Chapter 1: Introduction
Part 2 of the Housing (Scotland) Act 2006 creates a new Scheme of Assistance for housing purposes, based on the principle that individual owners have primary responsibility for maintaining their properties in good condition, but with assistance available where necessary. The Act introduces new powers for local authorities to extend, among other things, financial assistance from primarily grant to include standard and subsidised loans.
The core of the framework for financial assistance is around the following principles:
- Owners are primarily responsible for the costs of maintaining their properties
- Owners must use all reasonable means at their disposal to meet those costs which includes using savings and affordable commercial lending.
Lending is an extremely complex and potentially costly area to venture in to. Whilst some local authorities have in the past acted as lenders of last resort, the advent of new legislation such as the Financial Services Authority's Mortgage and Home Finance Conduct of Business rules present fresh challenges. There are many considerations that local authorities will have to make if they are to lend compliantly and avoid future claims of mis-selling associated with the provision of financial advice and lending products.
The Scottish Government is providing guidance to local authorities on how to implement the Scheme of Assistance and this report concentrates on the provision of financial assistance.
The Act states that local authorities can provide owners with access to standard loans if they cannot obtain a sufficient loan on fair terms from a commercial lender. This requires an understanding of the commercial market and also a process for ensuring that owners have searched the commercial market.
This report looks at the commercial market and the products currently available for owners in that market to finance home repairs. It highlights owners that the market does not serve and what products local authorities may have to provide to these owners if the shift from grants to loans is to be effective. Financial regulation is at the heart of any financial assistance and this is covered in some detail. The report also looks at schemes currently operating in England and Wales and considers who in Scotland could deliver lending to owners that are not served by the commercial market. In view of the limited options available to local authorities consideration is given to delivering lending through a new special purpose unit. Finally the report considers a model for local authorities to provide financial assistance under the Act.
The report provides an overall summary of the concepts of lending which is intended to inform and assist the Scottish Government when writing guidance and consulting on financial assistance under the Housing (Scotland) Act 2006 Part 2.
This report was written during the summer of 2007 prior to developments in the US sub-prime market which led to a credit crunch in the UK.
During the first quarter of 2008, many sub-prime lenders exited the market and some prime lenders tightened their lending criteria as the availability of funds to lend became scarcer.
The credit crunch has also affected the securitisation market with the Chancellor announcing in April 2008 that the recent and ongoing disruption in global financial markets had raised complex issues about the functioning of the mortgage-backed securities markets.
This has led to an overall reduction for some lenders in the amount of capital that they have available to lend and sourcing a sufficient loan on fair terms from a commercial lender may be more difficult for some owners. Availability of funds from commercial lenders on a larger scale, including securitisation may also be more difficult albeit that this was a longer term objective contained within the report and the market will continue to adapt and develop over time.
The situation is evolving almost daily and it is difficult to predict when the market will stabilise. In April 2008 the Chancellor of the Exchequer, the Chief Secretary to the Treasury and the Housing Minister hosted a meeting with the mortgage and lending industry to discuss what the industry could do to support borrowers in difficulty during the period of turbulence in global financial markets.
The Bank of England announced on 21 April 2008 that they would provide special liquidity to the banking sector in an attempt to tackle funding market difficulties, helping to bring further stability and confidence to the financial markets. The measure is intended to help banks and building societies ensure that competitive mortgage products are available to potential borrowers.
The lending industry is also discussing with the Government where they can work together to help ensure borrowers are treated fairly and are helped through this period.
The perceived impact of the credit crunch in relation to the contents of this report have been covered further in Annexes Four and Five. In the short term, it is anticipated that the credit crunch will result in more owners being unable to access commercial lending and it is considered that the model proposed for delivery of lending by local authorities within this report remains appropriate.