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Evaluation of the National Mortgage to Rent Scheme

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CHAPTER TWO POLICY REVIEW

Introduction

2.1 In this chapter we place the Scottish Mortgage to Rent scheme in a wider policy context. First we review the approaches adopted in other countries towards mortgage default and the risk of repossession, with particular attention paid to schemes operated in Belgium, the Netherlands and Australia. We then examine the policy context in Scotland and the wider UK in which the MTR scheme operates, looking both at mortgage safety nets and at homelessness strategies.

Review of other countries' approaches

Mortgage systems and levels of risk

2.2 Different mortgage systems exhibit different levels and distributions of risk. The most fundamental choice is between access to mortgage credit and the risk of default. The UK moved from being a relatively risk averse system before the 1980s with limited access to mortgage credit, to one of the most liberal in the world. The range of mortgage products available in the UK (at least before the credit crunch), including sub-prime and self-certified, is one of the most 'complete' in Europe (Mercer Oliver Wyman 2003). The downside of this structure is that the risk of default among borrowers is likely to be greater than in countries where access to mortgage credit is more restrictive. It is certainly the case that within the UK the levels of default among non-prime borrowers are much greater than for borrowers generally (Stephens & Quilgars 2008).

2.3 At the other end of the spectrum, the German mortgage system is still quite conservative. For example, mortgages granted through special housing-savings schemes operated exclusively by institutions known as Bausparkassen and those funded by mortgage bonds (that have a statutory maximum loan-to-value ratio of 60%) combine with a rather conservative valuation system and limit loan-to-valuation ratios and contribute to Germany's internationally low level of home-ownership.

2.4 Generally, mortgage systems in the English speaking countries ( US, Canada, Australia, UK), in Scandinavia and now the Netherlands, tend to be more liberal than other continental European systems.

Governments and risk

2.5 Governments do adopt various approaches to risk management, of which government guarantees are the most commonly employed and probably have the most far reaching effects.

2.6 Government guarantees underpinned the United States housing system and the post-war growth in home-ownership. The Federal Housing Administration has provided a government guarantee to lenders in the event of default since the 1930s 5. So its effect is to extend housing finance on more generous terms (i.e. higher loan-to-value ratios and lower interest rates) than would otherwise be the case to higher risk groups (Schwartz 2006).

2.7 The Canadian government operates a system of mandatory insurance on mortgages with high (over 75%) loan-to-value ratios though the Canada Housing and Mortgage Corporation. While this system was intended primarily to protect the financial institutions, it also has the effect of widening access to mortgage credit (Wachter 2005). It might be noted that nearly all UK lenders operated a private version of the Canadian system (Mortgage Indemnity Guarantee) until the 1990s. Under this system the borrower with a high loan-to-value mortgage paid for an insurance policy that protected the lender from losses arising from default.

2.8 Savings plans are often a feature of systems where availability of mortgage credit is restricted. They are often a feature of a risk averse finance systems, as in Germany. Subsidised savings schemes offer aspirant home-buyers assistance with saving for the significant downpayment that is required because high loan-to-value mortgages are not available.

2.9 Income-related housing allowances are available for home-owners in some countries, including France, Italy and Sweden - as they are in the UK in the form of Income Support for Mortgage Interest ( ISMI) (Scanlon & Whitehead 2004). Private insurance paid for by mortgagors in order to protect themselves from income loss is available in some countries, but it is the UK government's promotion of it that is highlighted in the literature (Atterhog & Song 2003).

Assistance to borrowers facing repossession

2.10 There are few schemes that can be characterised as sharing the same objectives as the Scottish Mortgage to Rent Scheme, i.e. assisting borrowers who are in danger of losing their homes through re-possession.

2.11 Based on the limited evidence of relevant schemes in the literature and internet searches, an initial survey of experts was undertaken in a range of countries. Experts were asked specifically whether there were schemes that were aimed at assisting home-owners who faced possession. Following the survey the Housing and Economic Recovery Act in the United States introduced a federally backed mortgage insurance scheme to assist home-owners who are in danger of losing their home. However, the scheme did not start until October 2008 so cannot be evaluated (see Table 2.1). The results of this survey are summarised in Table 2.1.

Table 2.1. Summary of international survey identifying schemes to assist distressed home-owners

Country

Scheme

Comments

Australia

Mortgage relief scheme: originally federal, now a discretionary programme operated by some states. Provides interest free or non-repayable loan to mortgagors having difficulty making mortgage payments. The objective is to tide them over where there is a good chance of recovery.

This scheme fits our criteria.

Belgium

Flanders operates a government insurance scheme that provides some assistance with mortgage payments after a waiting period for a period of up to three years.

The scheme fits our criteria

Canada

No scheme aimed at this group. High LTV mortgages are insured via Canada Mortgage & Housing Corporation and there are some assistance programmes for low income home-owners.

Not selected for further review

Finland

No such scheme. A temporary interest subsidy was introduced in the severe housing market recession of the early 1990s to help distressed home-owners. Around 6,600 households were assisted. But the scheme no longer exists.

Not selected for further review

Ireland

A mortgage supplement is available under the Supplementary Welfare Allowance scheme (the Irish version of Housing Benefit), but take-up is low. Many low-income home-owners have local authority mortgages on which much forbearance is exercised in the event of arrears.

