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Welfare Reform and Work Bill Committee

Written evidence submitted by the Council of Mortgage Lenders (WRW 56)

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 131 members currently hold around 95% of the assets of the UK mortgage market.

2. This briefing highlights specific points and areas where we would like additional certainty in relation to support for mortgage interest, and also greater clarity on social housing rents.

Mortgage safety nets and support for mortgage interest (SMI)

3. Mortgage arrears and repossessions are at an all time low; performance is buoyed by lower interest rates and favourable employment conditions. For example, in 2008 there were approximately 37,000 mortgage repossessions and by 2014 this figure had fallen to just 16,500. This year the number of repossessions is set to fall even further with only 4,000 repossessions reported in both the first and second quarters.

4. Because of these favourable conditions mortgage safety nets have been eroded as demand has declined. Mortgage customers who find that they cannot maintain their mortgage payments now have more limited options; they can either sell their property, restructure their loan with their lender (subject to criteria) or, if they are eligible, claim SMI benefit which is managed and funded by the Department for Work and Pensions (DWP).

5. We believe that retaining SMI is essential. As we move through economic cycles demand will naturally ebb and flow. It is better to have a safety net in place for when it is needed rather than design one when conditions require it. Of course, any safety net in place has to be effective and deliver benefits relative to the overall cost.

6. Mortgage lenders recognise that there are substantial cost pressures on public finances and that retaining a reformed SMI is better than losing it altogether. Because of this we support the principle of changing SMI from a benefit into a repayable loan. This ensures fairness and better value for public money.

7. It is essential that SMI remains independent from wider welfare reform, particularly Universal Credit as key to lender support of SMI is the direct to lender payment structure. This gives lenders absolute confidence that payment will be received and avoids mortgage customers falling into deeper arrears. Wherever possible mortgage lenders will seek to ensure that their customers are able to retain home-ownership.

Current SMI position

8. The DWP reports 174,000 households were receiving mortgage SMI payments via income support, jobseeker’s allowance or pension credit in the 2014-5 financial year.

9. CML sample analysis of mortgages where the borrower is claiming SMI shows:

· 43% of claimants took their mortgage out after 2004 but there is a long-tail of older mortgages (34%) where the mortgage was advanced pre-2000.

· The average mortgage interest rate for all claimants is 3.86%, slightly above the SMI rate of 3.12%. This means that some claimants are supplementing the mortgage payment with their own funds.

· 64% of SMI claimants have no arrears on their mortgage account. This is much improved over the corresponding positions in 2011 and 2013 (46% and 44% respectively).

· The loan-to-value (LTV) position of most claimants is extremely favourable, especially those of retirement age although younger borrowers tend to hold meaningfully poorer LTV positions.

· We do not have data on the volume of repossessions where SMI is being paid.

Waiting time

10. We believe the waiting time for SMI is counter-intuitive. SMI has historically required a claimant to wait 39 weeks before payment begins to be made by the DWP. After the financial crisis a concession was made to reduce this to 13 weeks. That concession has remained in place but it is planned to change from April 2016 to 39 weeks.

11. If the waiting time is extended, as planned, we believe that it will result in more cases of repossession as lenders will not be able to allow their customers to continue to accrue mortgage arrears over this period especially where the customer is unable to make any payment. Lenders already have to carefully balance allowing a person to remain in their home while not allowing their financial position to worsen. Extending the waiting time will only cause additional consumer detriment.

12. As SMI becomes a loan and DWP plans to reclaim >70% of the value we believe that there is a strong case for removing the waiting time entirely or keeping it at the reduced level. We do not believe that this would come at additional cost to the public purse.

Loans for mortgage interest

13. We are reassured that the eligibility requirements for SMI will remain unchanged from today and that qualification for a loan will not be based upon any additional underwriting. This should mean that there is no reduction in the availability of SMI.

14. In relation to Clause 16(7)(b) we recognise that the DWP wishes to protect its interest by registering a charge over the property at the land registry (or its devolved equivalents in Scotland and Northern Ireland). Some lenders limit the ability for further charges to be secured which may preclude, at the discretion of the DWP, an individual’s ability to obtain SMI. DWP may wish to consider relaxing this requirement.

15. In relation to Clause 17(3)(b) where "financial advice" is to be provided we believe that the DWP needs to undertake further exploratory work with the Financial Conduct Authority so as to ensure that SMI is not caught by existing regulations. If SMI is not caught by existing regulations and the administration of the loan is not overseen by the Financial Conduct Authority then the DWP should consider referring to "information" rather than "advice". This will reduce consumer confusion as "advice" in a financial context is understood to make a recommendation to the recipient.

