CHAPTER TEN SHARED EQUITY and other OPTIONs
10.1 This chapter considers various alternative or supplementary mechanisms which might be introduced alongside or instead of MTR. We were specifically asked to consider a shared equity option and this is considered first. We then go on to consider briefly a number of other specific suggestions about changes or developments in the scheme. The chapter then moves on to consider more strategic issues about mortgage rescue mechanisms alongside other related policies.
Why Shared Equity?
10.2 The basic idea here is that, instead of 'mortgage rescue' automatically meaning 'mortgage-to-(social-) rent', it could include the option of reducing one's equity stake in the existing home to a fraction of the total. One then uses the proceeds from this part-sale to pay off enough of the mortgage to resolve payment problems, and becomes a shared equity owner, in effect similar to someone using the LIFT shared equity schemes. The other part of the equity would be held by the SG (as with LIFT). 22
10.3 There are a number of arguments for this approach. Firstly, as with most LCHO products, when compared with social renting, it should be on average cheaper in subsidy cost 23. Secondly, and correspondingly, some households at risk of repossession may not be so poor as to require permanent HB subsidy or very low rent to get by. Thirdly, quite a lot of potential clients would like to remain owner occupiers, in some sense, and have an option possibly to increase their stake again in future. Fourthly, this could help to address the concerns of some MTR households about the loss of most or all of their equity. Finally, while MTR is quite tightly restrictive in its criteria, a shared equity scheme could be more inclusive, for example open to households in slightly higher value properties and on middle incomes 24.
10.4 Few participants had given much thought as to whether the scheme could be revised as a Mortgage to Shared Equity scheme. Advisers thought the willingness of the lenders to retain these customers as borrowers might be limited and that some households had no equity to sell in this way, as their debts were of such large amounts.
"I think there's scope for it, but we've not normally ventured into shared equity in Scotland. In England yes but not in Scotland, although we've done Homestake. I think it's entirely possible but from the way the scheme are operated at the moment as we're a charity tenants don't have the right to buy but if it was changed then yes I think it might be an option. Difficult to say whether some of the individuals that have come through the scheme could have done this, some have been relatively quite well off afterwards but others simply have had no money…some haven't cleared their debts so no." (Large RSL)
10.5 Shared ownership/equity were not seen as solutions for most MTR applicants, for a variety of reasons. Lenders were thought by some other stakeholders to be unlikely to lend to them given their poor credit record. However, in practice it is a question of continuing with part of an existing loan rather than starting a new loan; the lender already has a relationship with the household, and it has a problem with this loan which the scheme should help to solve. Shared Ownership Schemes involving rent and mortgage payments were thought likely to be too expensive. There was also a fear that the person could get into further debt problems and lose their home again. In essence, there was a view that MTR was a safety net for people who had tried owner occupation and found it unsustainable (including many former tenants who had bought using RTB) and LCHO schemes were a leg-up for people who aspired to owner occupation. A lender concurred with this view, believing that lenders who are involved would want to look at the account history of the potential shared equity owner and how the account was managed before lending. They would want to be sure the borrower could afford to borrow for shared equity.
10.6 One adviser suggested that the level of equity in homes varied considerably, some had very little some had greater sums. Another adviser pointed to the benefit of MTR for those who had multiple debts: if they get made bankrupt or are sequestrated, the home remains at threat as long as they remain an owner. For some households, converting from full ownership to having an equity stake in their home, would not completely remove the threat of homelessness from them if their equity was insufficient to clear all their debts on sale, which is not uncommon. Even if secured loans were repaid, other agencies including Council Tax collection could force sequestration, which would put the home once again under threat.
10.7 A counter view was expressed by a local authority interviewee, who believed that if shared ownership or shared equity schemes were available they would be very popular with people applying for MTR, because it would mean they retain some ownership. Numbers of applications would go up if this was available. Ownership Options Scotland believe MTSE would be useful for disabled people.
10.8 Some national stakeholders, who thought there was scope to consider mortgage-to-shared-equity ( MTSE), did not believe that this should be "tacked on" to existing schemes but should be developed as a separate initiative. However, there would seem to be administrative benefit in linking the schemes and sharing some of the administration backup. Lenders may be reluctant to continue lending to people with poor payment records and an MTSE scheme would have to be targeted carefully at only some of the current MTR clients (as well as some other people) and promoted appropriately. The option of staircasing up after a suitable period should also be considered.
Householder attitudes to future ownership and shared equity
10.9 In around 1 in 5 settled cases, the applicant interviewed hoped to be able to own in future. This was mainly through the Right-to-Buy ( RTB) once the eligibility period had been reached. A couple of respondents were disappointed to discover that they were not eligible for the RTB once they had sold their property through MTR25.