Expert advises that there is little worthwhile to explore further

Netherlands

A National Mortgage Guarantee ( NHG) is sold by the Security Fund for Owner-occupied dwellings ( WEG). Households must pay 0.45% of the mortgage payment and it results in lower mortgage interest rates. It does not protect them against foreclosure, but does clear households outstanding debts in the event of foreclosure. It is sometimes mischaracterised as insurance against falling house values.

While not directed at prevention, this scheme has been selected for further review as it attempts to mitigate the consequences of possession.

United States

Since this survey was completed, the Housing and Economic Recovery Act 2008 initiates a scheme that provides federally insured mortgages for mortgages where the borrower is in danger of losing their home and the lender voluntarily reduces the loan-to-value ratio to 90% of the property's current market value. The scheme started on 1 October 2008 and will end on 30 September 2011.

It is too soon to assess the scheme.

Source: survey of national experts, except United States:
http://www.hud.gov/news/recoveryactfaq.cfm

2.12 Three countries' schemes were selected for further examination, based on the assessment in Table 2.1: Australia (New South Wales); Belgium (Flanders); Netherlands. We designed a pro-forma that was circulated to national experts for completion. 6 The information that follows is based on the information provided in the pro-forma.

2.13 We examine first the context in which the schemes operate; we outline their principal characteristics (aims, eligibility, the nature and type of assistance and their administration); we also examine their scope and costs. Information on the UK/ Scotland and the Scottish Mortgage to Rent scheme are provided for comparison.

Context

2.14 Home-ownership in Scotland has been rising rapidly and has reached 66 per cent, only a few percentage points below the UK average. Despite this recent growth fewer Scottish households are dependant on mortgages (36.0%) than in the UK as whole (41.0%). Home ownership is also around 70 per cent in Australia and is just two percentage points lower than this in New South Wales, so in both these jurisdictions, mortgaged owner occupation is at very similar levels to Scotland. At 74.5 per cent home ownership levels in Flanders are higher than in the UK or Australia, but mortgaged owner occupation is somewhat lower than in the UK and similar to Scotland. Home ownership in the Netherlands is quite low (56%), but mortgage debt has increased rapidly in recent years as a result of financial liberalisation, a buoyant economy and very generous tax treatment of owner-occupied housing (mortgage interest payments being fully tax deductible). Mortgaged owner occupation stands at almost 50 per cent, which is especially high in relation to the level of home-ownership.

Table 2.2. Home-Ownership and Mortgaged Home-ownership

Country

Owner occupation

Mortgaged Owner Occupation

Australia

- New South Wales

69.8

- 68.0

35.0

- 33.5

Belgium - Flanders

74.5

33.6

Netherlands

56.0

49.0

UK

-Scotland

70.0

- 66.0

41.0

- 36.0

Source: National Experts, except UK figures sourced from (a) 2001 Census; (b) UK: Scanlon et al. (2008); (c) Scotland: Bank of Scotland quoted in Scotsman on-line, 3/7/08

2.15 Gaining international comparative data on the level of mortgage arrears is problematic as they are not measured in the same way, if at all. They are also cyclical, so to the extent that housing market cycles are not synchronised it is difficult to compare like-with-like. In the UK, 2.2 per cent of mortgages were in arrears of three months or more in 1998 and fell to a low of 0.85 per cent in the first half of 2004 and have since risen reaching 1.1 per cent in 2007 (second half of year) ( CML website, Live Table AP1). A survey of CML members found that 3.2 per cent of all borrowers were in arrears (including those of less than three months) at the end of 2005, but this was much higher among non-prime 7 borrowers at 11.3 per cent (Stephens & Quilgars, 2008). When mortgages taken out since statutory regulation was introduced in October 2004 were compared, the arrears rate was 0.8 per cent among prime mortgages and 6.5 per cent among non-prime borrowers - that is some eight times higher (ibid.).

2.16 In Australia, the proportion of mortgages in arrears have also risen in recent years and in early 2008 a little over 0.2 per cent of prime mortgages were in arrears of three months or more. This is half the level experienced in 1996. As in the UK, unconventional mortgages attract much higher default rates: some 10 per cent of 'low doc' loans were in arrears in 2006 and 7.25 per cent of loans made to people with poor credit histories were in arrears by the end of 2007. Data on arrears by state/ territory in Australia are much better than in the UK and it is notable that the '3+' month arrears rate in New South Wales (whose mortgage rescue scheme is examined in this report) exceeded 0.6 per cent in 2007. Australia also has far superior data available at postcode level and this indicates that the ten worst performing postcode areas exhibit '3+' months arrears rates in excess of five per cent and eight of these are in Sydney, the state capital of New South Wales.

2.17 In Belgium, the proportion of mortgages in arrears fell from 2.5 per cent in 2003 to 1.7 per cent in 2007. No data is available for the Netherlands.

2.18 Figures on possessions are also problematic. We know that possessions by mortgage lenders in the UK troughed at 0.07 per cent in 2003 and 2004 rising to 0.23 per cent in 2007, which is nonetheless much lower than the peak of 0.77 per cent in 1991 ( CML, Live Table AP4). (If the CML forecast of 45,000 possessions for 2008 8 is fulfilled, this would be approximately 0.38% of all mortgages). The data for Scotland (see Chapter 4, Table 4.6) must be treated with caution, but suggests a possession rate of between 1.6 and 1.9 times the UK level. No reliable data exists in Australia. The number of claims for possession in the Supreme Court of New South Wales has varied between 2,095 and 5,369 over the past decade though these include all properties (not just homes) and by no means has all of these claims led to possession. There have between around 1,500 and 2,000 involuntary auctions of dwellings per year in the Netherlands since 2004. No data is available in Belgium.

