Memorandum by Shelter (CRED 54)
1. Households across all tenures are struggling
to meet their housing costs. Restrictions on access to mortgage
finance have meant that house price falls have led to little improvement
in affordability for first time buyers, while the number of cases
of mortgage repossessions has risen sharply.
2. Shelter welcomes many of the Government's
measures to help homeowners avoid repossession, such as changes
to Support for Mortgage Interest (SMI), establishment of a national
mortgage rescue scheme and the proposed regulation of the private
sale and rent back market. However we believe that further action
is needed to minimise the rise in repossessions, including:
A more robust approach from the Financial
Services Authority (FSA) to the regulation of lenders' arrears
Bringing forward the timescale for
the FSA's review of the Mortgage Code of Business (MCOB) rules.
Wholesale review of mortgage law,
to close legal loopholes and to increase the courts' discretion.
Increased funding for advice, including
time-limited funding for legal aid specifically for homeowners
at risk of repossession.
Greater protection for tenants in
properties where the landlord is being repossessed.
3. The credit crunch and economic downturn
have had a dramatic effect on the overall level of housebuilding
and are likely to impact negatively on social housing completions
without radical remedial action.
4. Despite falling levels of housebuilding,
housing need and demand continue to grow. New Shelter research
from Cambridge University sets out that to meet newly arising
housing need, a higher proportion of new homes built must be for
social renting and low cost home ownership (Annex A).
5. Shelter has welcomed a number of the
measures introduced by Government to boost housing delivery, in
particular the frontloading of expenditure on the delivery of
new social homes. However, we consider that the overall impact
of the measures announced to date will be limited, and that more
radical solutions are required from the Government, the Homes
and Communities Agency (HCA) and local authorities to ensure that
we build the extra housing we need. These should include:
Increasing the grant rate for housing
associations, to fill the gap left by the drying up of cross subsidy
from Low Cost Home Ownership (LCHO) and market sales.
Reviewing schemes whose financial
viability has been affected by the credit crunch, in order to
find ways of allowing them to go ahead.
Shifting the balance of housebuilding
activity towards a more public led model, with a greater proportion
of subsided housing for social renting and low cost home ownership.
Provision of £500 million over
three years for the HCA to buy up land at low cost during the
Better use of public sector land,
by selling it off at sub-market levels for affordable housing
or as part of joint ownership and development initiatives such
as Local Housing Companies.
6. New LCHO measures such as Homebuy Direct
may not be in the best interests of first time buyers at present
given that prices are falling rapidly and likely to continue doing
so. The Government's recent announcements on LCHO appear to do
little to move us towards the goal of creating a simpler range
of LCHO products that are affordable for those on below average
7. We welcome the Committee's decision to
examine the impact of the credit crunch on the Government's housing
policies and the opportunity to contribute to its inquiry. Our
submission focuses in particular on measures to help existing
and prospective homeowners, and on the delivery of the Government's
8. While the impact of the credit crunch
has been greatest for homeowners, its effects are being felt by
households across all housing tenures. Many are struggling to
meet their housing costs, as a result of increasing mortgage and
rent payments, high levels of personal debt and recent price rises.
A MORI poll
conducted for Shelter in March 2008 found that:
400,000 households were falling behind
with their rent or mortgage payments.
16% of households (4.1 million) had
used a credit card to help meet housing costs in the last twelve
months, one in nine (three million) had sold possessions, and
one in 11 (2.2 million) had reduced spending on clothing for their
Nearly one quarter of households
(six million) say they are suffering from stress or depression
because of their housing costs.
9. As the economic downturn deepens and
unemployment increases, these affordability pressures are likely
10. Despite substantial house price falls,
there has been little improvement in affordability so far for
first time buyers. The reason for this is the impact that the
credit crunch has had on mortgage deals, as lenders have responded
to the lack of liquidity and declining house prices by increasing
rates and tightening their lending criteria. Existing homeowners
are also being affected, with many lenders failing to pass on
interest rate cuts and borrowers without at least 25% equity in
their home facing a substantial premium when they look to remortgage.
While the availability of mortgages is expected to improve over
the coming year as the credit markets resume, this will be a gradual
process, and lenders are likely to remain cautious while further
house price falls are anticipated.
