Repossessions and unemployment are up, house prices and the economy are down – things look grim in UK plc, not least for those in danger of losing their home. So what can be done to stave off the repossessions crisis, refloat the housing market and keep families in their homes?
The Big Issue’s campaign, launched two weeks ago in partnership with 38 Degrees, calls upon the government to hold a moratorium on mortgage repossessions for owner-occupiers until the recession has passed. But how would it work in practice?
One solution proposed by experts is a mortgage-to-rent scheme. The government’s Mortgage Rescue Scheme, where homeowners struggling with payments can sell a share of or the whole property to a housing association, is similar. However, eligibility for this scheme is very tight, not all properties are attractive to housing associations – who also find themselves credit-crunched – and there are fears that families in the midst of a crisis may not apply for it. In fact, since its introduction in January the scheme has helped only two families from the 12,800 repossessions in the first quarter.
A more encompassing approach was suggested by Gwilym Pryce, economist and Professor of Urban Economics and Social Statistics at Glasgow University, in a report for the government’s Housing Expert Panel in October. This would compel lenders to contact local authorities as soon as repossession proceedings begin. Councils would offer the property for sale first to local housing associations, and secondly to a national company set up by the government. This national body would buy up properties at risk until the housing market picked up, at which point it could be floated on the stock market and sold to recoup taxpayer’s money.
Professor Pryce told The Big Issue: “It’s a classic role for government; government is so big, it can take the risks, play the long game – and win.”
He added: “The government has been advocating home ownership for years, despite the risks. I mean, skydiving is risky, but the government doesn’t advocate skydiving. It’s only fair that they bear some of that risk now.”
An alternative system devised by York University’s Centre for Housing Policy for the Joseph Rowntree Foundation envisions a collaboration between government, lenders and borrowers. Each contributes to a pool of cash used to support overstretched borrowers in the event of certain events, for example divorce, unemployment or bereavement. The point is to spread the risk and bail out the borrowers, not the banks, because if borrowers are secure in their payments, banks won’t panic and repossess.
Others share the view that fairly drastic action is required. In February, MPs on the Communities and Local Government Select Committee urged the government to introduce penalties for lenders who repossess too quickly, noting that efforts to limit repossessions – the pre-action protocol that requires lenders to explore all avenues before seeking possession – were unenforceable. “As useful as a chocolate teapot,” was how one economist more forcibly described it.
Despite protestations from the Council of Mortgage Lenders and lenders themselves, it is apparent that repossession is not always put off as long as possible. Mother-of-two Sharon Amato, from Bristol, found herself being repossessed by lender Halifax Bank of Scotland last year after they fell into arrears – despite not previously having missed a payment in 11 years, and, incredibly, despite the fact she was an HBoS employee.
“The judge in the court at the time was absolutely gobsmacked,” Sharon said.
“I’ve worked there for 24 years, I’ve got a good track record. I said, you’re paying me, take it straight from my salary, which I’m perfectly willing to do. And they said no.
“They would rather evict me and my children than allow me to stay and pay the mortgage.”
Only at the 11th hour – minutes before an eviction hearing – did HBoS back down after the questioning of a BBC reporter rang alarm bells.
The major lenders asked by The Big Issue all confirmed they would at least conform to the pre-action protocol requirement of three months forbearance before starting repossession. Only RBS has agreed to wait six months.
Part of the threat that repossessions pose to the economy suffering a recession stems from international banking regulations.
The rules used to stipulate that banks hold cash equal to a percentage of their loans, depending on the size and type of bank. But with the rapid growth of complex financial products, derivatives and securities, this restriction was seen as outmoded, leading to the Basel II banking accord in 2004.
Pryce said: “Basel II agreed to adopt mark-to-market as a means for lenders to value their assets, in other words, the current market prices of the houses they had mortgaged.
“But this is destabilising: whenever prices fell, red lights would start flashing at the banks because their ratio of debt to value of assets had suddenly risen. So the bank starts to rid itself of debt, cutting lending to others,” he said.
“Because no one can get credit, this pushes down demand for housing, which in turn pushes down prices. And as prices continue to fall, the bank’s red lights continue to flash as their assets continue to drop in value.”
As banks are required to reduce their burden of debt, the vicious circle that results, he said, could be “cataclysmic.” Using a longer-term average to value assets would protect banks from sudden rises and falls in the market, and provide an escape from the vicious circle.
Although Britain’s economic instability has been caused by ‘toxic debts’ from America, should repossessions continue in this country it could usher in a second wave of UK bank collapses, making the need for reform urgent.
Critics of reform claim that bailing out borrowers creates a ‘moral hazard’, that the knowledge the government will step in will encourage risky borrowing.
Pryce is adamant: “The complex securitising and repackaging of risky sub-prime debts from the US has allowed lenders to profit from selling on debt – without any care to what happens after.
“There is a moral hazard, but it lies squarely with the banks, not the borrowers.”
[This article was originally published in The Big Issue]