10.10 More commonly, MTR applicants were leaving owner occupation forever. The vast majority were relieved or at least philosophical about this. It was more important for them to remain in their property than to build up equity. Most were now debt free or on the road to debt-recovery and felt they had learned 'a hard lesson'.
"Who would want to give us a mortgage?"
"Given the current financial 'credit crunch' they are going on about all the time, I'd be very reluctant to become a homeowner any time soon."
10.11 Around a quarter of settled applicants said they would definitely have been interested in some form of shared equity so they could retain a stake in their property. A further 1 in 7 would possibly have been interested. More than half were not interested in shared equity arrangements due to their age, poor health or disability, credit history, economic status and concerns about affordability. Commonly applicants would have not had this choice as they were required to fully liquidate all assets as part of Trust Deed arrangements.
"That sounds possible. If I could have raised £4,000 (the shortfall in the Trust Deed) I could have kept my house."
10.12 Others were not keen on the perceived lack of control in shared ownership:
"You need to own 100% to feel like an owner and to take advantage of ownership."
10.13 For younger owners who have less complex debt arrangements, shared equity may be an attractive option. The predominant client group for LIFT shared equity schemes is younger, and different in profile from the predominant group currently using MTR who are middle-aged or older.
10.14 If a shared equity option had been available, how many of the cases going through MTR would have been plausible candidates for such a solution? We can only make an approximate estimate for this based on the information on the databases, and only for settled cases. If we define potential equity sharing cases as those with positive equity (after repairs, and taking account of any contribution from savings) and not requiring HB, it turns out that 27% of cases appear to be potential candidates. However, only 15% would have more than 15% equity in capital terms, and equity shares larger than this would have to be financed from a new mortgage. If we apply a stiffer test, and exclude households who gave as their 'reason for not trading down' either 'financial difficulties/ arrears', 'low income/ unemployment/ pension' or 'sequestration', the proportion of potential candidates falls to 15%, of which only 7% have more than 15% equity in capital terms. Therefore, it would appear that only a minority of current MTR clients would be likely to be able to contemplate shared equity, probably in the range 15-25%.
10.15 It is possible that there would be additional candidates among the applicants who withdrew or were considered ineligible, but we do not have enough completed information in the database to assess the numbers. This group would have to overcome any other ineligibility factors to qualify, although the introduction of a shared equity option might well be accompanied by a broadening of the criteria 26.
10.16 It is clear from the small minority of existing MTR clients that would be eligible for shared equity, as well as from the stakeholder and applicant comments, that shared equity is not an appropriate solution for a majority of those currently helped by MTR. Therefore, a shared equity option is mainly an 'add-on' which would be primarily intended to widen the scope of the scheme and draw in more potential candidates; nevertheless, a number of those currently going into social renting might well switch to MTSE.
10.17 Shared equity as a form of mortgage rescue can have the basic institutional form of the current Scottish LIFT shared equity schemes, particularly the Open Market version. However, detailed arrangements would need to be more flexible, in terms of equity stakes which might need to be quite small. The flexibility of future upward or downward staircasing would also be desirable, the latter being used in cases where the household gets into further difficulty later. This would be more attractive to households and lenders than the traditional shared ownership model, which is more complex, does not fit well with Scottish law, and has higher outgoings including rent (although this may be eligible for HB).
10.18 To have a meaningful size of stake, most cases would need to retain a mortgage on part of the property. As noted in many of the comments above, taking out a new mortgage could be problematic given the households' payment and credit records. In addition, in the current mortgage lending climate, affected by the Credit Crunch, it may be difficult to get any lenders to participate 27. However, as explained in the following paragraph, it may be that a new mortgage is not needed and these difficulties would not arise. Currently lenders are focusing on loans with lower loan-to-value ratios. One advantage of LIFT shared equity schemes and similar equity loan arrangements is that the loan is a first charge on the property and the stake taken by Scottish Ministers is a second charge. Generally, lenders treated these as low LTVR loans and were more willing to make them as a result. However, it is not clear that this practice will continue in the current climate.
10.19 We speculated whether the SG, if it were to develop a shared equity version of MTR ( MTSE), would need to consider possibility of offering some form of guarantee on the mortgages to tempt lenders to participate. In discussion with a representative of the financial sector who had studied the issue, it appeared that, for those MTR clients for whom shared equity may be relevant, mortgage availability would not really be an issue because they would simply continue with a part of their existing loan. The lender has an incentive to do this as what is being offered is a solution to a problem they currently have with the loan, where the SG in effect takes on much of the future risk. It was suggested that this MTSE option could initially be offered to households whose situation was more straightforward; people without major secondary debts who had suffered a reduction in income but would still be able to maintain a lower level of payment. If there were still some cases where a new mortgage was required, it might be that this could be issued by the proposed new National Lending Unit proposed (whose remit is primarily concerned with equity or other loans for home improvement).
