We have welcomed the government’s acknowledgement that it has an increased role to play in helping lenders minimise possessions, and are working with it to refine the proposal into a form that is fair, manageable and transparent.
In releasing more details of the scheme last week, the government re-affirmed that it intended to help borrowers stay in their homes if they suffer a temporary fall in income but are expected to recover at a later date.
The scheme is for borrowers committed to sustaining home-ownership through regular payments, not a charter to take a payment holiday for customers who “won’t pay."
It is important to remember that lenders are continuing to work with customers already experiencing financial difficulty if they have a realistic chance of being able to resume their mortgage commitments and, in the longer term, home-ownership continues to be a sustainable option for them.
The government’s new scheme is an additional assurance, not a replacement of existing help for home-owners in difficulty by lenders.
In its press release last week, the government said it wanted borrowers suffering payment problems to be able to reduce their monthly mortgage payments, with the deferred interest rolled up, added to the principal and paid at a later date when the borrower’s financial circumstances have improved.
Last week’s release also disclosed that the government only wanted to guarantee the lender “against a proportion of any loss incurred” if the borrower defaults – this proportion remains to be settled.
The release went on to say that there should be “proper risk sharing between the government, lenders and borrowers.” Lenders are, of course, already exposed to significant risk in trying to help an increasing number of customers with mortgage arrears. And they, and their customers, will be taking on substantially more risk if they extend longer periods of forbearance to borrowers in arrears, and those borrowers are not able to get back on their feet.
Media reaction to the proposals has been mixed, partly because the details are not yet settled. Some have welcomed the government’s intentions, as we did in our initial press release.
However, the Financial Times described the proposals as “misguided on a number of levels.” It said that “amid a dearth of information over how the scheme would work in practice, there were growing concerns over fraud, ‘moral hazard’ and perverse incentives to borrowers who were already on debt management programmes.”
The Financial Times argued that intervention on the scale proposed by the government was unnecessary, and would delay an “inevitable adjustment” in house prices. It described the proposal as “slick politics ahead of an election but…poor economics.”
It also warned that the scheme would be “no free lunch for the banks: the more lending risks that the taxpayer underwrites now, the more tightly banks will be regulated in future.”
In The Independent, Jeremy Warner also focused on the political motivation behind the scheme, and the costs to lenders. “The Treasury is to charge a fee, the size of which is so far unspecified. The real purpose of the scheme,” he wrote, “is the entirely political one of ensuring re-possessions don’t surge before the general election to the record levels they were at under the Tories in the last housing crash of the early 1990s.”
Meanwhile, The Times identified significant risks for borrowers, as well as lenders. “If the recession is prolonged and the collapse of the housing market intensifies,” it said, “borrowers who take advantage of the scheme may find themselves impoverished at the end of the two-year mortgage holiday. They may have still greater negative equity in their home, no job, and the renewed risk of re-possession.”
It also criticised the government for floating a scheme without having worked out its financial impact. “The cost may outstrip the government’s tentative expectations, and put further pressure on public finances,” its editorial warned.
But The Times also saw merits in the proposal’s potential to instil greater confidence in the eventual recovery of the economy. “The measure is of at least symbolic value in an economic climate where symbols may help in restoring confidence.”
More details of the scheme will be released shortly, and we continue to work closely with the Treasury to ensure that the scheme is
fair to borrowers, lenders and the government;
manageable by lenders with the input of debt advisers; and
transparent for everyone, particularly borrowers, in terms of the scope and financial scale of the proposals.