11. In the private rented sector, the impact
of the credit crunch on affordability has been mixed. On the one
hand, there has been a sharp increase in the level of tenant demand,
generated in part by the inability of first time buyers to access
mortgage finance. On the other hand, this has helped create an
increase in supply to the market, as would be vendors have decided
that letting is a better option than selling in the current housing
market environment. According to the RICS residential lettings
survey for April-July 2008, the overall impact has been a continued
rise in the level of rents, although expectations are now beginning
to come down slightly.
One specific factor behind rent increases in the buy to let sector
is the rise in buy to let mortgage costs, which some landlords
are attempting to pass onto their tenants.
12. The number of cases of mortgage arrears
and repossessions has risen sharply and is likely to continue
doing so into 2009. The number of owner occupiers with a first
charge mortgage repossessed in the first half of 2008 was 18,900,
a 48% increase since the same period last year, and the CML predicts
that this will rise to 45,000 by the end of the year. These figures
are mirrored by Shelter's own experience: between February and
July 2008 the number of people coming to us for help with mortgage
repossession actions increased by 55%.
13. The current context for repossession
action differs from the early 1990s in a number of ways. More
borrowers are reliant on dual incomes, and a greater proportion
have high levels of personal debt. Many consumers are now on relatively
short-term fixed interest mortgage products. Sub-prime mortgages
have seen rapid growth in recent years, and until the onset of
the credit crunch, a rising proportion of mortgage lending was
being securitised and sold on through the wholesale markets. One
positive change is that since October 2004, all new first charge
residential mortgages are regulated by the FSA.
14. In recent months, the Government has
announced a number of measures designed to protect struggling
homeowners from repossession. These include:
Strengthening the state safety net
for homeowners, by reducing the waiting time before Support for
Mortgage Interest (SMI) becomes payable from 39 to 13 weeks with
effect from 1 January 2009, and increasing to £175,000 the
capital limit on the amount of mortgage that SMI will cover.
The introduction of a pre-action
protocol for mortgage possession cases, which sets out guidelines
that lenders should follow ahead of taking court action against
Establishment of a national mortgage
rescue scheme to enable families at risk of becoming statutorily
homeless to stay in their homes as tenants or on a shared equity/shared
Proposed FSA regulation of the private
sale and rent back market to protect vulnerable consumers from
exploitative practice, as recommended by the Office of Fair Trading
in its recent study.
Some additional funding to increase
advice provision for homeowners facing repossession, and to expand
the coverage of county court desk services.
15. In addition, mortgage lenders themselves
have taken various steps, most notably the publication of new
industry guidance setting out good practice when dealing with
mortgage arrears and possessions.
16. While the measures listed above are
welcome, Shelter believes that the Government needs to do more
to minimise the rise in repossessions. We set out below the key
areas in which we consider further action is needed.
Lenders' repossession behaviour
17. Too many lenders are taking an aggressive
approach to arrears management and failing to treat repossession
as a last resort. The FSA's recent study of arrears management
highlighted a range of problems, including that lenders:
could have done more to consider
customers' individual circumstances and offer more options to
imposed charges in circumstances
that could have resulted in the unfair treatment of customers;
did not exercise sufficient oversight
of third parties contracted to carry out mortgage arrears and
repossession handling activities on behalf of lenders.
18. In addition, the study highlighted the
following issues with the arrears management practices of sub-prime
operation of a one size fits all
approach, which focuses too strongly on recovering arrears according
to a strict mandate, without reference to borrowers' circumstances;
an over-readiness to take court action;
lower standards of systems and controls
in place to control mortgage arrears handling, including training
and competency arrangements.
19. Shelter believes that a more robust
approach to the regulation of lenders' arrears management behaviour
is needed from the FSA. We hope that the FSA's recent comments
about the end of light touch regulation may signal the beginning
of a change in this direction. We urge the Government and the
FSA to ensure that arrears management is treated as a regulatory
priority, and to invest more resources into monitoring this aspect
of lender behaviour and enforcing compliance with Treating Customers
Fairly and the MCOB rules.
20. We would also like the timescale for
the FSA's review of the MCOB rules to be urgently brought forward.