10.20 If MTSE were developed alongside MTR, it would make sense to broaden the eligibility criteria to some extent, to include more of the types of case for which it made sense. This could include for example raising the value limits and possibly modifying the requirement that households be at immediate risk of repossession. It would also be appropriate to introduce income criteria into the assessment, something which would be arguably appropriate even within MTR but which would certainly be necessary in order to assess what levels of equity and future mortgage payments people could sustain. Income assessment raises some issues about methodology and training of advisers to undertake this.
10.21 It is questionable whether people should be given a choice between MTR and MTSE, rather than being offered one or the other according to the assessment criteria (possibly with a grey area of overlap). A suggestion developed below is that, above a relevant income threshold, people should be offered a choice of MTSE and an intermediate rent form of MTR (see para's 10.67-10.71 below). There may also be a question about the minimum viable stake under MTSE. It would need to be less than the 51% used in LIFT shared equity schemes, but should it be less than 25%, or 10%? This is essentially a policy decision. Somebody could take out MTSE and pay less than someone on MTR paying a social rent 28. The equity shares directly affect the upfront subsidy cost: for example, 50% of typical values in 2007 would be £43,500; 75% would be £65,250. This suggests that MTSE might not be much cheaper than MTR in the short term, although it would be in the long run as the SG would eventually get a return on its equity stakes (including future capital growth).
10.22 Another point to remember here is that under MTSE, assuming it followed the LIFT model, the occupier retains responsibility for repair and maintenance. In one sense, this helps to 'solve' one of the problem areas with MTR, differences of view about the necessary level and cost of repairs to meet social landlord standards. In another sense, this leaves an element of risk floating with MTSE cases - that houses are below, or fall below SHQS - which is fully pinned down in MTR. This is another policy issue to be resolved; given the level of public stake and the general commitment to SHQS, there would be some presumption in requiring work to this standard within a defined period, but allowance would be made for the cost of this in calculating the appropriate equity share.
Other Potential Developments
10.23 As pointed out in Chapter 3, several RSLs, lenders and advisers thought that the system would be better if people could be eligible at a stage before being threatened with court action - from a point of view of minimising the distress of applicants and allowing more time to negotiate agreements. To some extent this is a matter of better communicating the practices which are actually followed in MTR. It could become more formalised as a form of 'pre-qualification'. Beyond that, criteria for applying MTR could be modified to include households falling into arrears, above some threshold, and with unaffordable ratios of outgoings to income. Again, this implies that an assessment is carried out of income and financial commitments. This would move the MTR scheme slightly closer to a preventative model, which some parties favour, rather than just using it as a 'last resort'.
10.24 A more radical option might be to exclude cases where the problem was caused by taking on secondary debt-beyond an affordable level, rather than by loss of income. This would require an element of retrospective income assessment. Under the current scheme the only way in which secondary debt is treated differently is when calculating possible contributions from capital and equity to defray scheme subsidies. Secondary debt not taken out for home improvements or essential transport/care purposes ( MTR Manual, para's 7.10-7.16) would be added back to applicants' notional capital available for making a contribution.
Value limits and areas
10.25 Value limits and definitions of local area were felt to be in need of review. This could be just a practical matter of updating the information and reviewing the geographical areas used. In theory 'housing market areas' ( HMAs) would be most appropriate, and there is a set of urban-based HMAs devised by the former Communities Scotland (Bramley et al 2006, Chapter 5). However, these vary greatly in size and do not cover all parts of Scotland. From a transparency point of view it might be simpler to use local authorities, although some of these are very large and diverse (e.g. Highland). Whatever area is used will involve some rough justice and there are likely to be continuing appeals.
10.26 Using narrower, more localised areas would increase the possibility for cases to be taken on from higher value areas, and hence perhaps from a wider range of localities within Scotland. The scheme would be more geared to individual circumstances, and the average grant cost would tend to rise. Using wider areas would mean that cases from higher value areas would not normally be considered, while more cases from lower value areas would come through. The scheme would then be more area-biased, with a lower average cost.
10.27 There is a case for raising the threshold level, relative to the local distribution of prices. Some stakeholders argued for this, on the grounds that in some instances it was not realistic to trade down enough to get out of difficulty, and secondary data supported this view (see Chapter 5). There would be additional case for raising the threshold if MTSE (and/or intermediate rent MTR) were to be introduced as an option alongside MTR.
10.28 The target timescales offered by the MTR guidance were thought to be appropriate. However, timescales in reality were normally much longer than the targets set in guidance, and this is a real problem creating more costs and stress for clients. A number of possible means were highlighted to prevent delays. As a general approach this entails active case management by the MTR team, so they chase up on outstanding issues, with pre-defined timescales for applicants to respond to requests for information was suggested. Several stakeholders believed that, as mentioned above, eligibility at an earlier stage in the repossession process would give more time to come to an agreement. However, as argued previously, it is probably more appropriate that householders with debt problems should be encouraged to seek advice at an earlier stage, allowing a range of options to be explored while MTR remains an option of last resort.