Schemes aimed at assisting home owners facing repossession

2.19 Outline details of the schemes examined are provided in Table 2.3 (below). We now examine the schemes for home owners facing possession that are run in Australia, Belgium and Netherlands and compare them to the Scottish Mortgage to Rent Scheme. In both responsibility for housing policy is largely devolved to the states and territories and in Belgium responsibility for housing policy is devolved to the three provinces. In these countries we examine schemes that are run at these sub-national levels. The Australian Mortgage Relief Scheme was in origin a federal scheme introduced in 1982, but details vary between states/ territories. Its aim is to assist those having difficulty in paying their mortgage due to unexpected income loss. The scheme that operates in New South Wales is examined here and accounts for the majority of cases in Australia. The Insurance Safeguarding Home-ownership scheme was an initiative of the government of Flanders and is not operated by the other Belgian provinces. It was introduced in 1998 as the Insurance against Income Loss, but was revised and renamed in 2003. It aims to minimise the risk of possession or forced sale by home-owners and arose from the limited tenure options available for low income households. We also examine the Dutch National Mortgage Guarantee scheme. This scheme has a broader objective, which is to fund owner occupation in a safe and responsible way, with a secondary objective of encouraging home improvements. Information on these schemes was collected from country experts in each of the countries who completed a pro-forma..

Table 2.3. Outline of Schemes

Name of Scheme

Introduced

Aims

Eligibility

Assistance

Type

Administration

New South Wales

Mortgage Relief Scheme

1982

To assist those having difficulty paying mortgage due to unexpected income loss

Claimant must suffer unexpected loss of income.

Mortgage < $350,000; home <$500,000

Payments after income loss >36% gross income and before income loss > 27% gross income

Max. income = $90,000

Interest-free loan paid to lender; sometimes loans become grants or are written off

Social assistance

State housing department

Flanders

Insurance against Income Loss/ Insurance Safeguarding Ownership

1998 (revamped and renamed 2003)

To minimise risk of losing home in context of limited tenure choice

Max. income = €35,260 (single); €49,970 (couple) + €2,870 per dependant

First 10 years of mortgage only

Payments to borrowers on decreasing sliding scale: Year 1 = 70% of payments; Year 2 = 56% of payments; Year 3 = 42% of payments.

Maximum monthly payment = €500

Maximum duration = 3 years

Opt-in insurance

Scheme

Cover = 2.4% of eligible households

Contracted to private insurance company

Netherlands

National Mortgage Guarantee

1995

To fund owner occupation in a safe and responsible way; to encourage home improvement

Max. loan set for given income and interest rate, i.e. the higher the income and the lower the interest rate the greater the maximum loan.

Max. loan = €265,000

Guarantee pays residual debts after foreclosure

Opt-in insurance scheme

Cover = 18% new loans

Not-for-profit foundation backed by local and central government guarantee

Scotland

Mortgage to Rent

2003

To prevent repossession

Need to live in area, in danger of possession and cannot trade-down locally

Max. price = local average

Max. capital (exc. house) = £8,000 (£12,000 if 60+)

Outstanding repairs normally under £6,000

Subsidy to allow social landlord to repair and purchase property

Social assistance

House is brought up to repairs standard and is rented back to household on social rent with secure tenancy

Source: National Experts; except Scotland = Scottish Government

Eligibility

2.20 Eligibility under the Scottish Mortgage to Rent scheme is structured to ensure that assistance is targeted implicitly at lower income households, in very particular circumstances. It is asset tested, both in that the house must be valued no higher than the local average price and that household's additional savings do not exceed £8,000 (£12,000 if 60 or above). Given that the household must have been unable to trade-down locally, this probably means that the effective maximum value of the home is rather less than half the local average (unless the entire market has become paralysed by recession). Although there is no explicit income-test, the terms of the scheme are likely to mean that beneficiaries are lower income households.

2.21 The New South Wales Mortgage Relief Scheme combines an explicit asset test with an explicit income test and an explicit liability test. The house must not be worth more than A$500,000 (c. £250,000) and the mortgage no more than A$350,000 (c. £175,000). The household income limit is A$90,000 (c. £45,000) which in 2005 was 175 per cent of the average full time wage in Australia ( OECD tax-benefit calculator, www.oecd.org). This apparently shifts eligibility way up the income scale, but given that eligibility is triggered by income loss this must narrow eligibility considerably. The scheme is also targeted at households paying more than 27 per cent of their income on the mortgage before income loss occurs and this must rise to more than 36 per cent after income has been lost.

2.22 The Flanders Insurance Safeguarding Ownership scheme is subject to an income maximum of €35,260 (c. £28,200) for a single person household, which is around the average full-time wage ( OECD tax-benefit calculator, ibid.) and €49,970 (c. £40,000) for a couple which is 137 per cent of the average full-time wage (ibid.). Additions of €2,870 (c. £2,300) are allowed for each child. Our expert suggests that the eligibility for the single person would lie in the income deciles 4-7. Note that this scheme is limited to the first ten years of the mortgage.