Despite having been ongoing since 2005, the review currently has
no end date. We believe that the MCOB rules require tightening
in significant respects: for instance to define more clearly what
is meant by "reasonable efforts" to reach an agreement
for repaying a payment shortfall, and to require lenders to publish
their arrears management policies. We therefore recommend that
the Government should ask the FSA to publish by the end of the
year proposals for amending the section of the MCOB rules on arrears
and repossessions (Chapter 13), so that the opportunity can be
taken to make improvements to provide greater protection to the
growing number of households at risk of repossession.
21. Equally important to the FSA's regulatory
framework, are the standards applied by the courts when lenders
bring possession claims. Although a breach of the MCOB rules may
result in enforcement action by the FSA, it does not follow from
this that a borrower will be able to avoid a possession order.
Courts do have power to adjourn possession proceedings or to make
a suspended possession order, but only if it appears the borrower
is likely to be able to pay any sums due "within a reasonable
period". Whether the borrower is able to pay the arrears
and keep up the regular monthly instalments may depend on whether
the lender is willing to vary the terms of payment so that the
mortgage becomes more affordable. A court may consider that the
lender has not done enough to assist the borrower, for example
by agreeing to restructure payments or to capitalise arrears,
or that possession is not genuinely the last resortbut
as the law stands, it has no power to refuse to grant possession
on those grounds. This means that the courts are not in a position
to require compliance with the rules for lender behaviour set
down by the FSA.
22. Shelter warmly welcomes the introduction
of the pre-action protocol on mortgage arrears. However, despite
the publicity it has received, the protocol cannot require lenders
to consider alternatives to possession action, and it offers the
courts no sanctions for non-compliance. This reflects the underlying
legal situation outlined above, in which the courts' discretion
to refuse possession is strictly limited.
23. As well as the limitations on courts'
discretion, other fundamental problems with the legal framework
for mortgages also exist. In the recent case of Horsham Properties
v Clark and Beech,
the High Court ruled that a lender could exercise its power of
sale with the borrower still in possession, without going to court
first. The new owner then successfully brought proceedings to
evict the borrower as a trespasser. This would appear to expose
a legal loophole under which lenders could choose to circumvent
the courts altogether by exercising a power of sale. Another anomaly
is lenders' power to use the common law remedy of foreclosure,
enabling them to obtain an order for possession, but in so doing
extinguishing the borrower's equity of redemption, so that the
lender keeps the entire proceeds of the sale.
24. Shelter believes that mortgage law is
outdated, complex and obscure and needs wholesale reform to lift
it into the 21st century. We believe that the current Banking
Bill provides the Government with an opportunity to introduce
require a lender which wishes to
enforce its security to do so only through the courts;
to give the court a general discretion
in mortgage cases to make orders which are just according to the
circumstances of the case;
to restrict the lender's statutory
and/or contractual power of sale by making it subject to the requirement
to obtain an order of the court; and
to abolish the common law remedy
of foreclosure in relation to residential mortgages.
25. In the meantime, we urge the Government
and lenders to promote the pre-action protocol so that borrowers,
lenders and the judiciary are fully aware of the behaviours that
should be expected of lenders in dealing with arrears. Implementation
of the protocol should be monitored carefully and data should
be gathered on its use and impact.
26. Finally, with the Government having
nationalised two banks and taken public stakes in several others,
it must use the influence that this gives it to insist on responsible
lending behaviour. While we recognise that these institutions
will be run at arms length and on commercial principles, the Government
has a duty to ensure that banks being bailed out with taxpayers'
money only repossess as a last resort and have sound arrears management
policies in place.
Advice and prevention
27. Shelter sees many clients with mortgage
arrears problems who are not eligible for ongoing LSC-funded free
legal aid, even if they are thousands of pounds in arrears. Whilst
court duty desk funding has been hugely welcome, the lack of legal
aid funding means we are severely constrained in our ability to
help borrowers or engage in casework before crisis point or past
the court stage, if legal support is needed. This problem has
been becoming increasingly evident in the wake of the credit crunch
and demand continues to rise.
