The repossessions timebomb: how to help homeowners at risk of default

Against the backdrop of the most prolonged recession in living memory, the relatively small increase in homes being repossessed has been a welcome surprise. Numbers did spike, but they never reached the levels of the early 1990s and have been coming down steadily over the last four years.

This owes something to government support programmes, but it owes more to the decision by the Bank of England to slash interest rates to a historic low of 0.5%. With the case for a rise in interest rates building, and significant numbers of households still weighed down by debt, the concern is that the crisis averted in 2008 may yet arrive.

One in five people with a mortgage say they struggle to meet their repayments, a figure not much lower than in 1992 when the interest rate was in double figures.

The majority of households will be able to navigate rising rates, but for those who are already struggling to make ends meet, the rate rise could lead to a big increase in repossessions.

Some would argue that this is a natural next step and that ultra-low rates have simply delayed the inevitable for a group of borrowers for who home ownership was never a good idea. But repossession brings with it wider economic and social costs.

Repossession, particularly if concentrated in specific areas, can increase the amount of empty homes which in turn breaks up communities, increases social problems and reduces the value of neighbouring homes. The borrower may be written off the bank’s balance sheet, but the liability may simply be transferred to the taxpayer in the form of increased demand for social housing and housing benefit.

And selling the property may allow the debt to be paid, but it doesn’t automatically improve the household’s finances or address its new housing needs.

So if the repossessions timebomb is threatening to explode after years of waiting, how can we help those affected?

One possible route that would tackle long-term affordability and allow the borrower to stay in the home, would be to turn the house into a something like a shared ownership property. The scheme could involve a housing association taking a stake in the property, leaving the owner to service a smaller mortgage and pay a subsidised rent to the housing association for the part of the property they no longer own.

Monthly housing costs would be reduced, the owner would stay in the home, the taxpayer avoids the frictional costs of repossessions and the lender recoups a significant proportion of the loan.

The cost lies in the difference between the subsidised rent and the housing association’s required return and there are a number of different ways of bridging this gap.

Government grant is central to this, as it is in normal shared ownership properties. It reduces the acquisition cost and allows them to charge a sub-market rent. But government may not have to shoulder the entire burden.

If there is equity in the property – that is, if it is worth more than the borrower owes – then this can be used to reduce the acquisition cost and so requires less grant. The homeowner would effectively give up their equity in order to stay in the home and in the local area – a high price, but one that may be worth paying to avoid disruption to schooling or loss of work.

And there may also be a role for lenders. If an existing borrower is now servicing a lower debt burden with improved affordability on housing costs, the risk of that borrower falling behind on payments or defaulting is reduced. If this improved risk profile were reflected in a lower mortgage interest rate, the borrower would be able to retain a higher stake in the property, the housing association would have a smaller acquisition to fund and the need for government grant would be reduced.

This is about dealing with a finite group of borrowers: those who borrowed during a period of irresponsible lending and who now risk losing their homes as rates go back to normal. There will be a cost to keeping them in their homes, one that could be shared between the taxpayer (grant), the borrower (equity) and the lender (financing rates). How that cost is split is worth exploring, as the cost of the alternative – however you care to measure it – will be high.