2.23 The Dutch National Mortgage Guarantee scheme reaches still further up the income spectrum; indeed eligibility is drawn in such a way as to exclude lower income home-owners. There is a liability rather than an asset test: the loan must not exceed €265,000 (c. £212,000) and there is no income limit. Within this liability limit the maximum amount of mortgage that allows a household to be covered by the scheme rises as income rises and mortgage interest rates fall. The intention is clearly to exclude irresponsible lending and borrowing, but especially in a inflationary housing market (as the Dutch market has been), this is likely to exclude households that are forced to take out high loan-to-value ratio mortgages. Unlike the other schemes, mortgages taken out for home improvement are included in the eligibility criteria, reflecting the secondary objective of the scheme which is to promote home improvement.

Type of schemes and their coverage

2.24 The New South Wales and Scottish schemes can be characterised as being social assistance schemes. Rather like safety-net social security benefits, they are contingent on a web of conditions that determine eligibility. But this does mean that in principle all eligible households are covered, though a 'claim' does need to be made and there is no 'right' to assistance. In contrast the Dutch and Flanders schemes are insurance schemes that must be taken out by the borrower. The contractual nature of insurance implies entitlement, though coverage is strikingly low in Belgium where only 2.4 per cent of eligible households appear to have taken out insurance. This dismal take-up rate may relate to the reluctance of commercial lenders to promote the scheme, especially as they often sell rival products. The coverage of the Dutch scheme is much higher at 18 per cent of new mortgages, which is similar to the take-up of mortgage payment protection insurance in the UK. However, this level of take-up may be lower than one might expect as it confers the immediate benefit of a lower mortgage interest rate than would apply if insurance had not been taken out.

Administration

2.25 The social assistance-type schemes in New South Wales and Scotland are administered respectively by the state housing department and the Scottish Government. The Dutch scheme is administered by a not-for-profit foundation with the government and local authorities acting as guarantors of last resort. The Flemish scheme is contracted out to a private insurance company that bears the risk of losses arising from higher than expected claims.

Nature of assistance

2.26 The nature of the benefit in the Scottish scheme differs from the schemes in New South Wales and Flanders in that it does not attempt to sustain home-ownership: the state safety net ( ISMI) in the UK fulfils some of this 'sustainability' function. The benefit of Mortgage to Rent is being able to stay in the home as the tenant of a social landlord, with a subsidised rent and security of tenure. The subsidy is directed at financing repairs that are needed to bring the property up to an acceptable standard and to allow a social landlord to purchase the property and to let it at a social rent. In contrast the New South Wales and Flanders schemes involve cash transfers that are intended to prevent repossession or forced sale, i.e. to sustain home-ownership. The Flanders scheme makes cash transfers to the owner in proportion to the monthly mortgage. The proportion is on a declining sliding scale, starting at 70 per cent of payment in the first year and declining to 42 per cent in the third, subject to a monthly maximum of €500 (c. £400). The maximum duration of assistance is three years in total in the first ten years of the mortgage. Assistance in New South Wales usually takes the form of an interest free loan paid to the lender, which the borrower is supposed to repay over time. However, these loans sometimes become grants and if it seems very unlikely that they will be repaid they are written off. The nature of assistance in the Netherlands is quite different, so reflecting the distinctive objectives of the scheme. Essentially, the assistance pays residual debts after the property has been taken into possession.

Scale, Efficiency and Effectiveness

2.27 Summary details of the scale and costs of the schemes are provided in table 2.4 below. The scale of these schemes is modest, the number of cases per year being measured in the hundreds. In 2007 there were 381 new cases in Scotland, compared to 229 new cases in New South Wales (2006/07), while there are around 100 new cases per year in Flanders. Given that Scotland's population is somewhat smaller than either Flanders (c. 6 million) and New South Wales (approaching 7 million), and homeownership a bit lower, there are proportionately more cases per year in Scotland. The numbers of successful claims in the Netherlands has increased markedly in recent years, rising from 145 in 2003 to 773 in 2007 (with some claims still being assessed), but of course the country is larger (16.5 million) than the others and the nature of the scheme rather different.

Table 2.4. Scale and Cost of Schemes

Country

Number of households assisted

Cost

Value for Money

Who pays?

New South Wales

229 new cases

850 cases in system (2006/07)

$1.4m gross

$0.74m net (2006/07)

Approx. $5,800 per case (2005/06)

Government (but borrowers repay)

Flanders

Old scheme: ave. 110 p.a. (1998-2007)

New scheme: ave. 92 p.a. (2003-2007)

Cost of premiums to govt.=
€3.1m (2006);
€4.1m(2007)

Old scheme: €218 per contract

New scheme €694 per contract

Government pays for insurance

Netherlands

Numbers of successful claims have risen from 145 in 2003 to 773 in 2007

€3.3m (2003), rising to

€24.3 m (2007)

€22,750 per case in 2003;

€31,400 per case in 2007

Borrowers pay one-off up-front fee of 0.45% of mortgage

Scotland 9

381 applications in 2007

£9.5m

Cost per settled case

£26,000 (2003)
£59,500 (2007)

Government

Source: Country Experts, except Scotland based on MTR/ Allocation of Case file data bases & interviews.