10.29 It was clear from Chapters 6 and 8 that many delays result from difficulties in finding landlords to take on individual properties, and the partly related problem of having to conduct a second survey and then reconcile differing repair cost estimates. It is important to focus on possible solutions to these problems. The following suggestions were made, or raised by members of the research team in the light of the findings:
- Making a limited number of referrals to housing associations for individual properties
- The subsidy offer to the landlord and the settlement repairs cost figure could be based on the Scheme 2 survey, rather than negotiated around the landlord's survey
- This route could be applied to a majority of cases, with a minority of cases where 'potentially significant repair issues' were flagged at the initial survey stage, handled by negotiation.
- Landlords could be mainly engaged via framework agreements which covered taking on up to n cases per year within a defined geographical area and set of parameters, including the use of Scheme 2 survey costs
- Joint surveys might be arranged
- There was some evidence that some landlords' internal approval processes were cumbersome and slow in some cases, particularly local authorities, and that what was needed here was more delegation of authority (to be stressed in guidance)
10.30 Most of these have some disadvantages or limitations. The first would mean that more applications would fail. The second option is attractive from the delays point of view, but this would not stop landlords conducting their own survey and carrying out additional work (at their own expense). It would be more worrying if it led to more dropout by landlords. The third option is really a sensible complement to the second option. The fourth option is also very attractive from an administrative streamlining point of view, and would fit well with the second and third options in a package. Landlords would spread their risks across the majority of normal cases where actual costs may vary in a modest way around the Scheme 2 estimate, while being able to treat exceptional cases separately. Arguably, such an approach is now appropriate given that the scheme is well-established. Some landlords (particularly smaller ones) might find it difficult to take on such an agreement, but most of those who have been active in MTR should be able to take it on. The fifth option might pre-empt some disputes and delays but could in itself be a factor in delaying the actual survey, due to coordination issues. The final option (delegation) should certainly be encouraged through guidance, but would be superseded by framework agreements.
10.31 This is a difficult issue, on which opinions vary somewhat. However, on balance we believe that it is important to improve the speed of processing cases in terms of landlord selection and settling of repair costs for subsidy purposes, and that the logical way forward is to operate MTR primarily through framework agreements with repair subsidy based normally on Scheme 2 survey (but with provision for exceptions).
Current Split of Responsibilities
10.32 MTR is dissimilar from most former Communities Scotland initiatives in that it is administered centrally by a team within SG. RSLs and LA's have no involvement in assessing applicants and can either accept or reject a particular application. All stakeholders were asked to comment on whether this arrangement was satisfactory or should be changed. All of the stakeholders thought that the current arrangement was preferable to a decentralised system. Key reasons included:
- Consistency of approach
- Development of Expertise, particularly given urgency of cases
- No evidence that local knowledge was necessary.
Treatment of repairs
10.33 One RSL requested that consideration should be given to waiving the 'right to repair' for pre-existing repairs for a period after the property had been acquired by the landlord. RSLs were having to fund some repairs which were either ineligible or above grant limits. However, those who commented did not want the repair grant increased at the expense of fewer properties being considered.
10.34 There was a significant groundswell of opinion from households who had gone through MTR, supported by some non- RSL stakeholders, that repairs undertaken were sometimes excessive or too costly. The current repair procedures also contribute to delays and problems in reaching agreed settlements. For these reasons, as already argued above, there is good a case for looking for a simplified process, in the context of a framework agreement approach to landlords. The essence of this approach would be to take the Scheme 2 Survey estimate of the cost of repairs to SHQS level as the basis for subsidy, in most normal cases. An 'exception' route would be provided, if the Scheme 2 survey flagged either a high cost (significantly above the subsidy threshold) or some significant structural problem or issue - in that case things might proceed by negotiation as at present, although a joint survey might then have a role. A further opportunity might be given for landlords to query the Scheme 2 figure if their quoted costs (for the same standard) looked much higher than the initial survey figure (above some other threshold). The presumption here is that the scheme would assume and fund an SHQS level of improvement. Social landlords have their own ideas about a good 'lettable standard', which may be higher; we are assuming landlords would make their own judgements about this, funding extra costs of this standard where applicable from their own resources.
10.35 The issue of individual household grievances would also be partly met by this approach, insofar as the landlords' repair cost estimates have been higher and the occupiers have then been expected to contribute to excess costs. This would not necessarily deal with all grievances, but we are also proposing a form of appeals mechanism, as discussed elsewhere
Subsidies and Allowances,
10.36 Several landlords found administration time consuming. However, as with repairs, they were of the opinion that, while allowances could be increased, they would rather this was not done if it reduced approvals.
