CHAPTER THREE ROLE AND OBJECTIVES OF SCHEME
3.1 In this chapter we discuss the objectives of the scheme and its role within the broader basket of housing, social and financial policies. We start with the stated objectives, move on to report what stakeholders said about objectives, and then relate this to issues of eligibility and targeting.
"The aim of the Mortgage to Rent scheme is to help households that are in danger of being made homeless due to legal action that threatens their home. The scheme helps by offering households the flexibility to change the tenure of their home from ownership to a tenancy in the social rented sector" Mortgage to Rent Manual, p.3.
3.2 In 2001, the then Scottish Executive made a commitment to explore options for providing help to families with mortgage difficulties by supporting the Mortgage Rights (Scotland) Bill in the Scottish Parliament. Following this they then considered the merits of a national mortgage rescue scheme. A number of mortgage rescue schemes had operated locally with the objective of allowing households to remain in their homes rather than having to leave their house as a result of repossession. Four such schemes operated in Scotland. Consultation on a national scheme was undertaken in 2001 and, following Ministerial approval, the MTR scheme became operational in February 2003.
3.3 From this, we can see that MTR is part of a broader strategy to respond to the potential problem of mortgage difficulties. We also see that it to some extent responded to 'bottom-up' initiatives, which implied that local stakeholders had perceived a need and gone on to demonstrate that such a theoretical need could be translated into practical action.
3.4 The aim of the MTR scheme is to help owner occupiers who are in danger of being made homeless due to legal action that threatens their home. This underlines the clear link with homelessness. Yet, as we showed in Chapter 2, MTR and indeed homeowner mortgage problems feature fairly small in the overall homelessness strategies across most of Scotland. We go on in Chapter 4 to show that the MTR numbers are indeed small in the homelessness context, but that MTR is somewhat more significant in the repossessions story.
3.5 The scheme helps by offering households the opportunity to change the tenure of their home from owner occupation to a tenancy in the social rented sector. In that respect the scheme differs from some of the comparators in other countries looked at in Chapter 2. This difference may reflect the stronger culture around social housing in Scotland, or simply the greater scale of the social sector. Some previous mortgage rescue schemes have looked to keep people in homeownership, perhaps through shared equity (Ford & Wilcox 1992), or else have looked to private renting (with some assistance if required), and indeed the private sector 'mortgage rescue' products involve private renting. We examine the shared equity and other options further in Chapter 10. A government that was less keen on social renting, or keener on tenure diversification might not have followed this model.
3.6 Homeowners risk losing their homes because of being unable to maintain payments on their mortgages, or other lending secured on their home. MTR explicitly links help to financial advice, and may thus also be seen as part of a wider Government strategy to counter 'financial exclusion', which in turn is part of its wider strategy against poverty.
3.7 There are a number of eligibility criteria (see Box 3.1 below) that the household has to fulfil including: the household must be in danger of becoming homeless; the household must have received advice about their financial situation; there must be a need for the household to stay in the local area; and the household must be unable to trade down in the local area. These are discussed further below in the light of stakeholder comments, but some general observations are in order here.
Assumptions behind the Scheme
3.8 The broad logic of these criteria is to confine the scheme to cases where there does not appear to be an obvious alternative (short of repossession and likely homelessness). So, if there is no immediate legal threat, the household can stay put and hope that things improve and/or that they can renegotiate/reschedule their payments in a way which will be manageable. A household which has received proper money advice will have considered and initiated such negotiations, and will also have reviewed their expenditure commitments against their income and hopefully identified a sustainable level of payments and/or appropriate expenditure economies. The latter point is of some importance given what emerges later in this report about the extent of secondary ('non-housing') debt.
3.9 In general, where owner occupiers are in financial difficulty, a key response may be to sell the house and move, in order to clear all or most of the debt. MTR assumes that if there is cheaper housing in a locality, people can move downmarket while still owning - in practice as we see below this may not always be feasible depending on the extent of debts, payment/credit histories and current income. However, MTR does not assume people could move into the private rented sector, which is another 'default' option. This is not an option which can necessarily be ruled out, given the potential availability of Housing Benefit and the recent expansion of supply associated with 'Buy to Let'.