2.28 Scotland's Mortgage to Rent scheme stands out as being more expensive than the New South Wales and Flanders schemes, both in terms of overall gross costs and costs per case. The Mortgage Relief Scheme in New South Wales cost A$1.4 million (c. £0.7 million) gross and A$739,000 (c. £370,000) net of repayments in 2006/07. The cost to the government (which pays the insurance premia) of the Flanders scheme rose to €4 million in 2007 (c. £3.2 million) reflecting the losses that the insurer incurred under the previous contract. This higher cost is still about one-third of the cost of the Scottish Mortgage to Rent scheme. The cost per case £26-59,000 in Scotland is also considerably higher compared to Flanders and New South Wales. In New South Wales the cost per case is A$5,800 (c. £2,900) while Flanders the cost per contract of the post 2003 scheme is almost €700 (c. £ 560).

2.29 To the extent that costs can be compared the Dutch scheme is the most expensive of any of these schemes, but again it is important to stress that the nature of the assistance is very different. The costs of the scheme have been rising rapidly and in 2007 reached €24.3 million (c. £20 million) and the cost per case rose from €22,750 (c. £18,200) in 2003 to €31,400 in 2007 (c. £22,000). This is more similar to the cost per case in the Scottish scheme. The key difference is that the cost of the Scottish scheme is met by the government whereas the Dutch scheme is paid for by borrowers who pay a one-off fee of 0.45 per cent of their mortgage when they take it out (and they recoup this through the resultant reduction in their mortgage rate in a few years).

Evaluations

2.30 Evaluations have been conducted of the Dutch and Flanders schemes. The main concern in the case of Flanders is the very low take-up of the insurance by the eligible group, which is estimated to be only 2.4 per cent. This has been blamed on commercial lenders being reluctant to promote the scheme as they offer rival products. The scheme is about to be reformed again. Among the reforms, the maximum consecutive claim period of 36 months is being reduced to 18, reflecting concerns about dependency as many of the claimants have become long-term. The scheme has clearly been under-priced in the past, but the risk was effectively past on to the insurance company. The housing department is also taking over the administration of the scheme as a matter of commercial confidentiality. The cost at which insurance companies were prepared to continue with the scheme was sufficiently high in a recent re-tendering exercise that the Government has ended the scheme for new entrants.

2.31 An evaluation of the Dutch scheme suggested that it had failed to extend the availability of mortgage finance, thought this seems counter-intuitive and is disputed by our expert. The scheme may have brought some stability to the mortgage market, but its key impact has been on laying down a minimum standard of lending as many lenders use the eligibility rules of the scheme as the basis for their lending criteria. Our expert suggests that the scheme may not be very well targeted in that very few people actually need the scheme while many of those who need it most are excluded from it.

2.32 There appears to have been no formal independent evaluation of the New South Wales scheme. Our expert notes that the eligibility of the scheme is drawn quite narrowly and the levels of funding are not great. This assessment is made while noting that housing affordability is a major problem for many tenants and owners, wider housing assistance has declined, households are more indebted, yet mortgage arrears remain relatively low.

Review of options available in Scotland

2.33 We now go on to consider and review the options available in Scotland to households finding themselves in mortgage arrears or facing re-possession, and whether these have changed since the launch of MTR. This discussion explores how MTR interacts with other safety net measures. It is followed by an examination of where MTR sits in relation to local authorities' homelessness strategies.

Interaction of MTR with other safety net measures

2.34 In this section we examine the options available in Scotland to households finding themselves in mortgage arrears or facing re-possession.

2.35 The main safety net measures available in Scotland, as in the rest of the UK are:

  • the state social assistance safety net, commonly known as ' ISMI';
  • private insurance, including Mortgage Payment Protection Insurance ( MPPI); and
  • private mortgage rescue schemes.

2.36 ISMI (Income Support for Mortgage Interest) is the popular name for means-tested social assistance payments to home-owners to help meet their mortgage interest costs. Formally, it also includes such payments to households in receipt of income-related Job Seeker's Allowance. ISMI is the responsibility of the Department for Work and Pensions. ISMI originated with the National Assistance system which later became Supplementary Benefit and then Income Support. It was first scaled back in 1987, but further restrictions were introduced affecting most borrowers with new mortgages from October 1995. A longer waiting period of 38 weeks was introduced, and interest payments were restricted to the first £100,000 of a mortgage based on a 'standard' interest rate. 10

2.37 The government hoped that borrowers would take out private insurance to protect themselves until they could receive ISMI. The main private insurance products that can assist borrowers are Mortgage Payment Protection Insurance ( MPPI), with policies offering a menu of risks that can be covered, i.e. accident, sickness and unemployment; Critical Illness insurance and Permanent Health and Unemployment Insurance. In 2000 the UK government set a target of a 50 per cent take up of private insurance.

2.38 Surveys ( UK) that have been undertaken suggest that:

  • the proportion of borrowers in receipt of ISMI who are in arrears rose from 20 per cent in the early 1990s (Ford & Wilcox 1992; Ford et al 1995) to 50 per cent by the end of the 1990s (after the restrictions outlined above were introduced) (Kempson et al 1999); however, this was in a context of falling overall numbers in arrears or receiving assistance.
  • Take-up of private insurance initially rose, but this has not been sustained. A study in 2004 showed that 60 per cent of borrowers had some form of private insurance (i.e. MPPI, Critical Illness or Permanent Health and Unemployment Insurance) (Ford el al 2004). The take-up of MPPI has been falling and is now below 20 per cent ( CML statistics, Live Table PPI3).
  • Even where households have private insurance, around one-fifth of successful claimants go on to develop mortgage arrears usually because the payments cover only part of the mortgage (Kempson et al 1999).

