Key Issues

Financial support to the banking industry
Arrears and possessions
Buy-to-let
Stamp duty holiday
Low-cost home-ownership
Valuing newly built property

Financial support to the banking industry

We welcomed the measures announced by the government to strengthen the capital position of banks and building societies, and to help re-open the market for medium term funding by providing guarantees of new debt issuance by eligible institutions. We believe the steps address both relevant issues – funding and capital – and provide both the short-term framework to enable banks to raise finance, and the longer term strengthening of their capital position that should help to re-instil confidence and stability.

The fact that both banks and building societies are eligible is also welcome. However, specialist lenders appear ineligible, so this scheme does nothing specifically to help them, other than through the indirect effect that improved confidence should create for the wider market.

The government has stated that the banks which are being supported by the recapitalisation scheme will be required to “maintain, over the next three year, the availability and active marketing of competitively priced lending to home-owners and to small business at 2007 levels”. There has been some confusion as to what this actually means. However, we have had confirmation from the Treasury that the nature of this commitment is an aspiration to achieving a broad, deep mortgage market in general with a good spread of products enabling access to the mortgage market for all credit-worthy borrowers. We support this objective.

This package of measures, along with the recent rate cut, will have a positive effect and augurs well for an improving market situation looking ahead.

Arrears and possessions

Our latest data released in August showed no surprises in terms of the number of mortgage arrears and possession cases in the first half of 2008. However, while both have increased from their low base, 98% of the UK’s borrowers continue to pay their mortgage in full every month, and will continue to do so.

We are maintaining our forecast of 45,000 total possessions and 170,000 mortgages three months or more in arrears by the end of the year. These numbers remain extremely small when seen in the context of the 11.74 million mortgages in the UK.

Our figures relate to first mortgages only, not to other consumer loans secured on property, and show:

• There were 18,900 possessions in the first half of the year, compared with 13,400 in the second half of 2007, and 12,800 in the first half of 2007. The proportion of all mortgages on which possession occurred was 0.16%, up from 0.11% in both the first and second halves of 2007. The possession rate now is similar that that of the late 1990s, but remains less than half the rate experienced in the early 1990s.
• The number of households with arrears of three months or more was 155,600 at the end of the first half of the year, up from 129,600 at the end of 2007 and 120,800 at the end of the first half of last year. The arrears rate stood at 1.33% of all mortgages, up from 1.10% at the end of 2007 and 1.02% at the end of the first half of last year.

We welcome the announcement of reforms to income support for mortgage interest (ISMI) next spring, where the waiting time for new claims is being cut from 39 weeks to 13 weeks, and the upper ceiling for the size of mortgage that will be met is being raised to £175,000. For eligible borrowers, these reforms will make it easier for lenders to exercise forbearance until benefit payments begin.

The government’s mortgage rescue proposals for some borrowers who would otherwise become homeless, while also welcome, will help only perhaps 6,000 households over two years.

We also support the Office of Fair Trading’s recent recommendation that sale and rent back schemes should be regulated by the Financial Services Authority, following its market study into the market. We would now like to see prompt action by the government to bring forward regulatory proposals.

Lenders must, and do, see possession as a last resort. Under FSA regulation, all CML members (first charge mortgage lenders) are committed to comply with the mortgage conduct of business (MCOB) rules, and the principle that possession is only taken where all reasonable steps to avert it have been taken.

MCOB 13 covers procedures that first charge lenders must adopt when handling arrears and possessions cases. The FSA’s rules were based on our statement of practice on arrears and possession which has since been withdrawn following the introduction of statutory regulation.

The concept of treating customers fairly also applies across all first charge lenders’ business, but is not delivered in a single standard approach. For example, arrears management processes will differ between lenders depending on their business model and customer base, and depending on borrowers’ behaviour and engagement to help themselves sustain their home ownership.

In addition to these statutory requirements, we have been working extensively with government, consumer groups, the Financial Services Authority and the courts to ensure that as much as possible is done to help borrowers who may be facing financial problems, and to manage arrears effectively.

Our members have committed to a package of voluntary measures which include looking at existing arrears management policies and providing information to borrowers to explain the process; introducing a pre-action protocol for use before court proceedings; and implementing strategies for assisting borrowers coming out of initial deals.

We have published a leaflet for MPs designed to help you to advise any constituents who may approach you for help as a result of mortgage payment difficulties.

