Government initiatives

The credit crunch and the associated financial turmoil in the UK domestic property and money markets has led to a raft of initiatives aimed at protecting homeowners from the risk of mortgage default and repossession. The Government has recently announced proposals to reform the terms of Income Support for Mortgage Interest – a move designed to avoid up to 10,000 repossessions a year; to bring forward further funding for Mortgage Rescue Schemes – designed to avoid up to 6,000 repossessions a year; and to introduce a new Homeowner Mortgage Support Scheme which is intended to provide greater assurance to homeowners that they will be able to remain in their homes if they suffer a temporary fall in income, but are expected to recover at a later date.

INCOME SUPPORT FOR MORTGAGE INTEREST

What is it?

Income Support can assist with payment of interest on:
• loans for ‘acquiring an interest in a home’
• or loans for financing repairs or improvements that are necessary to maintain the fitness of your
  home for human habitation
• or loans taken out to repay loans that were used for either of the above

On 2nd September 2008, the DWP announced that from 5th January 2009 the maximum amount of capital on which interest is paid will be increased from £100,000 to £200,000 and the waiting period before interest is to be paid will be reduced from 39 weeks to 13 weeks for new working age claims. The maximum level of interest payment was reduced from 6.08% to 3.63% from 1st October 2010.

The Income Support scheme does not help with repayments of capital or with the premiums or any endowment or pension policy that is associated with the loan.

For further details see the Jobcentre Plus website

MORTGAGE RESCUE SCHEMES

Who provides them?

• not-for-profit agencies (such as local councils or housing associations)
• mortgage lenders, or
• private, profit-making companies.

How do they work?

There are different types of mortgage rescue packages, but the most common involve a sale and leaseback arrangement - buying a borrower’s home and renting it back to him thereby allowing the borrower to stay in his present home and making the repayments more affordable.

Some schemes may allow the borrower to sell only part of his home – on a shared ownership basis – or to allow the borrower to buy his home back if his financial situation improves. These options have traditionally only been available through council and housing association run schemes – hence the Government’s recent announcement that it is going to bring forward a £200M package of financing available in over 50 local authority areas. For further information, see the Communities and Local Government website.

Eligibility
If the scheme is run by the local council or a housing association, there are usually rules on eligibility. For example, they may only be available to people who are facing a large reduction in income; have not yet built up high levels of mortgage arrears; need to stay in the area for other reasons, such as schools, work or support; are able to make small monthly payments.

Some schemes will only offer a service if there is a shortage of social housing in the area and the property value is below a certain amount.
Borrowers are advised to contact their mortgage lender first to see if they operate a rescue scheme. Otherwise, they should contact their local authority or local housing association(s).

Pros and cons
Apart from the obvious benefits, there are some risks associated with mortgage rescue schemes – particularly those operated by ‘for profit’ organisations. See for eg. the Shelter website

HOMEOWNER MORTGAGE SUPPORT SCHEME

The Government’s new Homeowner Mortgage Support Scheme was introduced on 21st April 2009. For the details see the Communities and Local Government website and the DirectGov website. There is also a webcast presentation of the Scheme on the CML website.

How does it work?

In short, the Scheme provides a state-backed mortgage holiday – enabling lenders to reduce a borrower’s current monthly instalment, with the deferred payments rolled up, added to the principal, and paid back at a later date when the borrower’s financial circumstances have improved, and with the Government guaranteeing the lender against a proportion of any loss incurred on the deferred interest payments in case the borrower defaults.

At the moment, the qualifying criteria are that the borrowers have:

• Suffered a loss of income from employment or self-employment of a scale which now makes full mortgage payments difficult, but which is not
  expected to be a permanent loss of income
 
• Been in dialogue with their lender, including over the use of existing forbearance policies, and have been making some level of regular payment

• Taken out a mortgage of up to £400k

• Savings below £16,000 (which is the same as for the existing Income Support for Mortgage Interest scheme)

• Applied for assistance as an owner-occupier – the programme will not apply to people with second homes or buy to let properties

• Not be in receipt of ISMI or Mortgage Rescue assistance

• Have been assessed as being able to pay a certain monthly amount on an ongoing basis

• Have received financial advice from a party other than their lender to determine their eligibility for the scheme, including testing the long-term
  sustainability of their financial position, and their ability to resume full payments once their income increases

• Have fallen into arrears for a number of months during which the lender has exercised forbearance
 
The scheme is initially to be open for two years. The guarantee will last for a maximum time and will expire once the borrower is able to commence normal payments. If during the period of the guarantee the borrower defaults, the Government will pay the lender the equivalent sum of the total amount of the interest guaranteed that is not recoverable from equity in the property.

To date there has been a disappointing take-up amongst lenders. The following lenders are participating: Bradford & Bingley, Cumberland Building Society, Lloyds Bank Group including Halifax and Bank of Scotland, National Australia Bank Group including Clydesdale Bank and Yorkshire Bank, Northern Rock and Royal Bank of Scotland including NatWest and Ulster Bank. Other lenders likely to come on board inclue Bank of Ireland including Bristol & West, GE Money, GMAC, Kensington Mortgages, The Post Office and Standard Life Bank. Some lenders have agreed to offer a comparable service of their own: Barclays including FirstPlus, HSBC, Nationwide and Santander including Abbey National and Alliance & Leicester.

GOVERNMENT INFORMATION SCHEME TO HELP BORROWERS IN DIFFICULTY

As part of its campaign to provide advice and assistance to mortgage borrowers in difficulty, on 8 September 2009 the Government launched a new mortgage help website: http://mortgagehelp.direct.gov.uk/
 
The site produces action plans under four main headings:
(1) I am struggling to pay my mortgage
(2) I have missed mortgage payments
(3) My lender is telling me I’m going to be repossessed
(4) I have received papers telling me I need to go to court

Each action plan provides useful practical guidance, with links to other sites and sources of information.
The new site has been endorsed by a number of key institutions – the CML, National Debtline, the CAB, Shelter and the Consumer Credit Counselling Service.

DEFERRING POSSESSION PROCEEDINGS

Finally, in consequence of the raft of political initiatives launched by the Government, and the increasing pressure upon lenders to assist borrowers in difficulty and ensure that repossessions really are a last resort, some lenders have stated publicly that they will not commence possession proceedings for fixed periods following default – typically six months.

GENERAL

For a summary of some of these schemes and the social, political and economic issues see the recently updated House of Commons Briefing Note on Mortgage Arrears and Repossessions (16th May 2009). For a useful practical review of issues arising on repossessions see the Law Society Practice Note (revised 4th June 2009)