2.39 Our interviews with Scottish advisers largely confirmed these findings. The 39-week delay before ISMI is paid was described as being 'torture' by one adviser. One adviser stressed that even when ISMI met full interest payments, lenders expected borrowers to make some other contribution towards the mortgage, while another suggested that they are prepared to exercise forbearance only for a short period. The advisers also confirmed that many clients do not have private insurance, which they attributed variously to their being 'maxed out' with their standard mortgage payments and to not fully appreciating the risks of home ownership. One adviser alluded to the policies not always protecting the people who took them out.

2.40 The impacts of safety net changes (described in 2.36) may have been different in Scotland due to generally lower house prices/ fewer mortgages over the £100,000 ceiling. Average house prices in Scotland are lower than in any other part of the UK, averaging £141,229 in 2007 compared to £196,478 for the UK as a whole (Halifax House Price Index), so we would expect fewer households to be affected by the £100,000 ceiling and even where it does apply to affect a smaller proportion of mortgage interest payments.

2.41 One striking features is the trend in ISMI claims in Scotland has not fallen as it has in England (indeed in all of the English regions) and Wales. There were actually more claims in 2006 than in 1993 (Table 2.5). A key factor in explaining this trend is likely to be the rapid rise in home-ownership in Scotland since the early 1990s. Home-ownership in Scotland has risen by one-third since the early 1990s (from around 52 per cent to 67 per cent), while it has risen by only a few percentage points in England and Wales. The Scottish home-ownership market has been growing and is therefore riskier than the more mature markets in other parts of Great Britain.

Table 2.5. Trends in the Number of Households in Receipt of ISMI (1993 = 100)

Year

England

Wales

Scotland

1993

100.0

100.0

100.0

1994

94.4

97.1

109.1

1995

88.8

91.2

109.1

1996

80.2

85.3

104.5

1997

66.9

73.5

90.9

1998

58.5

64.7

90.9

1999

53.5

61.8

86.4

2000

48.3

55.9

86.4

2001

44.5

52.9

90.9

2002

40.9

50.0

90.9

2003

39.1

50.0

90.9

2004

34.9

58.8

68.2

2005

37.5

50.0

113.6

2006

36.3

47.1

109.1


Source: Calculated from Wilcox (2008), Table 112a

2.42 It has been estimated that if the current safety net system had been in place in the early 1990s, some 80,000 more households in the UK would have experienced serious mortgage arrears (Ford & Wilcox 2005). Declining take-up of private insurance has almost certainly been affected by the referral of MPPI, with all other PPI policies, to the Competition Commission for investigation. Its provisional findings (reported in June 2008) focus on the need for price transparency and standardisation, and also on ways to reduce the advantages of selling PPI alongside the principal product such as a mortgage ('point of sale' advantages) (Stephens, et al., 2008). If measures of the latter kind, such as forbidding the sale of insurance with a loan and a requirement for annual renewal of insurance policies, were adopted, they would seem likely to reduce take-up further.

2.42 In Scotland, as in the rest of the UK, for-profit private sector firms offering their own mortgage rescue schemes have emerged. It has been estimated that there were 20,000 such 'rescues' in the UK in 2007 (Stephens, et al., 2008). The companies usually purchase the properties from the owner at below market value and rent it back to them on insecure assured shorthold/ short assured tenancies. The Office of Fair Trading announced an investigation into these schemes in May and intends to report by September 2008 (ibid.). The advisers we interviewed reflected national concerns about these schemes. In one 'quite horrendous' case a private company bought a house from a family that had lived in the house for more than 40 years and had got into mortgage difficulties after exercising the Right to Buy. The company had paid less than two-thirds of its market value and were now taking possession action after the family had difficulty paying the rent. Another adviser highlighted the difficulties households sometimes had in paying the rent and that they sometimes encountered Housing Benefit restrictions.

Statutory Mortgage Regulation ( MCOB)

2.43 Since 31 October 2004 almost all new home-owner mortgages have been subject to statutory regulation by the Financial Services Authority ( FSA). It is intended to improve the information provided to customers and improve customer protection. Provisions are contained in the Mortgage: Conduct of Business Handbook, chapter 13 11 of which deals with the management of arrears and possessions and is known as ' MCOB-13'.

2.44 Under FSA regulation, lenders are obliged to follow a regulatory framework set out in the Mortgage Conduct of Business ( MCOB). The rules on arrears and possessions are in MCOB 13. This section covers procedures adopted when handling arrears and possessions, the subsequent sale of a property in possession, the records lenders must keep, the information that must be provided to customers, and the recovery of any outstanding (shortfall) debt. The FSA's rules were based on the CML's statement of practice on arrears and possessions.

2.45 MCOB 13 requires lenders to ensure that a property is only repossessed where all other attempts to resolve the position with the customer have failed. In addition, lenders are required to treat customers fairly. If a lender has not treated a customer fairly or has not followed MCOB rules, the customer can complain and, if necessary, refer the complaint to the Financial Ombudsman' ( CML: http://www.cml.org.uk/cml/policy/issues/1629).