3.10 The criterion of needing to remain in the locality relates primarily to the potential to trade down, in that for most localities there is still somewhere else which is cheaper. It might be added that there are some localities in Scotland where social rented housing is not in particularly scarce supply (Bramley et al 2006), which is relevant to the alternative options available in the local housing system and to the value for money of measures to 'prevent' homelessness as discussed in Chapter 9.
3.11 Subsidies are made available by the Scottish Government ( SG) on a case-by-case basis to a local authority or registered social landlord to help them buy the property and charge a social rent, as well as to enable any necessary repairs to be made (the scheme pays a repairs' subsidy to the social landlord up to a maximum of £6,000). The scheme also funds applicants' conveyancing costs (unless the applicant wishes to use their own solicitor) and pays for a desktop and Scheme 2 survey of the property.
3.12 The MTR scheme is administered centrally by SG and involves working with solicitors, surveyors, lenders, landlords, trustees and advisers. Trust HA has also been provided with funding to promote the scheme to Black and Minority Ethnic households.
Stakeholder Views on Objectives
3.13 The MTR scheme was widely supported by the stakeholder interview participants and the administration of the scheme attracted relatively little criticism. Any comments and suggestions, detailed in subsequent chapters, tend to represent enhancements to the current operation, rather than far-reaching or fundamental changes.
3.14 The MTR scheme was widely understood to be a programme that assists people imminently facing the threat of eviction because of mortgage arrears to stay in their home as a social housing tenant and pay off their debts. It was therefore seen as well directed to meet its main objective of preventing homelessness. Various stakeholders emphasised that a significant plus point of the scheme was that it did not stigmatise the owner since neighbours did not have to know that the tenure had changed and the process was described as "seamless". The scheme also helped people to get out of wider debt problems. To some extent the programme also helps in improving property standards as they are brought up to Scottish Housing Quality Standard ( SHQS) and RSL letting standards.
3.15 There were several other motivations for participation in the scheme that could be highlighted to potential social landlords. For local authorities MTR was felt to be a cost-effective scheme that helped them meet their responsibilities towards preventing homelessness and also secure additional social housing units to add to their depleted stock. Housing associations also welcomed an opportunity to assist with the prevention of homelessness, but in addition they also expanded their portfolio for future re-housing opportunities and on which they could raise private finance. It was particularly welcome as part of an RSL growth strategy - increasing stock more quickly and with less effort than through development.
" As long as you do the homework properly when it's first referred, it's a win-win situation for everybody." (Large RSL)
3.16 Advisers were very supportive of scheme as it assisted people who had no further options available to them that would allow them to stay in their home.
3.17 National stakeholders saw the value of the scheme as part of a wider strategy to underpin home ownership and to prevent homelessness. It was a distinctive Scottish initiative which helped to counteract the gaps in safety nets which relate mainly to reserved areas of policy. However, this group were somewhat more likely to be aware of the subsidy costs of the scheme, which have to be weighed alongside the benefits in an overall evaluation (discussed further in Chapter 9).
3.18 The Mortgage to Rent Manual sets out the eligibility criteria which are summarised as in Box 3.1.
Box 3.1: Eligibility Criteria
- There is legal action that threatens the household with homelessness (with some limited exceptions).
- The household has received advice about its financial situation.
- All owners agree to be considered and have signed the application form.
- The property is the sole or main residence of someone in the household.
- The household has a need to stay in the local area.
- The household is unable to trade down in the local area.
- There are no inhibitions, adjudications or other legal action pending against the property that would prohibit the sale.
- The applicants have no more than £8,000 capital (£12,000 if aged 60 or over).
- Someone in the household has lived in the property for at least twelve months.
- The open market value of the property is lower than the local area average house price.
- The repairs required to the property are assessed at no more than £6,000 or the cost of repairs in excess of this limit can be funded in another way.