28. Shelter believes that the Government
and mortgage lenders should be working more closely with advice
agencies to facilitate access to free, independent advice. This
should include the following measures:
Time-limited provision of funding
for legal aid tailored specifically for homeowners at risk of
repossession, to enable caseworkers to engage in preventative
work and negotiation with lenders.
Additional funding for advice to
ensure there is capacity for Shelter and other advice agencies
to meet the steep rise in demand.
Funding to effectively market debt
advice services to homeowners most at risk.
29. One major difficulty in preventing repossession
actions is identifying and reaching at-risk groups. Whilst we
warmly welcome the Government's mortgage rescue package, we are
concerned that this will not be effective unless the existence
of this help is effectively communicated to the most vulnerable
households. Research is needed into why some borrowers do not
seek advice or talk to their lenders early and to explore effective
outreach methods. We would also like to see the FSA take a more
pro-active approach by requiring lenders to refer borrowers to
Tenants in repossessed properties
30. Shelter is calling for greater protection
for tenants in properties where the landlord is being repossessed.
Under the existing legal framework, tenants have no status in
this situation and become trespassers once a possession order
takes effect, even if they have been lawful tenants for a long
time. Shelter believes that this situation is deeply unfair and
that tenants need to be given more time to find suitable accommodation
once a possession order has been granted. Legislation should be
enacted to ensure that this is the case. In particular:
Courts should be able to defer possession
for whatever period they think just, up to a maximum of 90 days,
thus enabling the tenant to take stock of their situation and
look for somewhere else. The court could have flexibility to decide
how long to allow, according to the circumstances.
This protection should extend not
only to tenants, but also to lodgers and other licensees who were
living lawfully in the premises. The protection would also apply
where the landlord is not a buy-to-let landlord, but a borrower
under a mainstream residential mortgage.
31. We recognise the difficulty in reaching
tenants in advance of actionbut we suggest that lenders
need to try to make contact as early as possible in the process.
There is scope for notices to be sent in an envelope marked with
a message such as "Your home is at risk".
The state safety net
32. The repossessions crisis has highlighted
the need for reform of the state safety net for homeowners. Take-up
of private insurance products has been low and many households
can fall through the gaps even where they do have payment protection
policies. We welcome the cut in the waiting time for state support
from 39 to 13 weeks but would like greater clarity regarding the
details of this change, particularly in relation to the status
of existing claims.
33. Over the longer term, the Government
should give consideration to a more fundamental overhaul of the
state safety net. A good starting point for debate would be the
Joseph Rowntree Foundation proposals for a Sustainable Home Ownership
Partnership (SHOP), funded by contributions from lenders, borrowers
34. The credit crunch and economic downturn
have had a dramatic effect on the level of house building. This
will not only have an impact on housing output in the short to
medium term, but the subsequent contraction of the construction
industry will also have an effect both on unemployment and on
the long-term ability of the sector to deliver increased house
building. Indications are that housing completions will drop dramatically
from the 167,000 new build completions in 2007-08, with starts
anticipated to be below 100,000 next year (Figure 1). The number
of social housing completions has held up better so far, but there
are also fears that without radical remedial action this too could
fall sharply over the next few quarters.
35. The drop in the level of housebuilding
is explained by two main factors. First, the lack of mortgage
finance and worsening economic prospects have driven a steep decline
both in house prices and in the number of sales. Second, the credit
crunch has affected the ability of developers and housing associations
to access finance. Together, these pressures have led to many
new schemes being put on ice, and some developers having to sell
off land in order to improve cashflow.
36. This overall climate is affecting the
delivery of social and intermediate housing in a number of ways:
In recent years, an increasing proportion
of affordable housing has been delivered through section 106 agreements
as part of private schemes, many of which are now on hold.
Housing associations' access to finance
has worsened as a result of the credit crisis, while their borrowing
costs have substantially increased.
The lack of private and LCHO sales
has resulted in a drying up of cross subsidy for social housing.
Even where private schemes do go
ahead, lower land values mean that the size of private sector
contribution available for affordable housing is less.