2.46 A survey of CML members in 2005 found that:

'The vast majority of lenders (eight in ten) reported that statutory regulation had made little or no difference to their management of arrears cases, but had prompted changes in notification, suggesting that lender practices already conformed to what is now statutorily required' (Stephens and Quilgars, 2007, p. 7).

2.47 This finding was supported by our interviews with advisers who reported variously that they never made use of it, it was too soon to tell whether it would have an impact, or that it had no impact whatsoever.

Mortgage Rights (Scotland) Act 2001

2.48 The Mortgage Rights Act allows owner-occupiers to oppose an enforcement action brought against them by lenders by applying to the court to have the rights of the lender suspended. Previously, courts had little discretion in cases where default was established and were effectively obliged to grant a repossession order. This change is intended to bring Scots law closer to the position in the rest of Great Britain. The legislation has been in force since 3 December 2001.

2.49 Interviews with advisers mostly indicated that the Mortgage Rights Act is very important in arrears cases. One described it as making a 'massive difference' because it allowed them to explain individual circumstances to a Sheriff and to have a decision made on grounds of 'reasonableness'. Delays in possession allow people to recover their position or to sell the property voluntarily. Another adviser pointed out that it was valuable to partners who do not have their name on the mortgage, as all occupants of a house must be notified of possession action. Because all occupants must be notified of possession action, tenants of defaulting landlords must also be notified of possession action. However, one adviser did indicate that although the legislation is 'a handy tool to have' its use depended on a borrower's ability to pay for legal costs (if they were not entitled to Legal Aid).

2.50 In relation to the Mortgage to Rent, the Mortgage Rights Act can help to 'buy' sufficient time to allow a rescue to take place.

Local Authority Homelessness Strategies

2.51 The Housing (Scotland) Act 2001 obliges local authorities to prepare homeless strategies.

2.52 We have undertaken a review of local authorities' homelessness strategies to establish their relationship with the Mortgage to Rent scheme. Ten local authorities were selected to reflect differing types of council: urban, rural and island. These council's homelessness strategy documents were obtained in pdf files and subjected to a broad search of relevant terms:

  • mortgage to rent
  • mortgage (excluding MTR)
  • (re)possession
  • home owner/owner occupier

2.53 The Acrobat search will identify words that contain these terms. So, for example, the search term "home owner" will also identify "home ownership." It is therefore a broad search.

2.54 A further exercise was conducted using the search councils' home pages to establish whether information for the public concerning MTR was easily available.

2.55 The results of these searches appear in Table 2.6. Table 2.6 shows that half of the councils' homelessness strategy documents referred to the Mortgage to Rent scheme - which of course means that half did not.

Table 2.6. Mortgage to Rent and Local Authority Homelessness Strategies (Number of Hits in Search of Documents)

Local Authority

Homelessness Strategy

Mortgage to Rent

Mortgage (excluding MTR)

(Re) possession (relating to home-owners)

Owner occupier/ Home owner

MTR details found on search of council homepage

Aberdeen City

2003

1

1

0

0

No

Borders Council

2003-2008

0

2

0

0

No

East Dunbartonshire

2006-2011

2

3

2

7

Yes

Edinburgh City

2002-2007

0

0

0

0

No

Glasgow City

2003-2006

0

3

1

1

Yes

Highlands Council

2003-2008

0

0

0

1

Yes

North Lanarkshire

2006-2009

4

9

3

3 (same as repo)

Yes

Shetland Islands

2003-2008

0

0

0

0

Yes

South Lanarkshire

2006-2012

2

1

0

0

No

Stirling

2003-2006

4 (2 of which heading/ contents)

3

1

1

No

Note: All documents subjected to Adobe Acrobat search. Websites accessed 3 June 2008, except South Lanarkshire whose strategy document was supplied by the council.

Source: Local authority homelessness strategy documents (full citation details in references)

2.56 Table 2.7 shows that three councils refer to MTR in terms of advice (Aberdeen, East Dunbartonshire and Stirling). Two councils refer to plans to investigate the feasibility of MTR or to support a pilot (Aberdeen and South Lanarkshire). North Lanarkshire refers to a local scheme whereby the council funds the shortfall between the grant from the (then) Scottish Executive and the purchase costs. All of these actions can be characterised as forming part of homelessness prevention strategies.

Table 2.7 The Role of Mortgage to Rent in Homelessness Strategies

Local Authority

Role of Mortgage to Rent in Homelessness Strategy

Aberdeen City

Commitment to provide advice including reference to the use of the Mortgage to Rent scheme (p. 48)

Undertake to evaluate the feasibility of a mortgage rescue scheme (p. 48)

East Dunbartonshire

'For those households threatened with housing crisis, services have been developed to assist with sustaining housing status. Specific initiatives include the Mortgage to Rent scheme, and an agreement with Govan Law Centre to provide legal advice both of which assist owner-occupiers facing repossession proceedings' (p. 17)

North Lanarkshire

Commitment to 'Continue with local Mortgage to Rent Scheme by funding shortfall between SE Grant and the purchase costs' (p. 36)

South Lanarkshire

Homelessness strategy action plan gives possibility of funding for a mortgage to rent scheme (p. 40) and to 'develop proposal for SLC to participate in Community Scotlands [sic] mortgage to rent scheme' (p. 48).*

Stirling

'The Council will ensure that as plans develop, homeless advice workers will be made aware of and will promote this option [i.e. MTR] to those presenting with mortgage difficulties' (p. 20).

