CHAPTER TWELVE RECOMMENDATIONS
12.1. We have seen that the Mortgage to Rent scheme broadly meets its objectives. However, we believe that its operation could be improved in four broad areas by:
- strengthening state and other safety nets;
- enhancing preventative approaches to repossessions;
- improving the operation of the MTR scheme itself; and
- considering other options, notably the introduction of a Mortgage to Shared Equity Scheme.
The recommendations in these areas are now discussed in more detail.
Strengthening state and other safety nets
12.2 MTR operates in the wider context of state and other safety nets. This study reports evidence of the inadequacies of the state safety net, especially in the light of the eligibility restrictions introduced in the mid-1990s. Take-up of private insurance to fill the gaps left by the state safety net never met targets and has been falling in recent years. The UK Government has recently announced modifications to the state safety net in response to the credit crunch, and the Scottish Government has been active in calling for these changes. However, these are short-term measures and there is a need to develop longer-term solutions to improve home-owner safety nets. The partnership approach to insurance (' SHOP') combined with the development of housing tax credits, involving lenders, borrowers and government, as suggested by the Joseph Rowntree Foundation, would be a suitable starting point. We therefore recommend that the Scottish Government calls for a review of the safety net arrangements for home-owners.
12.3 The study suggests that the system of mortgage regulation contributes to the difficulties faced by home-owners experiencing payment difficulties and to the operation of MTR. Primary mortgages have been subject to statutory regulation since October 2004 and evidence suggests that this has made little difference to lender practice, probably because of compliance with the voluntary code on which the statutory model is based. However, the situation is complicated by the increased prevalence of secondary lending - both secured and unsecured - as a major source of problems for households presenting through MTR. Such lending is generally regulated through the Consumer Credit Act, which is the responsibility of the Office of Fair Trading. We recommend that the Scottish Government supports efforts to ensure the better co-ordination of regulatory systems relating to debt and to consider whether all secured debt should be subject to the same regulatory arrangements.
12.4 The research identified that many home-owners were seeking advice only when they are facing an imminent threat of repossession. By coming to advice agencies late in the process there is less chance that lenders will exercise forbearance and a successful repayment plan be negotiated.
12.5 This suggests a need to develop a more concerted strategy for earlier intervention, linking financial advice, section 11 notification to local authorities under the Homelessness (Scotland) Act 2003 and a possible code of practice with lenders.
12.6 We recommend that efforts should continue to educate Scotland's relatively inexperienced population of home-owners on the costs, risks and responsibilities of ownership. The Home Report and the Right to Buy information packs will contribute to this goal.
12.7 The evidence suggests that the wider public lack awareness of the scheme, and that promotion of it may have been uneven geographically. We recommend that MTR be promoted actively in the context of this strategy to the wider public as well as public agencies, including local authorities and advice agencies.
12.8 We recommend that greater recognition be given for the training of money and debt advisers on the operation of MTR and on the wider processes for mediating between home-owner clients and lenders.
12.9 Part of this promotion should seek to give MTR and associated initiatives a higher profile in local authority homelessness strategies. However, MTR should not be promoted in isolation, but as a part of the package with financial advice as the key and payment renegotiation with lenders the first priority.
Improving the operation of MTR
12.10 As discussed in Chapters 9 and 10, MTR has a clear role and it fills a gap in the safety net provision for home-owners. Its aims remain appropriate and it is meeting these aims. However, the research identified a number of problems with the operation of the existing scheme and the following recommendations are intended to enhance its fairness and effectiveness.
12.11 It is important that MTR is targeted on households who merit assistance on the basis of their objective needs, and that the scheme does not create perverse incentives for borrowers or lenders to behave recklessly.
12.12 For this reason we recommend that applications should be subjected to (a) a check on current income and credit commitments, and (b) (as far as is feasible) a retrospective check on income at the time that the loan was agreed to ensure that FSA guidelines were followed. On this basis, applications should be subjected to an additional test of loss of income in relation to household needs and commitments. This information would also inform the choice of most appropriate solution (see 12.26-12.27).
12.13 Some of the problems with MTR arise from its purpose as a safety net of last resort that means that households are not eligible for assistance until they are actually subject to legal action. While recognising that the scheme should remain one of last resort, we recommend that a form of pre-qualification be introduced that would allow a household to complete a pre-application form that would be assessed and remain valid for a fixed period. Only in the event of legal action being taken would the pre-application become activated. This would cut down the time taken to process applications. This recommendation may require additional financial resources.
12.14 Some anomalies arise from the value limits placed on eligibility for MTR. We recommend that the rules relating to value limits be reviewed with a view to raising the general level as part of widening the scheme to incorporate Mortgage to Shared Equity (see below).
12.15 In the interests of fairness, we recommend that the basis for setting valuation limits be refined to better reflect changes in house prices, sizes of houses and the effective local housing market area. We recommend that the limit should be raised to reflect median prices (plus a margin) for properties of particular sizes, according to housing sub-markets based on local authorities' Local Housing Strategy analysis of market areas and / or their established divisional basis for housing provision and planning. We further recommend that limit be linked to the Open Market Shared Equity pilot and revised either twice a year or annually.
