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Mortgage rescue: does it work?

11 September 2009

Despite its good intentions, is the Government’s Mortgage Rescue scheme working for Registered Providers (RPs) and – more importantly – vulnerable households and families?

As is apparent from the front page of any newspaper, the onset and continued ill effects of the credit crunch has proved to be a challenging time for many vulnerable families with financial difficulties.

Whilst there is reason to be thankful that the level of repossessions in England and Wales is falling, we must consider the role and impact of mortgage rescue in the grand scheme of seeing vulnerable families through difficult times.

Since its advent in January, the Government’s original expectation for this £200m scheme was to assist up to 6,000 families over the next two years. As many critics have already highlighted, to date the scheme has had an extremely lethargic start: only one family received Mortgage Rescue help in its first three months.

To make matters worse, statistics compiled by the Council of Mortgage Lenders show that of the 11,400 repossessions in the last three months, 26% have been on a voluntary basis. Commenting on the statistics, the Communities and Local Government (CLG) said some of those homeowners could have been eligible for support. This being an obvious opportunity for Mortgage Rescue to, one must question why it failed to.

One might argue that the scheme faces a major problem in how it is structured. Mortgage Rescue permits eligible homeowners two ‘rescue’ options:

Shared equity

Shared equity is an option available to homeowners with at least a 25% equity share in their home. In this option an RP agrees to pay part of the homeowner’s mortgage in exchange for an equity share in the property. This is unpopular, because homeowners are left with manageable mortgage repayments at the expense of losing part of the equity in their homes.

Mortgage to rent

Mortgage to rent has been received as the more palatable of the two options: an RP purchases the property and agrees to pay the outstanding mortgage. In return, the homeowner becomes a tenant and makes rent payments (lower than market rent) to the RP.

Both options may have sufficient flexibility for a homeowner to steady their income and buy back the equity share or property from the RP at a later date.

The spirit of Mortgage Rescue is intended to be a scheme committed to supporting and sustaining communities, in line with the values and objectives of RPs. This intention is apparent, and yet the scheme is still only taking baby steps eight months on.

Whilst the benefits and practical idealism of Mortgage Rescue have unfortunately been overshadowed by general criticism by both the press and political parties, this is not to say that they are without merit. Criticisms of the scheme have been scathing, but it is also important to note that the process was inevitably slow. Lenders are reluctant to take part and RPs are, understandably, shying away from the idea of spending large sums on a scheme that may or may not work for them.

A well informed RP may benefit greatly from the scheme and assist in its overarching objective to help vulnerable homeowners and families, particularly in these difficult times. The scheme offers a 55% grant to RPs towards the purchase of a property, ensuring the RP acquires a property at a substantial discount. In addition, the RP may be reassured by the fact that it will have a willing tenant already resident at the property. Should there come a time when the RP chooses to sell the property, it would also receive the benefit of sale at the prevailing market rate.

Whilst Mortgage Rescue has not yielded the glamorous results expected, it is likely that more positive results are just over the horizon.

What does this mean for RPs?

There are various problems with Mortgage Rescue, which may be attributable to various factors: RPs are reluctant to devote money to the scheme because many cannot afford to devote such large sums to an initiative where there is a pressing concern that it may not work; independent lenders do not appear inclined to want to take part; and vulnerable families, despite their perilous situations, do not appear to favour giving up legal ownership of their homes.

However, the benefits of the scheme for RPs who are aware of the pitfalls may outweigh the disadvantages, and the slow take up of the scheme should not deter them from considering this as an excellent business and socially moral opportunity.

If you would like to discuss this article further, please do not hesitate to contact us.

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