Prevention Action Plan commits council to 'Provide training of staff on Mortgage to Rent Scheme and promote where suitable' (p. 34)

(*) Pilot started in 2008 (email from officer)

Source: Homelessness strategy documents (full citations in references)

2.57 Table 2.6 indicates that five of the councils' homepage search facilities lead readily to information for the public on MTR. Often these form part of the local authority's Housing Options Guide. Such information is readily adaptable for local authorities to use from HomePoint's Guide to Housing Options in Scotland (section 15.1) 12.

2.58 Table 2.7 gives a further indication as to local authorities' wider regard to home-ownership in their homelessness strategies. It is notable how few hits terms such as 'owner occupation', 'home ownership' and 'mortgage' receive. That the references to home ownership sometimes occur only in tables that list the causes of homelessness applications provides a clue: mortgage arrears account for very few presentations. In other cases home owners are mentioned only in that those facing repossession qualify as occupying 'insecure' accommodation.

2.59 However, some of the councils surveyed have broader strategies for preventing homelessness among home owners and refer to other legal mechanisms that can be employed to prevent homelessness. For example:

  • Section 2 of the Mortgage Rights Act can be used to apply to have repossessions suspended (North Lanarkshire Council 2006, p. 37)
  • use of section 11 of the Homelessness (Scotland) Act 2003 (North Lanarkshire Council 2006, p. 52; East Dunbartonshire, p. 30)

Homelessness Monitoring Group

2.60 The Homelessness Monitoring Group ( HMG) was established in 2002 to monitor the progress of the implementation of the Homelessness Task Force's recommendations.

2.61 An analysis of the first three reports of the HMG was undertaken in the same way as for local authority homelessness strategy documents. (Table 2.8) from which it became clear that home-ownership has featured very little in these documents

Table 2.8. Mortgage to Rent and home ownership in Reports of the Homelessness Monitoring Group

Report

Mortgage to Rent

Mortgage (excluding MTR)

Re(possession)

Owner Occupier/ Home owner

2004

0

0

1*

0

2005

0

0

6*

1**

2006

0

0

0

0

2007***

-

-

-

-

2008

1

1

4*

0

(*) appear to relate to tenants
(**) relates to supply of low cost home ownership
(***) no report identified for 2007 on Scottish Government website publications search engine

Source: Acrobat Search of Reports of the Homelessness Monitoring Group (full citation details in References)

2.62 An interview with the chair of the HMG suggested that the reason why the Mortgage to Rent scheme does not feature in the reports is that the causes of homelessness are dominated by other factors. Official statistics on the main reasons for homelessness applications indicate that the loss of accommodation with friends and relatives and disputes within households account for 60 per cent of applications, whereas mortgage default accounts for just two per cent of the total, that is 913 cases out of a total of 59,096 in 2006/07 (Scottish Government, http://www.scotland.gov.uk/Publications/2007/10/30092316/13). For comparison, the loss of private sector accommodation accounts for some eight per cent of applications and the loss of a social tenancy for four per cent.

Conclusions

2.63 The UK mortgage system is relatively liberal, enabling more access to a wider range of lending products but allowing much more risk. Governments adopt a range of approaches to risk management, with government guarantees most common. The UK is exceptional in seeking to rely to a high degree on private insurance (although in practice takeup remains low). Arrears and possessions appear to be higher in the UK than in some comparable countries, and they are clearly much higher for non-prime lending.

2.64 It is hard to find any directly comparable schemes to MTR in other countries. The recent set of measures initiated by the Housing and Economic Recovery Act in the United States will be worth monitoring, but it is too soon to judge the results of a scheme that is only just beginning. The nearest existing comparable schemes differ in their context, aims and mechanisms used, for example operating either as state-backed insurance against loss of income or as state guarantees of mortgages. The schemes that operate in New South Wales and in Flanders operate primarily to keep people in owner occupation. The insurance-based schemes in Flanders and the Netherlands tend to have problems of low coverage. The social assistance schemes that operate in New South Wales and Scotland mean that all eligible households are in principle covered, but they have no right to assistance. It is difficult to compare the costs of the schemes, but the Scottish scheme does appear to require a high level of subsidy per case -value for money is discussed further in Chapter 9.

2.65 The review suggests that home-ownership in Scotland differs in some respects from the rest of the UK. The most important differences are the less mature character of the tenure arising from its recent rapid growth and, in part arising from this, the maintained use of the state safety net (compared with the rest of Great Britain).

2.66 Nonetheless, the same issues arise in Scotland as in the rest of the UK. There are concerns about the adequacy of existing state and private safety nets and statutory mortgage regulation has had little impact (suggesting that lender practices already conformed to the standards set out in the statutory regulation). The Mortgage Rights Act has had a clear benefit in Scotland, bringing the legal system more in line with England and Wales, making recovery strategies more practical. Nonetheless, the Mortgage To Rent Scheme clearly fills one important gap in the safety net coverage.

2.67 MTR is intended to prevent homelessness arising from mortgage problems and repossessions and, as we show below, it does do this to some extent. However, the scheme does not appear to feature strongly in many local homelessness strategies, probably because the number and proportion of homeless applications relating to mortgage problems and repossessions in Scotland remain relatively small.