10.37 A smaller association was concerned that the drive for efficiencies amongst RSLs was predicated on a view that they all had large reserves. Smaller associations would therefore feel the pinch while larger associations with reserves could afford to cross subsidise the administration of schemes like MTR. The evidence reviewed earlier tends to confirm this picture and suggests that only some RSLs, particularly larger ones, are likely to be able to engage with MTR regularly and for a wide range of cases (as with framework agreements). Any attempt to reduce grant levels would reinforce this position.
10.38 Rent level is obviously related to subsidy. Most landlords felt that social rents were appropriate. If subsidy was greatly reduced, one RSL felt that it could consider market rents but most others were against the idea. However, we discuss options for intermediate or market rent schemes further below.
Training and guidance
10.39 Overall, there was satisfaction with the levels of information and training for those who needed, it, and broadly the scheme's internal procedures were being followed. One area where there was a suggestion for more training was to help advice agencies in presenting MTR as one of a range of options, and potentially also in relevant aspects of financial assessment. As lender involvement is limited, lenders commented that they don't have or need extensive guidance or training. Some solicitors and landlords felt that it would be useful to organise training, bringing together different professionals involved in the MTR process to share experience. Lastly, the case for giving clients more guidance to help prompt them to provide the required information and facilitate the process so as to avoid delay was set out in Chapter 6.
Knowledge and awareness of the scheme
10.40 Knowledge amongst advisers such as CAB and many landlords seemed good. However, there were some misconceptions about the scheme among non-participating landlords e.g. about the roles of landlords and the MTR team. There was a lack of knowledge amongst some other professionals e.g. consultants working in housing.
10.41 Lack of awareness was much greater amongst members of the public. It was rare for anyone in mortgage arrears seeking help from advisers to have any previous knowledge of the Mortgage to Rent scheme or their rights under the Mortgage Rights Act, but when clients were made aware of the provisions for the scheme it was felt to be enormously attractive to them.
10.42 Some advisers thought that people should routinely be advised of the scheme when they go into lenders and banks. There was a common concern that the scheme should be more widely advertised. Some stakeholders thought that the CML could promote the MTR scheme more amongst its members, although this may have reflected a lack of knowledge of how much CML is currently doing in this respect.
10.43 This evidence suggests that there is a need to improve the publicity and promotion of the scheme, if it is to meet all of the potential need in the market, and this may require some extra resources. This could target areas of currently low takeup, as well as working through bodies (local authorities, advice agencies) which are in regular contact with a wide range of the public, as well as with the media. This would then have implications for the level of demand for MTR, which may also be impacted by other possible changes in eligibility and scope. As discussed in Chapter 3, that would then raise potential issues about rationing.
Meeting Scheme Objectives
10.44 The MTR schemes attracted high levels of support and satisfaction amongst the stakeholders, who were largely enthusiastic about its capacity to prevent homelessness. A local authority commented, however, that it was making a very small impact on overall homelessness figures in their area (and this reflects the national picture). There was agreement that there needs to be some form of safety net and a commonly-held view that public money was required, but that MTR should only kick in when there are no other options left.
10.45 No-one thought that the scheme should be directed towards particular areas, but rather it should be available wherever there was demand throughout Scotland. However, in practice there were clusters at a national level and in particular areas. A small number of local authorities such as North Lanarkshire and North Ayrshire had high take up, as shown in Chapter 4. In a rural local authority area where a stakeholder operated, it seemed concentrated in the larger towns. Speculation on the causes of these patterns considered whether the existence of knowledgeable CABs or other advice agencies led to these clusters.
10.46 Tenancies appeared to be sustained, leading to the belief that for individuals it was a sustainable solution. However, the small number of successful cases for each landlord meant it was difficult to establish with certainty the pattern of outcomes for MTR tenants. There were incidents of problematic rent arrears amongst some tenants and it appeared to a couple of landlords that these might be greater than for other new tenants, but there were too few cases to say for certain. Additional advice and support was given to new MTR tenants at the outset because of their background.
10.47 There were hardly any cases of MTR tenants wishing to move and a single report of an enquiry about the RTB, which the landlord thought was unrealistic. Advisers and landlords felt that people were often relieved that their debt problems were being resolved and that they no longer had the responsibility of homeownership.
10.48 Alternative ways of meeting the scheme objectives focussed on prevention by more prudent lending and earlier-stage interventions where forbearance or exit routes can be developed for struggling borrowers.