37. These trends clearly have significant
implications for the delivery of the Government's housing targets,
over both the short and longer term. Recent analysis by Savills
(Figure 2), based on their forecasts of the size of the downturn
in housing delivery, suggests that in order to achieve the Government's
target of three million homes by 2020, housebuilding would need
to recover to a level of 325,000 (the highest level since the
1960s) by 2016 and remain at that level for four years. Savills
note that there is often a significant time lag between a housing
market recovery and developers increasing housing supply, and
that this could lead to further sharp price rises once the market
38. Despite falling levels of housebuilding,
housing need and demand continue to grow. The credit crunch and
the economic downturn are likely to lead to increases in the numbers
experiencing homelessness and bad housing, and in the length of
social housing waiting lists. And while the National Housing and
Planning Advice Unit expects house prices to dip and affordability
to improve in the immediate future, they predict that these will
be back to their long term trend by 2017 due to the continued
shortfall in housing supply.
39. Looking ahead, there is a need to re-evaluate
how new housing delivered should be split between tenures, in
order to ensure that need is met and to avoid future problems
with households overstretching themselves in order to access homeownership.
Shelter will shortly be publishing research by the Cambridge Centre
for Housing and Planning Research, setting out new estimates for
housing need and demand up until 2026. A confidential draft of
this is attached for the Committee's information as Annex A. It
shows that, while the Government's target of 240,000 new homes
per year is about the right level to meet newly arising housing
need and demand, a higher proportion of new homes built must be
for social housing and low cost home ownership than at present.
40. The Government has already announced
a number of measures intended to stimulate the housing market
and housing delivery, including:
Frontloading £400 million from
the existing social housing budget, to deliver up to 5,500 extra
homes by April 2010.
Increased funding flexibility so
that the Housing Corporation can offer more of the payment to
housing associations and other developers delivering affordable
and social housing at the start of schemes, helping improve providers'
£200 million for affordable
housing providers to purchase unsold stock from house builders,
which can then be used for social or affordable housing, and the
establishment of a national clearing house to help facilitate
A year long stamp duty holiday for
residential property of less than £175,000 starting in September
41. Shelter has welcomed a number of these
measures, particularly the frontloading of money for social housing.
We support the principle of buying up unsold stock for use as
social or affordable housing, provided that the homes purchased
are built to Housing Corporation standards, are suitably sized
and are in the right locations. On the other hand, we are sceptical
whether the £600 million cost of the stamp duty holiday represents
the best use of money, given the experience of the stamp duty
holiday in 1992-93 which would appear to have had little impact
on the overall number of housing market transactions.
42. Although Shelter considers the Government's
overall package to encourage housing delivery to be positive,
we believe that its impact will be limited. More radical solutions
are therefore required to ensure that we continue to build the
extra housing, including affordable housing, that we need for
43. Shelter has recently commissioned housing
expert Kelvin MacDonald to produce a report, due to be published
shortly, exploring the challenges and opportunities for affordable
housing delivery in the current environment. We draw on this below
in setting out some of the priority areas in which we believe
the greatest scope exists for Government, the HCA and local authorities
to have an impact.
Increase the grant rate for housing associations
44. The funding settlement for social housing
in the current spending review period was predicated on a grant
rate of around 40%, with roughly 50% of the total cost secured
through private borrowing and 10% financed from cross subsidy
from low cost home ownership schemes and market housing sales.
As noted above, the current economic and financial situation has
undermined housing associations' ability to secure this 10% cross
subsidy, creating a gap which needs to be filled by increasing
the grant rate. The average shortfall is approximately £20,000
per unit, which for the 80,000 social rented homes to be delivered
in years two and three of the CSR period would amount to £1.6
billion additional investment. Although the Government has reportedly
committed to raise grant rates, housing associations claim that
this is not being translated into practice by the Housing Corporation.
