Can lenders continue to fund social housing?

Lenders continue to help fund housing in all tenures, including the social sector, report the Council of Mortgage Lenders.

Related topics:  Mortgages
Millie Dyson
27th July 2011
Mortgages
But now lenders are having to adjust to government reforms in the provision of affordable housing – and in welfare – as the coalition seeks to take policy in a new direction.

The government has ambitious plans to increase the provision of affordable housing, partly by enabling landlords to raise rents to 80% of the market rate. It hopes that improving the income stream for social landlords will stimulate greater provision of housing in the sector.

Additionally, the government wants to implement radical welfare reform, reducing benefit dependency but also empowering those who receive benefits by encouraging them to take greater responsibility for managing their financial affairs.

Both initiatives have significant implications for the funding of social housing by lenders. We are therefore engaged in detailed discussions with the government over its plans for reform, and the implications for lenders and the funding of social housing.

Welfare reform

While we understand the government’s desire to reform welfare, uncertainty about how housing benefit will be replaced in the new system of universal credit is a major source of concern to lenders contributing to the funding of social housing.

So far, more than £60 billion of private finance has been lent to the social rented sector. A fundamental pillar supporting the provision of this funding has been the direct payment to social landlords by the government of most of their rental income through housing benefit.

The certainty of this guaranteed stream of income has helped produce advantageous lending terms, thought to benefit the social housing sector by at least £500 million a year.

The proposal to remove direct payments of housing benefit will have a substantial impact on the cash flow of registered providers of social housing, pushing up rent arrears and increasing the administrative costs of processing rental payments.

It is estimated that unless there are measures to keep rent arrears in check, the amount owed in unpaid rent could more than double, putting a considerable strain on cash flows and further restricting growth of the sector.

How the markets react could also lead to a substantial rise in funding costs.

This all comes at a time when registered providers of social housing have to fund a greater share of the cost of housing produced under the affordable homes programme. This will increase their borrowing and stretch their financial gearing.

Working with the government

In July, we met the welfare reform minister, Lord Freud, along with some of the largest providers of funding for social housing.

Discussions were productive, and Lord Freud was keen to assure firms that he was fully aware of the importance of protecting the flow of income for social housing providers and retaining lender confidence.

The minister agreed that direct payments of rent should continue for the elderly and other vulnerable groups, although there is still no clear definition of exactly who is vulnerable. He also set out his views on some of the options for alternative payments that could protect income streams.

He said he remained committed to working with lenders to find solutions which would sustain the industry’s confidence in funding the sector.

Options discussed with the minister included:

- how direct payments would be triggered by a tenant falling into arrears;

- how the Department for Works and Pensions would contribute to repaying debt arising from arrears;

- the creation of ‘jam-jar’ accounts for benefit recipients, with money going into allotted ‘silos’ in which there would be prioritised direct debits;

- greater provision of debt advice, perhaps by Citizens Advice or other housing debt advisers; and

- the need for a clear definition of those deemed to be vulnerable, for whom direct payment of rent from the government to the housing provider would continue.

We have agreed to take part in further discussions, and to contribute to financial modelling to test how effective these ideas could be in helping to guarantee reliable streams of income.

Discussions will also involve the Tenant Services Authority and some of the largest lenders that are funding social housing. The minister agreed with our suggestion that any new system should be pilot-tested before being fully implemented.

We have urged the minister to give assurances on these issues as quickly as possible.

We have also re-iterated our concern that removing direct payments of rent – one of the basic pillars supporting private finance of social housing – will result in higher funding costs. Bond market investors already showing signs of reduced confidence.
The CML's view

Although we will continue to discuss, and consider, alternative payment arrangements, we believe that direct payments of rent should remain as an option for any tenant who wants this arrangement.

Continuing to offer this option for tenants is even more important given that affordable rents will be higher, increasing the likelihood of arrears for those households unable to manage their finances effectively.

Our views on this are strongly supported by the National Housing Federation, the Tenant Participation Advisory Service, and the Tenants and Residents Organisation of England.

We believe that rent should be the highest priority payment to be made from benefit entitlement, and that direct payments of rent should be enforced for tenants who fall into more than four weeks of arrears.

There are substantial risks in introducing the government’s plans for universal credit and, while we welcome the minister’s assurances that he will work with us to find acceptable solutions, we are sceptical
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