10.49 To a certain extent the role of secondary and sub-prime lending may resolved itself, in the medium term at least, because of a more cautious lending environment as a consequence of the credit crunch. Advisers suggested that expenditure as well as income should be verified during mortgage applications (including secondary secured loans); and that there should be limits on the total loan to value ratios, as some advisers complained that second and third (and in some cases more) debts were secured on the property when it should have been clear at the outset that there was insufficient equity to cover further borrowing. These proposals have implications for the regulation of mortgage lending generally and for secondary as well as primary lending.
10.50 There were calls for greater emphasis on prevention to make better use of public money by helping people avoid facing repossession procedures in first place. A series of staged interventions should include early advice, with MTR as the final resort. Several people thought that the developments around section 11 of the Homelessness (Scotland) Act 2003 will help, as lenders will have to notify local authorities when they first issue possession proceedings at Sheriff Court. But authorities have to ensure that this becomes more than a statistical exercise and that systems are set up in local authorities so that the notification triggers prevention activities for the struggling homeowner. In addition, this is still a relatively late stage in the process.
10.51 A stakeholder believed that more could be done to engage problem lenders, since the scheme is very good for all involved including the lender, who will have less cost and have more money returned than if there is a repossession. "There are no losers." He believed that the Scottish Government should set up a framework which lenders wishing to take part should agree to, which would reduce the need to negotiate in every case. A more practicable version of this suggestion would perhaps be a voluntary code which would be promoted through CML.
10.52 A broader and earlier prevention issue is raising awareness of the costs, risks and responsibilities of home-ownership at the stage when people enter this commitment, particularly for the first time. It was suggested at a Project Advisory Group that these issues might be underlined in both the Home Report and the RTB tenant information pack. This would further underline the value of these initiatives. These information sources should also give some guidance on what people should do if they do get into difficulties, but with a primary emphasis on independent financial advice.
Safety Nets and Alternatives
10.53 There were problems with regard to the take up and persistence of private mortgage protection polices. One adviser routinely asked if people had purchased these policies but they did not feature heavily in other people's suggestions of potential solutions. Household interviews also threw up considerable evidence of the limitations of MPPI. Some agencies were sceptical about the worth of such policies and it was widely thought that people in financial difficulties frequently dropped insurance payments. There was concern about whether insurance policies were too expensive and have too many conditions attached which meant that they were often not paying out. Similar critical evidence was cited in a recent Office of Fair Trading ( OFT, 2006) report. In addition, given the profile of MTR applicants included many people in work who had become overstretched with secondary loans, the other main safety net ( ISMI) was often not applicable.
10.54 Possible redesign of the general safety net arrangements for homeowners goes beyond the scope of most of our discussions with stakeholders within the context of this project, which has focussed on MTR. Nevertheless, the evidence from the study has confirmed what we would have expected from other studies, some of which were referred to in Chapter 2, namely that there are significant gaps and limitations in the current UK arrangements. It was clear that quite a lot of MTR cases got into serious difficulties threatening homelessness because of loss of income which was not fully covered by either MPPI or ISMI.
10.55 There have been proposals for reform, particularly a recent set of proposals from the Joseph Rowntree Foundation known as ' SHOP', which would entail a universal insurance scheme funded on a partnership basis between borrowers, lenders and the government ( JRF 2008). This would apply to all new mortgages, and would entail setting up a fund to cover both non-means tested payment of mortgage interest and capital payments in cases of 'designated risks' of loss of income, after two months of forebearance, up to month ten; with means-tested assistance for non-designated risks, and for the period after month 10. This would be much more cost-effective than the currently failing MPPI and ISMI combination. The proposals also embrace introducing housing-related tax credits as well, with a particular focus on high cost areas. Clearly, any reform of this kind currently relates mainly to reserved UK-wide policy matters.
Private Sector Mortgage to Rent Schemes
10.56 Participants were aware of private buy-back schemes but direct experience was not widespread. Private buy-back schemes were not considered a viable alternative to MTR in their current form, as owners were not given full market value or security of tenure. Advisers were particularly opposed to these schemes as they currently operate, with several recounting tales of people who had been made homeless after agreeing to them. However, private schemes were heavily advertised and are tempting to homeowners in real problems. A local authority, an advice agency and a national stakeholder all found that, amongst people in serious financial trouble, recourse to private schemes stemmed from "panic" and might then be used well before other options had been exhausted. One lender which does not have a partnership with a Sale and Lease Back company had been approached by these companies and believed that most lenders would also have been contacted. It was noted that CML has voiced concern regarding regulation of the sector.
10.57 In considering recommendations for future mechanisms, one cannot ignore existing private sale-and-leaseback, and nor should one ignore the possibility of creating better versions of these, through regulation or possibly public-private partnership in some form. In addition, one could consider an option of RSL-sponsored intermediate rent MTR, as discussed further below.
