Housing and the Credit Crunch - Communities and Local Government Committee Contents

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 management behaviour.

    —  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 market downturn.

    —  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 incomes.


  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 housebuilding targets.


  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[82] 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 children.

    —  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 to increase.

  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[83]. 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 homeowners.

    —  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 ownership basis.

    —  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 practices[84] highlighted a range of problems, including that lenders:

    —  could have done more to consider customers' individual circumstances and offer more options to resolve arrears;

    —  imposed charges in circumstances that could have resulted in the unfair treatment of customers; and

    —  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 lenders specifically:

    —  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; and

    —  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 resort—but 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[85], 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 legislation to:

    —  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 advice agencies.

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 action—but 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 and Government.


  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.

Figure 1

  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[86] (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 bottoms out.

Figure 2

  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' cash flow.

    —  £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 this.

    —  A year long stamp duty holiday for residential property of less than £175,000 starting in September 2008.

  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 the future.

  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[87]. We recommend that Government, the Housing Corporation and the HCA urgently increase the level of grant rate available to housing associations.

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 rented[88].

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 rented homes.

Make best use of public sector land

  48.  Over a quarter of the land we could potentially use to build homes is publicly owned—by 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[89]; 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[90]. 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 Homebuy Direct[91], 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

83   Residential lettings survey Great Britain, RICS Economics, July 2008. Back

84   http://www.fsa.gov.uk/pages/Library/Communication/PR/2008/087.shtml Back

85   [2008] EWHC 2327 (Ch) Back

86   The Residential Property Focus, September 2008, Savills Research Back

87   "Regulator is stagnating", Inside Housing, 12 September 2008. Back

88   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

89   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 6. Back

90   CLG Press release, Helping first time buyers onto the property ladder, 14 May 2008 Back

91   CLG Press release, Ensuring a fair housing market for all, 2 September 2008 Back

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