Homeowner bailout: Whitehall to the rescue?

After the bailout of the banks, now begins the rescue of their borrowers.

The government has come up with a range of proposals intended to help out those who can’t pay their mortgages. One scheme, where borrowers can defer interest on their mortgage for two years, was announced at the end of last week. Another, where housing associations buy the homes of people in danger of repossession or give them loans to repay their debts, started to take applications last week.

Rent or loan

Under this second scheme councils will take applications for help from the most vulnerable people, including families with children, the elderly, people, with disabilities or mental illnesses and pregnant women, who cannot pay their mortgages. There will be caps on their income set at regional level, they must not be overcrowded and unable to trade down to a cheaper home. Eligible homeowners can either sell their home to a housing association at its current market value, use the proceeds of the sale to clear their debts and rent it back, or get an equity loan from the association on part of their home to reduce their mortgage payments to a manageable level. The first 60 councils started the scheme on 1 December and the rest will join in from January.

The scheme, designed by government with the National Housing Federation and Council of Mortgage Lenders, is designed to prevent homelessness caused by repossessions amongst people who would be a priority for housing help from their council were they to become homeless.

Equity

To qualify for the scheme, homeowners must also have equity in their home. Lucy Thornicroft, policy officer at the National Housing Federation, explains that the equity restrictions are there to ensure that there is enough equity in the home to repay the homeowner’s mortgage and other debts when it is sold or via the equity loan. However some of the people who need the scheme most will be in negative equity and therefore ineligible for it.

Going into Orbit

Orbit Housing, one of the first to start up the scheme with local council Broadland, says it will put in £5m matched by the same amount from government. They expect to help about 150 people. People selling their home to the association would have to have at least 5% of equity in their property but not more than 25% and they would rent it back for about 80% of the market rent. Homeowners with more than 25% equity in their home can joint the shared equity scheme and the maximum loan value is 75 per cent of the capital value.

A spokeswoman for Orbit says the association will get a £3600 administration fee from government for each family it helps. It would also have to bring any homes it bought outright up the decent homes standard. There is a review after six months when the housing associations involved can decide whether they want to increase or scale back the number of cases they take on.

Thornicroft said the scheme has been designed to protect the housing associations from financial risk. “It is quite a small scale scheme and over 20 housing associations, if not more, are involved in delivery so there will be a relatively small number of transactions and the risk will be shared.” She added that housing associations would be able to refuse to buy a home if they had concerns about it.

How many will be helped?

The scheme, backed by £200m of government funds and the same amount from housing associations, is expected to help about 6000 people over two years. This is not enough to help the 9000 people estimated to be eligible for the scheme although Thornicroft that not all of them would want to use it. “We are confident the level of demand will match the government target,” she added. But it’s also a drop in the ocean as far as helping the 45,000 people who are likely to have their homes repossessed over this year, according to estimations from Council of Mortgage Lenders. A spokesman for the CML says: “It is only going to make a modest impact. We see it as being for people who have no realistic hope of getting back on track [with their payments].” He said the government’s other scheme, which allows homeowners who have lost their jobs or had a severe fall in income to defer their mortgage interest payments for two years, might be a better option for some other groups. However criteria for the scheme are still being thrashed out and the housing minister Margaret Beckett suggested that only 9000 people might be helped by the scheme – a long way short of the total number facing repossession.