In reporting a further reduction in mortgage arrears and possessions last week, we emphasised that a concerted effort by lenders, borrowers, the government and advice agencies was successfully helping to keep payment problems in check.
We warned that continuing reductions in arrears and possessions could not be taken for granted, however, and urged the government to continue to maintain its commitment to helping borrowers in difficulty.
We welcome the government’s decision to extend for the whole of next year the current 13-week qualifying period for payments of support for mortgage interest (SMI) and the existing upper limit of £200,000 for loans that are covered. Support for borrowers in difficulty will be required throughout next year and beyond, so the government may need to extend current eligibility for SMI into 2012 and succeeding years.
But while extending eligibility for SMI is welcome, the government’s decision to reduce from 1 October this year the standard rate at which SMI is paid from 6.08% to 3.63% – a reduction of 40% in payments to qualifying households – is unhelpful and will make it more difficult for some households to remain in owner-occupation.
According to press reports, the minister for welfare reform, Lord Freud, has acknowledged that the lower rate at which SMI is paid increases the risk of claimants falling behind with their mortgage commitments. We have discussed the issues with representatives of the Department for Work and Pensions, but some of the reported suggestions from government on how lenders could deal with this will not work.
- Lenders are unable to charge all borrowers in arrears an average mortgage rate equivalent to the rate at SMI is paid. That would be in breach of the contractual agreements between individual borrowers and lenders, and could be challenged in the courts, probably successfully.
Even if it were possible to charge all borrowers in arrears a rate equivalent to SMI, lenders and borrowers would be left exposed to future arbitrary changes in benefit arrangements, like the 40% rate reduction announced by the chancellor in his emergency Budget and implemented less than four months later.
- It is wrong to assert that the “guarantee” of SMI payments from the government means lenders can afford to charge a reduced rate for borrowers in arrears. Ultimately, the “guarantee” of mortgage payments comes not from the government but from the security provided by the property (although lenders rely on this only as a last resort).
In any case, the arbitrary changes to SMI arrangements already introduced by the current government show that lenders have no “guarantee” on the rate of future payments, or on eligibility for them, or the extent to which the amount the government pays for the small minority of borrowers who qualify for SMI will cover future arrears for individual customers.
- Lenders are not routinely able to borrow money “at reduced rates.” Following the collapse – and only partial recovery – of wholesale markets, the mortgage market remains afflicted by a shortage of funding (and has been for more than three years now), leaving lenders to compete for limited retail funds.
Not all lenders are in the same position – some will have to pay more than others for retail deposits, and some cannot raise them at all and therefore remain frozen out of the market at present. Meanwhile, over and above the cost of raising funds, lenders must also cover the other costs of running their businesses, including the higher costs associated with raised levels of mortgage arrears.
There are a number of other reasons why it is not possible for lenders to waive interest payments for borrowers whose mortgage commitments are not covered by SMI, and why doing so would create problems for lenders, borrowers and the government:
- There is a moral hazard in giving borrowers a signal that they do not have to comply with the contractual terms of their mortgage and will be compensated by the state for failing to do so.
- Borrowers who do not qualify for state support and who struggle to meet their commitments would, in effect, be cross-subsidising those who do not.
- There is limited incentive for borrowers to return to work while they still qualify for SMI if interest rates are rising and taking a job would trigger the start of higher contractual payments.
- Waiving contractual rights would create problems for loans that are securitised, further reducing the prospects for recovery of wholesale markets and the already limited capacity of lenders to raise funding in this way.
- Many borrowers in difficulty have other debts on top of their mortgage. They have obligations not only on their first charge loan but on second and other charges, and it is not clear what would happen in these cases.
- The government-supported home-owner mortgage support scheme provided for the deferral – rather than the waiving – of interest.
- Changes to the rules applying to SMI in future could lead to inequitable treatment of equally deserving borrowers. Those newly qualifying for SMI today, for example, may be entitled to two years’ state support, while in future borrowers may be paid at a lower rate or for a shorter period. We have accepted the principle that SMI should be paid for a limited period to encourage claimants back into work, but this weakens the “guarantee” being offered.
- Those paying higher mortgage rates may not be those that the government wants to support.
We recognise the pressures arising from the fiscal deficit, and that paying SMI at 6.08% would have meant that some households were receiving payments that were higher than their current mortgage commitments. We believe, however, that the best way of addressing this is to pay SMI to individual borrowers at the rate applying to their individual mortgages. That would ensure there