16. In relation to Clause 17(3)(c) we believe that borrowers should be provided with suitable literature so as to ensure they understand the obligation to repay and how repayment is structured.

17. In relation to Clause 17(5) we understand through dialogue with DWP officials that the administration of loans for mortgage interest will be carried out by a third-party contractor. We believe that the full cost of this should be borne by the DWP and not passed to borrowers or to lenders. We further believe that efforts should be made to ensure that this activity is carried out by an organisation which represents consumer interests.

Social housing rents

18. On behalf of commercial funders and investors in the housing association sector in England, we are keen to see this legislation framed in a way which does not give rise to ambiguities or unintended consequences for funders and housing associations, particularly where social housing property is sold or transferred.

19. The current rent standard for social housing requires registered providers (RPs/ housing associations) to charge social rents in accordance with the government’s direction to the regulator and related guidance. When enacted, the Bill will override elements of the rent standard, which will need to be revised. The primary legislation and the rent standard should not conflict, particularly where social housing is disposed with an exemption from the rent reduction requirement.

20. In relation to clause 19, clarity is required regarding the approach to be adopted in relation to specific categories of social housing, such as supported accommodation, which is currently exempt from the rent standard but appears to be covered by the rent reduction requirements.

21. Clause 20 currently provides an imperfect exception for a mortgagee in possession (MIP) and a purchaser from a MIP. We welcome the intention to provide this exception, but the drafting should be amended and improved by including an express exception for all future successors in title.

22. In relation to clause 20(1)(c), the exception is limited to a mortgagee in possession, or a receiver appointed by the mortgagee or the court. We would like to see this exception clarified so that it applies irrespective of the method a funder chooses to enforce its security (whether or not the funder is a mortgagee in its own right or operating via a security trustee/agent structure).

23. We would also like to see the term "mortgagee in possession" defined in the Bill. Without definition, this could be viewed as a restrictive term meaning that, in order to take the benefit of the exception in clause 20, the mortgagee must have entered into and taken physical possession of the property, as opposed to merely exercising its power of sale. This would not be appropriate or practical for social housing property.

24. We would like to see references in the Bill to "mortgagee in possession" clarified and defined so that the clause 20 exception is available to a mortgagee and receiver in their own right having exercised its power of sale. In addition the exception should be expanded to include:

· an administrator (whether appointed by the funder or the court); and

· any other person appointed under any security documentation to enable such mortgagee to realise its security

25. We expect that if these issues remain unaddressed, then funders might conclude that the exemption is not fully effective and that its provisions are ambiguous. This could result in the restrictions being taken into account when the social housing is valued for loan security purposes.

26. In relation to clause 20(1)(d), we would like to see the legislation framed so as to ensure that if there is a disposal of social housing property at the direction of a funder, then the exception should apply. It is not clear that the current drafting delivers this.

27. The exception applies when the registered provider's interest is sold by a mortgagee/receiver and owned by a "person" who bought it from them. There are two concerns:

· It should be explicit that this applies whether or not the "person" is a registered provider.

· We would expect that the restrictions would cease to apply to the social housing in perpetuity following the sale, so that the social housing is "wiped clean".

28. As drafted the exemption appears only to benefit the first successor. We would like it made explicit in the wording that all parties deriving title through the mortgagee/appointed person take the title free of the provisions on rent reduction.

29. Clarity is needed on how the exemption provisions would operate in practice and how it is intended to tie in with the rent standard, if the social housing is acquired on enforcement by another registered provider. The point is that the primary legislation must prevail over the rent standard so that the properties are "wiped clean" following a disposal relying on the exemption.

30. Clarity is needed on whether the exemption is expected to be temporary or that the (current) legislative intention is that a RP acquiring social housing on enforcement is exempted from rent restrictions in relation to that social housing.

31. Section 20 may only be relied upon if there is a sale by a mortgagee/receiver. The exemption does not expressly cover all cases where a disposal is made following intervention by the regulator, such as through a transfer of engagements of the RP which is the subject of the intervention.

32. From the perspective of the funders, regardless of the route taken on a rescue there may be triggers which allow the funders to make demand under its loan or otherwise enforce its security.

33. Even if there is a transfer of engagements (without enforcement by a mortgagee/receiver) a funder would expect the exception to operate in the same way as an arms length disposal following enforcement of security ie the provisions should not apply to the acquiring RP.

34. We would like to see the Bill amended to specifically make it clear that the exception in Section 20 is to apply on a business transfer.

35. We would like to see these issues addressed in order for funders (and valuers) to be able to permit unrestricted loan security valuations. The uncertainties in the current drafting might result in a funder concluding that the exemption is not fully effective.

October 2015

Prepared 14th October 2015