.

3. This submission further highlights headline issues and points of concern for lenders about the Water Bill clauses, in addition to  the points which were covered in the evidence session which we attended.

4. We would like to see amendments on the face of the bill which address the following issues.

Excesses

5. To have sufficient comfort and reassurance that Flood Re will effectively control policy excesses, as well as premiums, lenders need to see more up-front detail of how this will be achieved.

6. We would like to see included in the Bill clauses provision for a framework or mechanism for setting and controlling policy excesses and enforcing any agreed cap.

Inclusion of buy-to-let (BTL) properties

7. BTL lending is a major part of the mortgage market. It accounts for around 11.5% of gross mortgage lending, and is worth over £140 billion. There are over 1.5 million BTL mortgages (around 13% of all mortgages).

8. Our headline position is that if a property is being used as a domestic residence, then it should be included in Flood Re.

9. To the tenant, a BTL property is no different from any other domestic property. To the landlord, BTL mortgages are the same as any other in that they include the standard condition obliging the borrower landlord to insure the property, including for flood.

10. We welcome the intention that Flood Re will protect tenants’ contents. To be consistent, we would like to see the same protection also covering the BTL landlord’s property, so that all domestic properties are treated the same way.

11. BTL properties are currently protected under the existing Statement of Principles, and it would be inconsistent and detrimental to landlords and tenants to withdraw this protection under Flood Re.

12. If it is decided to exclude some residential properties because they are provided by SMEs via BTL landlords, then there could be consequences, which will be for parliamentarians to debate:

· Without Flood Re protection, costs are likely to increase for landlords and tenants;

· Increased landlord costs could increase the likelihood of default on some BTL mortgages, and some landlords might leave the sector.

How risk-reflective pricing will be achieved within 25 years

13. It is currently unclear how risk-reflective pricing will be achieved in the envisaged 20-25 year timeframe, and lenders need to see more up-front detail on this.

14. In addition, because some mortgages now extend to 30 or 40 years, there could be further uncertainty in the medium term if there is no clarity about how affordable insurance will be provided after 25 years.

15. We would like to see the sunset provisions allow for a longer timeframe to achieve risk-reflective pricing.

16. We would like to see, on the face of the statute, a clear framework or mechanism for achieving risk-reflective pricing in 20-25 years.

Affordable flood insurance; mortgageability and housing market impacts generally

17. These are the implications for mortgageability and the housing market if households cannot afford or obtain buildings insurance with flood cover:

· For existing customers/ lending (back book):

o Cover may be allowed to lapse

o Customers may be in breach of mortgage terms and conditions to insure at all times

o Lenders may not be aware that cover is not in place or is insufficient

o Borrowers might default or fall into arrears through repair costs for uninsured damage

o The potential risk to the lender of repossessing a flood-damaged property (the loss of loan security value; repair costs and impact on re-sale margin)

o Administrative costs for lenders of checking borrowers have/ are maintaining cover

o Regulators might force lenders to provide extra capital for uninsured mortgaged properties.

· For new customers/ lending (front book):

o Having and maintaining buildings insurance is a standard condition of any mortgage. If flood cover is not available or premiums or excesses are too expensive, this could affect mortgage affordability calculations or loan-to-value (LTV) rates, suppressing the housing market. Some properties might be un-mortgageable or sellable only to cash buyers.

December 2013