We recommend that Government, the Housing Corporation and the
HCA urgently increase the level of grant rate available to housing
Review schemes whose financial viability has been
affected by the credit crunch
45. As a result of the housing market downturn,
some previously agreed developments may no longer be financially
viable, due to lower market values and reduced scope for cross-subsidy
of infrastructure and affordable housing requirements. In such
circumstances, it is vital that the Housing Corporation and local
authorities work together in order to find ways of overcoming
financial barriers and allowing schemes to go ahead. This should
include active consideration by the Housing Corporation of whether
additional grant should be made available. In some cases, local
authorities may also need review section 106 agreements. Where
this is done, priority should be given to ensuring that social
housing provision does not lose out to low cost home ownership
or to other types of infrastructure. For example, in Walsall,
the local authority recently renegotiated the affordable housing
requirement on a site down from 33 to 17, but with a change in
the type of housing to be provided from shared equity to social
Shift the balance of provision between public
and private sector housebuilding
46. To date, the house building sector has
been based on a market led approach, with up to 65% of social
rented housing delivered through section 106 agreements. With
the collapse of the private sector, we believe there is a strong
case for shifting the balance of provision towards a public-led
model, with a greater proportion of overall house building subsidised
into the affordable sector. Clearly this would require significant
additional investment to increase the output of social rented
homes over and above the 110,000 target for 2008-11 but we believe
it would also make the achievement of the Government's overall
housing targets significantly more likely.
Invest in buying up land for future development
47. Land prices are falling dramatically,
which provides a real opportunity for the public sector to buy
up land to ensure a steady supply for housing development over
future years. We recommend that the Government funds an additional
pot of around £500 million over the next three years for
the HCA to buy up land at low cost during the market downturn.
We estimate that this could provide land for over 10,000 social
Make best use of public sector land
48. Over a quarter of the land we could
potentially use to build homes is publicly ownedby central
government departments such and the MoD and DoH and by local authorities.
We believe the Government needs to do more to exploit the use
of this land for affordable housing, either through selling it
off at sub-market levels for affordable housing development, or
through exploring joint ownership and development initiatives
along the lines of local housing companies. Local authorities
already have considerable flexibility to dispose of land at below
market prices to further social objectives;
however, awareness of this is low amongst lead officers and councillors
and the belief prevails that there is a duty to obtain best price
for the land. We recommend that the Government should promote
better understanding of the rules by issuing guidance for local
authorities on this point. In addition, we call on the Treasury
to lift the constraints on central government departments, to
give them the same flexibility as local authorities to dispose
of land at below market rates to support affordable housing development.
49. The Government has introduced two specific
LCHO measures designed to respond to credit crunch by helping
individuals into home ownership and supporting the market for
new homes. Firstly, in May it announced a major expansion of eligibility
for the Homebuy programme so that first time buyers with a household
income of less than £60,000 a year would be able to apply.
Previously the scheme had been open only to key workers such as
nurses and teachers, social tenants and some buyers identified
as a priority regionally. Secondly, in September it announced
a £300 million scheme which aims to help 10,000 first time
buyers. Buyers are offered an equity loan of up to 30% to purchase
new build properties, co-funded by the government and the developer
and free of charge for five years. The aim of the scheme is to
provide a boost to the housing market and make more homes accessible
to first time buyers.
50. The majority of commentators expect
that house prices will continue to fall rapidly throughout 2009.
At present, those taking up LCHO schemes such as Homebuy Direct
could quickly find themselves in a position of negative equity
or having lost much of the original equity in their homes. It
is unclear what evidence there is that these products are currently
in the interests of consumers or indeed that consumers are currently
interested in them. Shelter believes that the priority for LCHO
should be to create a simpler range of products that are affordable
for those on below average incomes. The Government's recent policy
announcements on LCHO unfortunately appear to do little to move
us towards this goal.
82 Breaking Point: how unaffordable housing is pushing
us to the limit, Shelter, June 2008. Back
Residential lettings survey Great Britain, RICS Economics, July
 EWHC 2327 (Ch) Back
The Residential Property Focus, September 2008, Savills Research Back
"Regulator is stagnating", Inside Housing, 12 September
Walsall Council Development Control Committee, Report of Head
of Planning and Building Control, 22 April 2008: http://www2.walsall.gov.uk/CMISWebPublic/Binary.ashx?Document=5552 Back
CLG, Circular 06/03: Local Government Act 1972 General Disposal
Consent (England) 2003-disposal of land for less than the best
consideration that can reasonably be obtained, 2003, paragraph
CLG Press release, Helping first time buyers onto the property
ladder, 14 May 2008 Back
CLG Press release, Ensuring a fair housing market for all,
2 September 2008 Back