- The property is suitable for the needs of the household, for example, it is not overcrowded.
(Source: summary of criteria in Archived Communities Scotland MTR Website)
3.19 Although issues can arise in individual cases about any one of these criteria, from the case file audit and the stakeholder interviews two of these criteria seemed to generate more widespread problems, and questioning.
A 'Last Resort'?
3.20 The requirement for the applicant to be under imminent threat of eviction (Criterion 1.) raised strong feelings amongst some interviewees (and was an issue in quite a few Case Files). Advisers in particular pointed to the pressure this put applicants under "with eviction sometimes only 24 hours away." However there was an understanding that this approach was consistent with public money being used only in circumstances of last resort.
3.21 A lender also pointed to this as worsening the problem it was trying to solve (i.e. arrears).
"Because the borrower is not eligible for MTR until the notice that the lender will seek repossession then considerable arrears - possibly 12 months - could have built up and this is a heavy burden on the account. There will also have been a good deal of legal fees incurred, again a burden on the account." (Lender)
3.22 Having to wait for legal action placed considerable stress on applicants and increased problems of "negative equity" in the property. Clients often sought assistance from advisers too late in the process, when negotiation with lenders is frequently no longer available. This was felt by some to be dictated by the eligibility criterion 1. One adviser noted that he had clients tactically making wholly unsustainable repayments to stave off eviction and buy time, yet by doing this they rendered themselves ineligible for MTR. There were also some households who sought assistance too late, when there was not enough time to instigate applications and prevent the lender from pressing ahead with the eviction. Of course these people might simply have been ignorant of MTR, rather than put off by the eligibility rule.
3.23 Securing earlier intervention may produce agreed repayment plans or defended possession actions in the courts and remove the threat of eviction for some households. This is more of a 'prevention' strategy favoured by some stakeholders, including both advisers and lenders. There were some calls from advisers and lenders to allow eligibility at an earlier stage:
" MTR is very much 11th hour and can come very suddenly. It might be more attractive and save a lot of expense if the MTR could be brought into action earlier, possibly at the first intimation by the lender that it will take legal action for recovery of the debt." (Lender)
3.24 Advisers reported that if people seek assistance early in the process they may be ineligible for the MTR scheme. However, by having sought help early on in the arrears process there is a greater chance that the lender will exercise forbearance and the arrears problem managed and legal action avoided.
3.25 The current procedures followed by the MTR team enable them to accept applications from households where the lenders have indicated that, were it not for the MTR application, they would be taking legal action. However, potential clients may not realise, from the limited information available to them, that this is the case, and that a lender can be approached to provide such a letter. Advisers should be more aware of this possibility. There would appear to be a case for making this much clearer in all information about the scheme, including the application form. Beyond that, there may be a case for changing or broadening the eligibility criteria, perhaps to reflect 'unsustainable' mortgage costs based on an income assessment as an alternative or additional criterion. Broader possibilities of this kind are picked up in Chapter 10.
3.26 The other key lesson, recognised by many stakeholders, is that householders with debt problems should be encouraged to seek advice at an earlier stage. This would allow a range of options short of MTR to be explored and for MTR to remain an option of last resort.
3.27 The requirement for the property value not to exceed the local average market value (Criterion 10) caused a lot of problems with eligibility, according to monitoring data, the case file audit, stakeholders and individual households. This criterion is obviously linked to 6 (that people should not be able to trade down) but is also a form of asset-test. Clearly, many owner occupiers who may get into mortgage difficulties would not qualify because their house is above the relevant level. Yet their ability to trade down may be complicated by other factors such as debt history or loss of income, as discussed further in Chapter 5.
