The CML welcomes the move to help more people facing temporary financial difficulties. At the same time, it is important to recognise that the impact of the deferred payments may be significant for borrowers once they get back on their feet financially. A number of important structural and operational questions, as yet to be decided, will also have a significant influence on the attractiveness and take-up of the scheme by both borrowers and lenders. It needs to be seen to be -
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 risks, scope and financial scale of the proposals.
For example, the CML suggests that:
The government guarantee to the lender should cover the total deferred interest accumulated by the borrower and should be in place for up to 10 years. This would help to remove the risk of lenders feeling they have to seek repossession shortly after the end of the deferred interest period in order to trigger access to the guarantee, giving the household longer to clear the accumulated arrears built up during the period when they were making only reduced payments.
Concessions regarding the capital treatment of loans accepted into the scheme need to be explored, as the amount of capital that lenders will have to hold against loans within the scheme is a potential barrier to take up,, as well as creating a potential impact on new lending. The amount of capital that a lender has to hold for each mortgage in arrears is between 30 and 80 times that of a new mortgage.
The CML understands that legislation to empower the Government to provide the guarantees will be needed. While recognising the desirability of ensuring that any scheme is implemented quickly, the CML urges the Government to undertake a regulatory impact assessment to ensure that the scheme fulfils its objectives without giving rise to unintended consequences. The operational issues need to be resolved before implementation if the scheme is to be effective in meeting its objectives.
Commenting on the proposed scheme, CML director general Michael Coogan said: "This scheme is not a payment "holiday" or a "free lunch", but rather a payment deferral. The future impact on borrowers' repayments may be very significant if they defer a high proportion of their interest, and the scheme is not without the risk of potentially unwelcome impacts on lenders.
"However, for eligible borrowers who would otherwise face repossession it may make the difference between keeping or losing their home, while for lenders it makes longer term forbearance a less risky option. If the government can find ways to address the capital treatment of loans within the scheme, and the period and amount of the guarantee for lenders, this would improve its attractiveness and likely level of take-up."