Buy-to-let

Some commentators have interpreted recent developments, including the nationalisation of Bradford & Bingley, as signalling the death of the buy-to-let market. This is not the case. Buy-to-let remains underpinned by strong market fundamentals that will not change.

In the immediate aftermath of nationalisation, some lenders raised rates on buy-to-let products. But we have seen the same thing happen in the mainstream mortgage market at other times during the credit crunch. The use of pricing to manage business flows when there is not enough funding to meet demand, it is a predictable and sensible response – but does not mean that the market is closing for new business.

The reality is that pockets of difficulty will arise for particular types of property. But the scale of the problems should not be overstated. The sector continues to offer good long-term prospects for landlords who take a professional approach.

Falling property prices will boost rental yields. And the understandable decline in current rates of construction will reinforce the shortage of housing supply going forward, underpinning rental income and helping to keep void levels low. The Association of Residential Landlords and other commentators are reporting that, overall, demand from tenants is strong and rental yields are rising.

Going forward, it is important that unnecessary regulatory intervention does not deter investors and constrict the supply of rental property, and that the media and others recognise the virtues of a buoyant private rented sector. For the foreseeable future, buy-to-let will be the domain of “professional” landlords, who, by and large, are providing a valued service for their tenants.

The table below provides a summary comparing the buy-to-let market and the wider mortgage market during the first half of 2008.

Comparison table

	Buy-to-let market	Entire mortgage market
Number of loans outstanding	1,103,000	11,741,000
Value of loans outstanding, £m	132,500	1,210,672
Value of gross advances, £m	18,600	149,300
Mortgages +3 months in arrears, % of all mortgages	1.10	1.33
Mortgages taken into possession, % of all mortgages	0.16	0.16

Stamp duty holiday

The government’s decision to increase the threshold for stamp duty on house purchase from £125,000 to £175,000 means that the proportion of borrowers who will not have to pay the tax when buying a home has risen from around a quarter to a half.

However, there are geographical differences in the extent to which borrowers will benefit from the governments measures, as shown in the table.

The Treasury predicted that the measure would cost more than £600 million. But we believe it may have based its calculations on the number of transactions in earlier years, when sales were higher than is now likely in 2008/09. We estimate that the reduced number of transactions means that the cost to the Treasury will be approaching £300 million if the stamp duty holiday lasts for a year, as announced.

Note: Percentage of those buying on mortgage exempt from stamp duty at £175,000 threshold, based on transaction data for the first half of 2008

	Already exempt	Cumulatively exempt
Northern	47	72
Yorkshire and Humberside	41	69
North West	40	68
East Midlands	34	66
West Midlands	34	65
East Anglia	16	51
Greater London	2	11
South East	6	27
South West	11	42
England	21	45
Wales	38	68
Scotland	41	66
Northern Ireland	8	40
UK	24	29

Low-cost home-ownership

We welcome the various government announcements of plans to provide more help for first-time buyers which include:

• All first-time buyers with an income of less than £60,000 will have the opportunity to apply to buy a share of their home;
• An allocation of £200 million for the Housing Corporation to buy new properties on the open market, either for purchase by first-time buyers through the homebuy scheme or for social renting; and
• A new homebuy direct shared equity product available on selected new-build schemes.

Although these measures will have only a modest impact on the housing market, they do have the potential to widen the first-time buyer shared equity scheme.

These announcements mean that the government is now proposing a more logical approach to help for first-time buyers, providing assistance based on income rather than the occupation of buyers. The proposals will also remove the anomaly by which one group of less well-paid workers makes access to home-ownership more difficult for others earning similar salaries, but working in different jobs.

Valuing newly-built properties

We have introduced new measures to help ensure that the valuation of newly built property is robust and reliable.

From 1 September lenders require builders or developers to complete a new ‘disclosure of incentives’ form, with the aim of ensuring any discounts or other incentives are declared. This will mean that any mortgage is granted on an accurate valuation and will provide more effective protection for both lenders and borrowers. It will also help reinforce lenders’ confidence in the market for newly built property, which has fallen due to recent experience of losses and frauds.

This initiative is supported by the Royal Institution of Chartered Surveyors, the Law Society of England and Wales, the Home Builders’ Federation, Homes for Scotland and the Construction Employers Federation.

October 2008