3.28 The property value eligibility tool used in MTR identifies the local housing market area and calculates the qualifying property value for the area. While one might argue about the detailed operation of this tool, the fundamental point is that Criterion 10 is clearly intended to exclude a large number of potential cases, targeting help on those nearer the bottom of the market with nowhere else to go. Particular cases might argue that they are arbitrarily excluded by this, perhaps because the market area boundaries are unrealistic or circumstances have changed. Individual circumstances may be recognised in cases of larger households (5 or more people) or disability, and we also noted a number of successful appeals against this criterion for rejection in the case files
3.29 These examples suggest that the scheme criteria are in practice interpreted flexibly, particularly if people complain, question or appeal. However, other people might be put off by reading the formal rules or from an initial ruling. We also interviewed individual households who had been excluded from the scheme on these grounds and felt some sense of grievance.
3.30 Most stakeholders understood the eligibility rules and mainly accepted their logic. Some argued for some greater flexibility or generosity particularly relating to the stage of legal action the household must be at to qualify for MTR and the property value. In addition it was argued that flexibility should apply to vulnerable people such as those with physical or mental disabilities.
3.31 The suggestion was made that the scheme was in effect being 'rationed' by these criteria. This is true, in one sense, but not in the more general sense. The criteria have been deliberately set so as to target the scheme, having it act as a 'last resort' for economically weak homeowners with few options. Given this targeting, it is clear that hitherto resources have been sufficient to meet demand (albeit demand has been very uneven geographically, suggesting issues about promotion discussed in Chapters 4 and 6). So there has been no further rationing applied.
Changing market conditions
3.32 The MTR scheme has operated until recently under relatively benign market conditions. Taking a longer view, the scheme needs to be robust enough to cope with significant changes in these conditions, such as those threatened currently following the Credit Crunch.
3.33 Under the conditions of the last few years, demand for the scheme arising from economic difficulties such as unemployment has been moderate, with the usual range of changes in individual circumstances triggering problems but no large wave of redundancies to cope with. Demand has partly reflected a greater tendency in British society to take on debt, encouraged by relatively liberal lending regimes. Rising house prices have created a cushion of equity for many of the households applying to the scheme.
3.34 Quite different conditions could arise, changing both the volume and the nature of cases applying to the scheme. A combination of credit restrictions, falling house prices and rising unemployment could lead to a rapid escalation of mortgage arrears and potential repossessions. More of these cases could be constrained by negative equity, as in the early 1990s in England. Although the financial provision for the scheme has been slightly enhanced recently, demand could run significantly ahead of available resources, leading to questions about whether further rationing mechanisms might need to be applied. The unit cost of subsidy could rise further, as less equity may be available to defray subsidy cost. More cases could fail to stack up in terms of the ability to clear debt.
3.35 However, some factors could work in a different direction. Greater credit restriction and tighter regulation of secondary lending might mean that the kinds of problems of multiple debt which MTR has been dealing with could become less common in the medium term. We comment further on future prospective demand in the next chapter.
3.36 The MTR scheme objectives focus on homeowners at serious risk of losing their home and thereby preventing one (not very common) cause of homelessness. It can be seen as part of a broader strategy, alongside other legislation, to improve security in the housing market, but also as a component of strategy to counter financial exclusion and poverty-debt problems.
3.37 MTR emphasises social housing as the solution and serves to increase the stock and quality of social housing. This is not necessarily the only way assistance could be provided. For example, there could be more emphasis on supporting continued ownership, possibly through shared equity, or on supporting solutions in the private rented sector.
3.38 Stakeholders and applicants are broadly positive about the objectives and the criteria/targeting of MTR. The two main areas provoking most critical comment are the requirement for legal action to be being taken (or immediately threatened), and the 'below average' property value test.
3.39 MTR is intended to be a last resort for homeowners and the eligibility criteria reflect this, for example implying that people who could 'trade down' should do so. This last resort approach may however provoke some tensions around timing, where it tends to conflict with a prevention approach. There is a case for (a) making existing flexibilities more apparent to potential clients and advisers, and possibly (b) formally widening the criteria
3.40 A minority of applicants believe their personal circumstances have not been taken into account, and there will always be some disagreement where outcomes are negative. To ensure that the decision-making and appeals process is robust, there could be periodic external reviews of case files and appeal decisions, and/or a standing Appeals panel with external membership.