12.16 Raising the value limit implies widening eligibility for the scheme and hence its costs. It is also likely that current conditions in the credit, housing and labour markets will increase potential demand substantially in the short and medium term. Although the Scottish Government have increased budgetary provision to some extent, it is likely that potential demand could exceed available resources. This implies that it may be necessary to have stricter rationing criteria or priorities in place to manage demand on the scheme and to avoid running our of money part-way through a year and not being able to offer a consistent service. Proposal 12.12 entailed restricting eligibility, or giving differential priority, to different groups. Proposal 12.27 below entails creation of a shared equity version, and 12.28 a possible intermediate rent version, either of which should be cheaper per unit; these would be offered to households with sufficient income and/or equity to sustain them. Additional rationing criteria which might be considered could include household/family type, geographical location relative to housing market pressure and social renting supply (as in LIFT schemes). Excessive demand in particular peak years might be handled through use of private sector leasing.
ii Promotion and communication
12.17 Several measures, in addition to the introduction of pre-qualification recommended above, could be taken with the objective of speeding up the progress of applications. This is very important to help prevent arrears mounting much further during the application process, as well as to enable the MTR team to handle potentially increasing caseloads.
12.18 We recommend that information should be provided to applicants emphasising the importance of the timeous provision of information. We found that most commonly delays are caused by (a) not enough detail about debts on application forms, (b) not being able to get access to the property to complete a survey, (c) specific legal delays, and (d) waiting for lender responses. Some of the uncertainty around communication and timescales could also be addressed by providing (good and bad) anonymised case study examples in the guidance literature, including details about the process, timing and delays. These could give examples of the type of personal information that affects decisions on eligibility (such as the need to live locally).
12.19 In addition, we recommend that the MTR team should provide more frequent information on the progress of individual cases.
iii Scheme operation
12.20 One of the problems with the scheme is the regional variation in landlords willing to participate in it. A partly related problem is that many cases are delayed, and quite a few frustrated completely, by the inability to find a landlord willing to take on that individual case. Steps should be taken to ensure that there are sufficient landlords to meet demand, and that landlords have made a degree of commitment to the scheme to ensure the smoother operation of most individual cases.
12.21 To achieve a greater level of landlord participation we recommend that the Scottish Government encourage more local authorities to participate in the scheme either in their own right or through alternative mechanisms such as private sector leasing ( PSL).
12.22 In order to increase participation, and reduce so far as possible the incidence of repeat requests to different landlords to consider individual cases, we also recommend that use be made of framework agreements between the Scottish Government and both local authority and housing association landlords. These could be open to tender and would require landlords to undertake to take up a certain number of cases within a defined geographical area each year. Under the framework agreement, landlords would take cases that met criteria and would accept subsidy, including the repair element based on a Scheme 2 Survey (though exceptional cases with potentially high costs above a threshold could still be negotiated as at present).
12.23 We also recommend that consideration be given to establishing a code of practice with mortgage lenders, specifying what is expected of them if their problem borrowers are to be rescued by MTR.
12.24 Now that the scheme has operated for several years, and some of the problems are now known, we recommend that it is time to consider the establishment of a feedback and grievance procedure. A simple feedback form would allow the performance of the scheme and individual landlords who operate it to be monitored. The area of repairs is sometimes one that creates ill-feeling and the provision of better explanatory information for clients (e.g. a booklet written in plain English) as well as allowing some kind of come-back over the costs and necessity of repairs that are sometimes disputed. It is recognised that any appeal system must be proportionate to the relatively small scale of the scheme.
12.25 As part of the monitoring system, landlords should monitor the rent payment records and assess the sustainability of their MTR tenants.
12.26 MTR is one model in the possible range of mortgage rescue schemes. We recommend that a broader range of schemes be developed. In particular a Mortgage to Shared Equity ( MTSE) mechanism would extend the scope of MTR and operate alongside it, providing help to some households currently applying to MTR and others excluded by current value limits, at lower subsidy cost. It could be built on existing LIFT shared equity schemes, but with more flexibility (including upward and downward staircasing). The target group for MTSE would be applicants fitting income/ equity criteria and without complex debt problems.
12.27 The Scottish Government should also review different models of MTR, including the use of intermediate rents and private sector leasing. These schemes would demand lower subsidy per rescue and could increase the range of landlords likely to offer assistance. They could be introduced in the context of local framework agreements for landlords, who could bid or be asked to take these on. It is envisaged that intermediate rents would be seen as a rental alternative to MTSE for households with sufficient income for this to be a reasonably sustainable solution but who, for various reasons, choose or are obliged to rent rather than remain owners.
12.28 There is also a case for introducing regulation to govern private sector sale-and-leaseback schemes, given that these schemes are very risky and are being promoted to vulnerable households 32. The Scottish Government is unlikely to be able to action such regulation unilaterally as consumer protection is reserved to the UK government. The Office of Fair Trading is currently reviewing these schemes.