CHAPTER ONE INTRODUCTION
The Scottish Mortgage to Rent Scheme
1.1 This report describes the results of research commissioned by the Scottish Government to evaluate the national Mortgage to Rent Scheme in Scotland 3. This is a form of 'mortgage rescue' scheme which enables homeowners who are in financial difficulty and at risk of losing their home in certain circumstances to remain in their home by becoming a social tenant.
1.2 The Mortgage to Rent ( MTR) scheme was introduced in February 2003 and has been running for over five years. An initial evaluation after six months' operation was undertaken by ODS Ltd (2004), which provided a generally positive account of the scheme and much detailed insight into the issues raised in its operation. What gives a further study added value and topicality is the current deterioration in financial and mortgage market conditions, with the prospect of potentially increasing repossessions and wider issues of problem debt. There is further value in looking at what has been a relatively innovative (and possibly unique) scheme of mortgage rescue, by UK or international standards, given its national scope.
1.3 The Scottish national Mortgage to Rent scheme started in 2003 and until recently has operated within a relatively benign climate of low unemployment and interest rates. However, mortgage possessions in the UK have been rising, reaching 27,100 in 2007. If the Council of Mortgage Lenders' forecast of 45,000 possessions in 2008 is realised then it will mark the highest level since the housing market recession of the early to mid 1990s 4. At the time of writing the UK housing market is suffering a severe downturn and disruption due to the 'Credit Crunch' and the reduced availability of mortgage funds. While it may be expected that this will further increase pressures on this and related schemes, the nature of the problems may also change somewhat.
1.4 We believe this evaluation is timely, for reasons mentioned above, and will be of wider interest beyond Scotland. At the same time, the field of mortgage provision and regulation and the processes invoked when things start to go wrong is complex at the best of times. Major new statutory regulation of mortgages (' MCOB') overseen by the Financial Services Authority ( FSA) was introduced in 2004, but it should also be noted that significant parts of secured mortgage lending (secondary loans) are covered by different regulatory regimes (Consumer Credit Act). Further significant changes have also been mooted recently. These complexities are increased when one has to consider differences between the Scottish legal framework, having regard to the recent changes, and the framework in England and Wales. Thus the Mortgage Rights Act Scotland (2001) and more recently the Bankruptcy and Diligence etc. (Scotland) Act (2007) have both been implemented in this period, with possibly differing effects on the extent of debt problems affecting homeowners' security.
1.5 This background underlined the importance of having a research team with a range of relevant expertise and experience, but also the importance of having effective communication with key stakeholders during the research process to ensure that no important issues are missed.
Objectives of the Evaluation
1.6 A number of objectives were set for the evaluation research, as identified below. These include some broad overarching questions and some quite specific ones.
(Objective 1) Review approaches adopted by other countries.
(Objective 2) Review the options available in Scotland to households finding themselves in mortgage arrears or facing re-possession
(Objective 3) Assess the characteristics of applications to the MTR scheme, including changes over time, market influences, geography, household demography and dwelling condition profiles
(Objective 4) Critically assess the application process, including application of eligibility criteria, applicants' views, guidance, forms, processes and role of advice agencies, including awareness of MTR among advice agencies
(Objective 5) Sustainability of MTR tenancies and future housing aspirations
(Objective 6) Assess landlord selection process
(Objective 7) Landlords' perceptions of and participation in MTR
(Objective 8) Critically assess subsidy calculation
(Objective 9) Assess the rents being set for MTR properties
(Objective 10) Critically assess the operation of the repairs policy and whether it provides value for money
(Objective 11) Examine MTR as option for trustees
(Objective 12) Explore lenders attitudes towards the MTR scheme
(Objective 13) Critically assess MTR aims, achievement and VFM
(Objective 14) Consider the viability of extending the scheme to 'mortgage to shared equity'
(Objective 15) Synthesise the evidence gathered in relation to Objectives (1)- (14) into robust conclusions and recommendations
1.7 The research has set out to examine all of these issues, using a range of methodological tools and approaches, as described below. Inevitably, this report has more to say about some of these issues than others, partly because of their inherent interest or complexity, and partly because of the evidence we have been able to obtain within finite time and other resource limits. Some of these objectives might be considered more fundamental or overarching than others; in particular, Objective 13 seeks an overall critical assessment of achievement and Value for Money ( VFM).
