Controversially, the Council of Mortgage Lenders recently stated that it wants the government to encourage home owners to voluntarily sell their property to avoid court action and try to minimise the number of repossessions.
Part of me thinks this is common sense and part of me wonders if the CML has thought this through. There has been, quite rightly, a big drive by the government in the past few years to find solutions to enable people to stay in their homes.
Unfortunately, this has been at the expense of the lenders, often portrayed as the bad guys just looking for an opportunity to enforce repossession so that they can ratchet up the default fees.
Consequently, there have been myriad schemes launched by the government to try to keep people in their homes.
Worst of allworlds is for home owners to bury their heads in the sand and hope the governmentwill help
At the same time the regulator has been applying additional pressure to lenders to be more flexible and considerate in their approach to repossession.
If the borrower has equity in their property then there is a case to encourage them to think about the possibility of selling the property if they get into financial trouble, and maybe banking any equity and renting for a time. But however sensible this may sound the reality is often quite different.
If a borrower is faced with repossession the chances are they have suffered a life-changing event such as marital break-up or redundancy, so their ability to meet future rental payments may also be somewhat impaired.
Equally, landlords take references and if the borrower’s previous lender discloses the arrears then the landlord may decide not to take the risk, especially as there seems to be a good supply of tenants at the moment.
Recent figures by Hometrack show that houses are taking 9.3 weeks on average to sell, so the time to consider selling is right at the beginning of the trauma and not waiting until all the options are gone.
It’s also worth taking the emotion out of the situation and remembering that the property is not just a home but also an asset, and when times are good we acquire assets and when they are bad we can realise those assets.
The CML went on to ask the government to consider a new form of insurance-based scheme to provide a safety net for the most vulnerable in society. It wants this new policy to be jointly funded by borrowers, lenders and the government.
Unfortunately, this is unlikely to work. First, as a fundamentally insurance-based product and one that is linked to debt repayment it is likely to get swept up in the Competition Commission recommendations. This means borrowers would have to take this policy out themselves and it certainly wouldn’t be able to be sold anywhere near the point-of-sale, wherever that is.
Second, and probably more important, aiming this at the most vulnerable in society is a curious concept as it’s unlikely that people in this position would be able to afford to purchase a property let alone get mortgage funding, even though they may aspire to home ownership.
So the effectiveness of any policy is questionable even if you could get an insurer to cover it.
There is possibly an opportunity to design an insurance-backed product that completely circumvents borrowers and simply provides lenders with a way of insuring their mortgage book below a certain level of defaults, thus enabling them to meet their consumer protection obligations as far as the regulator is concerned while protecting their balance sheet against bad debt.
In the same paper the CML urges the government to extend the range of free debt advice. This is sensible, given the explosion in debt management companies there has been as well as a fair amount of negative press in recent years.
It’s only with a free service that debt advice becomes impartial and does not compound the problem with hefty advice fees charged to those seeking advice.
The simple facts for clients remain – if you can’t afford to buy, then rent. If you get into trouble and you have equity try to realise the asset. If you have no equity, work with the lender to find a solution including the now fully regulated sale-and-rent-back sector which is rapidly coming of age.
The worst of all worlds is for home owners to bury their heads in the sand and hope the government will sort it out.