Eliminating the negative
With intervention needed to rescue the housing market, Clifford German explores the options
Sunday 11 June 1995
Despite the drop in interest rates over the past two years, which left borrowers with more cash to repay debt, more than a million home-owners, perhaps 10 per cent of mortgage debtors, still owe more than their properties are worth.
Property prices are looking weak, and further falls in house prices will worsen the problem again. Even if interest rates stay at current levels, according to Rob Thomas at UBS Global Research and other experts, the proposed reductions in mortgage interest support for home owners who lose their jobs will cut property prices by a further 2 to 5 per cent and pull a further 500,000 into negative equity.
Provided they can continue to pay monthly mortgage payments, they will not be evicted, but owners with negative equity are unable to move, because they are unable to redeem their existing mortgages.
Some lenders, such as the Nationwide Building Society and Lloyds Bank, do have special negative equity schemes for customers with good track records who want to move house. But so far, fewer than 5,000 home owners have been able to take advantage of them.
If the situation continues, more and more of these unhappy owners will lose hope and simply hand in the keys rather than wait for eviction. In the meantime they are a dead weight on the housing market, and that affects the whole economy.
A 10-15 per cent recovery in property prices would probably solve the problem, but it is looking less and less likely for the forseeable future. Until now the Government has been unwilling to intervene, and lenders have by and large avoided unorthodox solutions on the grounds that it might involve throwing good money after bad.
Many borrowers in negative equity blame the lenders for leading them into debt and abandoning them. Two of our readers speak for thousands of others. Ashok Ahir of Hounslow believes that, with or without government encouragement, lenders have a moral duty to help borrowers who find themselves saddled with negative equity, and should offer them opportunities to take advantage of discount mortgages to start reducing their debts.
If such help were also extended to borrowers in arrears and the half- million households having mortgage payments met by income support - and they could take advantage of the competitive offers - the cost of providing income support could be halved from the present pounds 1.2bn a year, Mr Ahir claims.
Peter Stallard, a retired insurance broker in Stamford in Lincolnshire, takes a more robust view of the problem. He also believes lenders were grossly negligent in pushing mortgage loans in the 1980s. He suggests: "Home owners with negative equity should club together to find a good lawyer to obtain legal aid and institute a class action for negligence against mortgage lenders."
But the problem is unlikely to go away between now and the next election without intervention or a change of heart among commercial lenders. If the Government does target the problem, it will have to decide whether relief comes from a stimulus to the housing market as a whole, through abolition of the 1 per cent stamp duty on sales of property above pounds 60,000, through a return to 25 per cent mortgage interest tax relief or an increase in the long-standing pounds 30,000 threshold for tax relief, or whether help should be targeted specifically at home owners who can prove they are suffering from negative equity.
Tory backbenchers led by David Shaw, MP for Dover, are now asking the Chancellor, Kenneth Clarke, to increase tax relief to all owners with negative equity to the standard rate of tax, at an estimated cost of pounds 700m a year to the taxpayer. Borrowers would then be expected to hand the subsidy over to reduce their mortgage debts.
It would not, however, be as simple as it sounds - even if other borrowers agreed that it was fair to offer selective help. To assess who is eligible, surveyors might have to value as many as 2 million homes at an average cost of pounds 100 a time, and it would not be easy or cheap to administer the scheme.
There is little doubt that if a U-turn did become necessary, the fairest and most cost-effective measure would be the abolition of the plan to reduce financial support for home owners who lose their jobs - a plan that is to take effect in October.
Research by the Department of Employment suggests that commercial mortgage protection insurance policies will be no substitute for this support, and affordable options are still on the drawing-board.
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