Scheme Success and Future Funding
10.58 The MTR was perceived as very successful and to be meeting its objectives overall. Participants generally felt that the MTR scheme was successful in assisting households under imminent threat of eviction, but a greater emphasis on prevention would be beneficial. It was suggested that more could be done to reach and support people struggling financially prior to repossession action being issued against them.
10.59 Clearly the MTR scheme is seen as successful and relevant by the SG, as in a recent ministerial announcement there was a commitment to somewhat enhance the budget for this area of activity under the broader heading of 'Home owners Support Fund', committing £25m over two years to cover MTR and associated initiatives (including a new MTSE scheme) (Scottish Government 2008).
10.60 For the individuals involved it was believed to be a very satisfactory scheme, helping to preserve family and social links and to prevent homelessness and avoid stigma. However, a number of interviewees expressed a personal view that the scheme could be seen as controversial because it was helping people in cases of "irresponsible borrowing" and "irresponsible lending". As we suggested in Chapter 9, there are some dangers of 'moral hazard' and inappropriate incentives here. However, interviewees also believed that since the government would have responsibility for dealing with homelessness if it occurred, MTR would be a better solution than dealing with the consequences of homelessness.
10.61 The scheme was also viewed as very successful for the landlords in increasing their stock at relatively small cost and effort. However, from a broader public sector perspective the scheme can be seen as rather expensive in up-front public investment per case assisted, as we pointed out in Chapter 9. It costs nearly as much as a new social or low cost home ownership unit, but buys a unit which is already occupied. One or two national stakeholders acknowledged this area of concern. The costs are likely to increase as the housing market downturn and the credit crunch bite, because of greater takeup and less equity contributions, and also if the scheme were more effectively promoted in all areas. Widening the scope through MTSE would further increase total costs although the per unit costs for this extension would be somewhat less. All of this is in a context of relatively constrained total public spending in Scotland and a general SG commitment through Firm Foundations to reduce the unit subsidy cost of new social housing.
10.62 Although such options were not discussed in detail with stakeholders, the logic of this situation suggests that policy options should be considered which would significantly reduce the cost of MTR and related mortgage rescue mechanisms. In addition to MTSE, which we have considered in some detail, this should perhaps logically include mechanisms such as MTR by social landlords but with 'intermediate'-level rents 29, private rental sector leasing by social landlords for MTR purposes (similar in some ways to some existing homeless provision), and perhaps most controversially private sector MTR subject to some greater level of regulation. This regulation could cover issues of information, capital value discounts, rent levels and increases, and tenure security. The advantage of some of these ideas is that they would reduce or possibly eliminate the need for a public capital subsidy, while retaining access to revenue subsidy through HB where required. Another plus could be that such mechanisms might circumvent the current problem that quite, for a lot of MTR cases, a social landlord cannot be found.
10.63 Levels of equity available vary considerably, so although there may be scope for a mortgage to shared equity ( MTSE) scheme, it is unlikely to be appropriate in all circumstances. We showed earlier in this chapter that in fact only a minority of MTR settled cases could have gone into MTSE. In particular, mortgage to rent may be more suitable where there would be outstanding debts even after the sale of the property, as the potential to lose their home would remain, or where lenders were no longer willing to lend because of the previous defaults. MTR would also be more suitable for low income, benefit dependent households with limited or no equity.
10.64 Rents for MTR properties are set as for any other property acquisition and none of the landlords had any MTR tenancies on market rents. Larger organisations could cope with some reductions in grant rates but small ones would be unlikely to accommodate such changes to scheme. Some stakeholders felt that MTR could operate with somewhat higher rents so long as these were within HB levels. However, advisers did not feel that clients could support market rents, which in some areas were thought to be in excess of the former owners' mortgage payments. Under the Local Housing Allowance Scheme, Housing Benefit would not necessarily cover market rents fully anyway.
10.65 Taking this point on board, we would suggest that use of full market rents within MTR as presently conceived (last resort) would not be appropriate. However, intermediate-level rents might be a viable way of reducing costs, as might a model involving private sector leasing, possibly with a revenue subsidy. A national stakeholder suggested the possibility of a grant competition for local framework agreements to take MTR cases, with rents pitched between social and intermediate levels. Modelling subsidy for settled cases suggests that using intermediate rents, set at a mid-point between existing social rents (£52pw) and market rents (£116 pw, based on Hometrack data), a rent of around £84pw, could reduce average net subsidy by around a half, to around £25,000 per unit. A revenue subsidy to private landlords to bridge the gap between this intermediate rent and market rent would cost about £1,665 pa per unit. A problem with revenue subsidy is defining an exit route, setting a time limit or tapering it over time. Households might then have to be rehoused in the social sector or elsewhere at the end of a private lease period.