Review of Policy Innovations and Options
1.8 This part of the research is particularly concerned with meeting Objectives (1) and (2). It has entailed reviews of literature and policy documents, including formal searching routines, and the use of networks of contacts and key informants in different countries. There are relatively few comparable schemes in other countries but a small number of relevant comparators are selected for a closer look. This work is reported mainly in Chapter 2, which also reviews existing safety net and related mechanisms in the UK and Scotland, and the place which MTR may play in homelessness strategies.
Analysis of Secondary Datasets
1.9 Considerable use has been made of the analysis of secondary data sources relating directly or indirectly to the Mortgage to Rent ( MTR) scheme. Direct data derives from the administrative databases generated in the administration of the scheme. In addition, we undertook to examine a range of other secondary data sources, including major government surveys, administrative data systems and published statistics. Examples of the first kind include the Scottish Household Survey ( SHS) and the Scottish House Condition Survey ( SHCS). Examples of the second kind include Homelessness data returns from Local Authorities, as well as data from the Scottish Courts system. Examples of the third kind include housing market statistics provided by the Scottish Government, Registers of Scotland and the Council of Mortgage Lenders ( CML).
1.10 The secondary data analysis is intended to address a range of questions including the scale of MTR activity, its geographical pattern, types of households and properties involved, financial costs and values, different outcomes, potential need/demand for the scheme and its relative contribution. The findings are reported particularly in Chapters 4 (scale of activity and need) and 9 (costs, value for money), but with elements also in Chapters 5 (household profile), 6 (administration times), and 8 (landlords, properties) The data were also used to identify key stakeholders involved with the scheme as lenders, landlords or advisers.
Mortgage to Rent Databases
1.11 There are two main databases held centrally for the administration of the MTR scheme. The MTR database is an Oracle relational database which is triggered by the receipt of application forms and which records most of the information collected during the process of administering cases. The structure of this database is complicated, involving many separate files, and the information recorded is a mixture of dates, coded categories, yes/no logical fields, free text comment fields, and financial numbers. This is not a particularly user-friendly resource from a research and monitoring viewpoint. Considerable work has been entailed in deciphering some of the coding and in linking together information from different files for the same cases.
1.12 The second database is called the Allocation of Cases file and this is a simpler Excel spreadsheet. It deals primarily with what has happened to cases and contains the final financial values at settlement stage. We are advised that these are more reliable than some of the corresponding figures within the MTR Oracle database, and it is our impression that some of these fields are not completed in all cases.
1.13 In this process of analysis a number of possible weaknesses or gaps in the data have been identified. So far as gaps are concerned, this arises because the databases only record information which is strictly required for the operation of the scheme under its current rules. This omits certain information which we might regard as important from a broader monitoring or research viewpoint, for example the income of households. These issues are addressed in the recommendations ( Chapter 12).
Interviews with Stakeholders
1.14 The research proposal indicated that around 35 stakeholders would be interviewed. Stakeholders included in this report encompass national policy or sectoral representatives, social landlords, mortgage lenders, money, legal and housing advice agencies, surveyors and solicitors. The breakdown of those interviewed is shown in Table 1.1. It may be inferred from the pattern in this table that certain groups were more ready to engage with the research than others, contrasting for example social landlords and mortgage lenders. We had originally intended to approach similar numbers in these categories. In addition to greater difficulties being experienced in obtaining interviews with lenders, the sample of landlords was widened to include local authorities and other agencies not participating much in the scheme hitherto.
Table 1.1: Stakeholders Interviewed by Type
1.15 Although relatively few mortgage lenders were talked to directly (partly owing to difficulties in identifying the right person in the organisation to talk to about both policy and practice) national stakeholders, advice agencies and others provided extensive comment on lending and repossessions practices. One major lender provided written comments.
1.16 Stakeholder interviews were conducted mainly by telephone, on a pre-arranged basis, using a topic guide, although a few were undertaken face-to-face. Topic guides followed a common overall structure and set of themes, but adapted as appropriate to particular groups. A sample topic guide is provided at Appendix B.
1.17 The findings from the Stakeholder interviews inform many parts of this report, but particularly Chapters 3, 6, 7 and 8.
