Mortgage rescue plan extended
Struggling homeowners will be able to sell all or part of their homes to their local authority without having to move out, under extended government plans to prevent the predicted rise in repossessions.
Under new plans, homeowners facing repossession will be allowed to defer their mortgage payments for up to two years, while 'vulnerable' households in England will be allowed to sell all or part of their homes to their local authority and remain in their homes on subsidised rents.
The mortgage support scheme, which was first announced by Gordon Brown in November, will allow struggling homeowners who suddenly find themselves out of work to defer paying the interest on their mortgage for up to two years.
The amount that borrowers can defer will be agreed between borrower and lender, with the deferred payments being added on to the term of the mortgage. Eight of the largest lenders, including HBOS, Nationwide and Abbey, have signed up to the scheme.
However, to be eligible for the scheme there are certain conditions: applicants must be five months or more in arrears, they must have a mortgage of up to £400,000, and a combined household income of less than £60,000.
Crucially, they must not be in negative equity. But with house prices having plummeted by 16% in 2008 - and as many as a million properties predicted to be in negative equity by the end of 2009 - this last factor will restrict many from applying for the scheme.
Mortgage lenders are also critical of the plans. Michael Coogan, director general of the Council of Mortgage Lenders (CML), warns that the scheme will increase the cost for homeowners in the long-run.
“This scheme is not a payment 'holiday' or a 'free lunch', but rather a payment deferral,” he says. “The future impact on borrowers' repayments may be very significant if they defer a high proportion of their interest, and the scheme is not without the risk of a potentially unwelcome impact on lenders.”
The CML estimates that for every repossession that a lender puts off, up to 80 new mortgages will be refused.
“Lenders will have to set aside more capital to support borrowers on the scheme,” said Coogan. “There is an opportunity cost for lenders in tying up capital that might otherwise be used for new lending.”
It is a view shared by Paul Broadhead, head of mortgage policy at the Building Societies Association (BSA). “It is vital that the government understands that lenders have to hold increased capital for accounts in arrears, and if not considered fully this scheme could have the unintended consequences of further stifling new mortgage lending,” he says.
And, because homeowners have to be five months or more in arrears before they are likely to be eligible for help, concerns remain that their property could already have been repossessed. Lenders are currently expected to wait until a borrower is at least three months in arrears before initiating repossession proceedings.
In other measures announced by the government, vulnerable homeowners across England will be allowed to sell a share in their home to a local housing association, or sell the property outright to the association and remain in it as tenants on subsidised rents. The government says that the £200 million scheme could help up to 6,000 families who face losing their homes.
The scheme is limited to pensioners and households with small children or an elderly/disabled relative.
Applicants will have to apply to their local authority to have their finances assessed by the local council. Should they meet the criteria their property will be valued by an independent body and bought by a housing association.
The National Housing Federation's chief executive David Orr welcomes the extension of the scheme, and says that it will undermine the controversial sale-and-rent back industry.
“These shadowy companies currently make money out of people’s misfortune by buying their properties at substantially less than the going rate – and then only letting them stay on a short-term tenancy basis,” he adds.
The scheme was designed in consultation with the National Housing Federation in September last year, and has already been taken up by 80 councils across England and will now be rolled out across the country. Northern Ireland, Wales and Scotland will soon have their own initiatives in place.
Housing minister Margaret Beckett said: “We are determined to do everything possible to ensure that repossession is always a last resort. For the most vulnerable households, the mortgage rescue scheme will be available to ensure they can stay in their homes.”
According to the CML, repossessions will hit an estimated 75,000 this year as property prices continue to plummet and mortgage lenders rein in on their lending. Around 200,000 people are already believed to be at least three months behind on their mortgage repayments.
The government has been under intense pressure to help cash-strapped homeowners in their homes. In October it approved the mortgage pre-action protocol, which forces lenders to prove to the courts that they have tried everything possible to help their customers - such as reducing their monthly payments - before they are given the green light to repossess a property.
And last week the government cut the period homeowners on income support have to wait to receive help on their mortgage interest payments from 39 weeks to 13.
A homeowner’s worst nightmare; repossession is an action of last resort by mortgage lenders to recover money from borrowers that have failed to keep up with repayments on their mortgage or other loan secured on their home (see secured loan). Repossession is a legal procedure that has to go through several processes before the homeowner is evicted and the property reposed. These are: if a borrower keeps defaulting; the lender applies for a solicitor’s notice; the lender instigates possession proceedings through the court; at the court hearing a possession order is granted and sometimes a possession warrant; a bailiff is appointed and an eviction notice issued at which point the homeowner has two to three weeks to vacate the property.
The circumstances in which a property is worth less than the outstanding mortgage debt secured on it. Although it traps householders in their properties, the Council of Mortgage Lenders (CML) says there is no causal link between negative equity and mortgage repayment problems. At the depth of the last housing market recession in 1993, the CML estimated 1.5 million UK households had negative equity but most homeowners sat tight, continued to pay their mortgages and eventually recovered their equity position.
“Arrears” tend to be associated with debt. If you fall behind and miss payments on any outstanding debt, the amount you failed to pay is an arrear – the amount accrued from the date on which the first missed payment was due.