10.66 Having reviewed this option we would not go so far as to recommend intermediate rents (' MTIR') as the basis for the core of existing MTR cases. This would push up HB costs and increase the risks of further debt problems, while not fitting with many providers modes of operation and hence putting at risk the availability of landlords. This might need to be reconsidered, however, if the pressure of demand and the need for financial rationing became acute. What we would recommend is testing and establishing MTIR as a parallel option to MTSE for households with rather more than the minimum benefit levels of income, but who would prefer to rent rather than remain as owners, or for whom credit and debt histories are such as to make MTSE unviable. It would also thereby be an option for some of the extra households captured by any widening of the eligibility criteria.
Private Sector Leasing
10.67 We do not recommend treating even a regulated private sector sale-and-leaseback scheme as a substitute for MTR. It is never going to be a reliable permanent solution for households, while there are considerable reputational risks for the government in getting involved with this.
10.68 Private sector leasing ( PSL) is a potentially different matter, but not one which we have investigated in detail. Here the precedent is its use for accommodating homeless households in pressured areas, involving the use of an intermediary managing agent. This might make some sense as a way of meeting this need by local authorities, overcoming their capital financing constraints, but there are significant differences from the homeless PSL model, notably that what you are looking for is a private investor with cash to invest rather than a private landlord with a property to let.
10.69 A local authority would work with a managing agent, possibly one already engaged to provide accommodation for homeless households. This agent would advertise for investor landlords to participate in the scheme, by buying individual properties or groups of properties, at market values less repair costs (both certified by an independent surveyor). Properties would be repaired to a minimum standard, probably based on Decent Homes. Rents would be set at levels compatible with Local Housing Allowance, and the agent would take a management fee and arrange the repairs. We recommend that this possibility be explored further, probably through discussion with LAs active in PSL already.
10.70 A Mortgage-to-Shared Equity ( MTSE) scheme could provide similar benefits to MTR but at lower subsidy cost, and could be both appropriate and attractive to some home-owners at risk, as well as providing a basis for somewhat wider eligibility. However, it is clear that most current MTR clients could not really avail themselves of such an option, owing to a combination of low income, low/negative equity, severity of debts, credit history and mortgage prospects. MTSE could suit a minority of current MTR clients, but would make more sense as a way of widening the scope of the scheme. MTSE could be based on shared equity schemes, but would need to offer more flexibility.
10.71 An intermediate rent version ( MTIR) could be developed alongside this, targeted as a similar group in terms of income but for whom MTSE is not preferred or not viable. Both of these variant schemes would make it essential to include an income assessment within the application process, but there are wider arguments for doing this anyway, including to facilitate earlier engagement /prequalification and as a possible base for rationing.
10.72 There is some support for widening eligibility in terms of how close to repossession households are, and in terms of raising value limits, although this would have some implications for cost and coverage.
10.73 Current national administration arrangements are appropriate, as are time targets, although more could be done to speed up processes in many cases (so also reducing debt and shortfalls). Guidance to participants on what they should do, reducing the number of landlords approached, reliance on Scheme 2 Surveys, delegation within landlord organisations, and framework agreements with landlords, and a voluntary code for lenders could all contribute to this goal.
10.74 Subsidies and allowances are seen as appropriate by providers, as are the charging of normal social rents. However, we would argue that from a broader public policy perspective the subsidy costs are high and therefore alternative models entailing higher (intermediate) rents and possibly use of private investment (e.g. leasing) should be explored. However, full market rent based MTR would not be a satisfactory substitute for MTR, although there may also be a case for regulating private sale and leaseback.
10.75 The scheme is reasonably well-known by advisers and lenders, but not so well across all local authorities and not at all by the public. Better publicity and promotion would be appropriate but would increase demand.
10.76 MTR is achieving its aims in a way which is pretty satisfactory for most stakeholders and households affected. However, the overall scale of its contribution to preventing homelessness in Scotland is small.
10.77 There is considerable evidence in this study that many of the problems presenting through MTR reflect irresponsible secondary and consumer lending compounding financial mismanagement by some households as well as the usual contingencies of loss of income which existing safety nets do not adequately cover. MTR is a 'last resort' mechanism but what many stakeholders wanted to see more of was better preventative measures at an earlier stage. This has broader implications for regulation of lending and national insurance/safety net schemes as well as suggesting a need for more concerted efforts at making financial advice, lender forebearance and flexibility more generally available. The costs, risks and responsibilities of home-ownership should be emphasised in the Home Report and the RTB tenant information pack. The new section 11 requirement to notify the relevant local authority (from February 2009) should also provide a further entry point for advice and intervention, but could also be supported by more engagement of problem lenders, possibly through a voluntary code.
10.78 Existing private sale-and-leaseback schemes are widely promoted and being taken up quite commonly, but these attracted strong criticism for their poor value, high rents and insecurity and for being promoted to vulnerable households. While there is a case for regulating these, they do not appear to be a substitute for the government-sponsored MTR.