Case File Audit
1.18 The research team carried out an audit of manual case files held at the Scottish Government office from which the MTR scheme is administered. The purpose of this audit was to gain greater insight into issues which arise for different clients, beyond what could be summarized from the analysis of secondary data. These could include the background circumstances of clients leading them to apply for MTR, the administrative process and factors which could cause disruption or holdup, and factors leading to outcomes such as clients withdrawing or being deemed ineligible.
1.19 We originally anticipated sampling up to 75 Case Files. In the event Files on 67 cases were examined. In general the Case File Audit provided confirmatory evidence for much that emerges from other strands of the research, but specific examples are mentioned as appropriate at different points in the report.
1.20 Some of the key issues raised in the research brief, particularly under Objectives (3), (4) and (5), cover the experiences of MTR applicants. The MTR databases contain relatively little detail about how households got into difficulty and there is a need to examine the application process in more depth to look at the perception of and operation of eligibility criteria, housing options and experiences (particularly for ineligible or withdrawn applicants), applicants' experience of the application process and experience of using advice agencies.
1.21 In order to provide greater depth to our understanding of household experiences, perceptions and decision-making, we recommended that the research with applicants included both quantitative and qualitative dimensions. A structured topic guide allowed the collection of key factual information about the application while there was scope to also explore experiences more qualitatively. In an individual interview people are more able to discuss personal issues such as unemployment, financial hardship and relationship breakdown, as well as financial issues such as savings and debt on a one-to-one basis.
1.22 Due to the challenging nature of the timescale set, and the issue of contacting people who may be out a good deal, the interviews were conducted primarily by telephone (with provision for face-to-face interviews in a few instances where desired by applicants). Each interview took around 30-45 minutes depending on the respondent's experiences, characteristics and talkativeness.
1.23 The target sample for the research was 35 settled cases, 20 withdrawn and 20 ineligible cases, with the aim of achieving a geographic spread to offset the heavy concentration of cases in the West Central Belt while having a bias towards more recent (post-2005) cases. The sample of 300 contacts was selected disproportionately at first to give enough cases in the 'ineligible' and 'withdrawn' category and coverage across rural areas as well as the West of Scotland (where cases are heavily clustered). Households were written to by the Scottish Government and given the opportunity to participate.
1.24 As expected, withdrawn and ineligible cases were much more difficult to contact and much more difficult to persuade to participate, despite particular efforts being made to boost response from these groups. Overall, 69 applicants were interviewed - 52 who had settled through Mortgage to Rent and 17 who had withdrawn or had their application declined.
1.25 The research has been conducted with the benefit of an Advisory Group, which has met three times during the life of the project (late March-August 2008). An interim report was discussed in early June 2008, before most of the household interviews and many of the stakeholder interviews had been undertaken.
1.26 This report is structured in a thematic fashion rather than simply reporting each element of the research separately. It starts by looking at the policy context and possible alternative models from abroad in Chapter 2, before then discussing the particular role and objectives of the MTR scheme, including its eligibility and targeting rules, in Chapter 3. This draws considerably on stakeholder perspectives. Chapter 4 analyses the scale of activity and relates this to potential need, drawing primarily on secondary data.
1.27 Chapter 5 focuses on the applicants themselves, both in terms of their profile of characteristics and in terms of their background circumstances and experiences which led them to MTR. This is based mainly on household interviews with supporting evidence from other sources. Chapter 6 is concerned with the administration of the scheme and draws primarily on stakeholder interviews, but supported by evidence from other elements. Chapter 7 focuses on issues of debt and financial difficulty, and on the roles of lenders and advisers, again underpinned primarily by stakeholder interviews. Chapter 8 is concerned with social landlord issues, including the issue of finding landlords to take on MTR clients, landlord attitudes and motivations towards the scheme and experiences with it, the issue of property types and condition and the repairs process, and issues of rents and sustainability of tenancies. This chapter draws on evidence from secondary data, stakeholder interviews and household interviews.
1.28 Chapter 9 looks at the cost of the scheme, and its relationship with property values, repair costs and the wider market, as well as the costs of scheme administration, based mainly on secondary data. It raises questions about wider value for money of MTR against possible alternative options. Chapter 10 goes on to consider some options for varying the scheme or alternative mechanisms, including the specific option of a Mortgage to Shared Equity model which was identified in Objective (14).
1.29 Chapters 11 brings the different themes together in a broader synthesis, leading into an overall assessment of effectiveness and value for money. Chapter 12 complements this by offering recommendations for future policy and practice development.