Good News For Worried Homeowners

The government is desperate to avoid a steep rise in home repossessions. It will improve the benefits on offer to homeowners and has ordered lenders to show restraint...

Although the government had stepped in to rescue some of the UK's biggest banks, the outlook for the UK housing market continues to look pretty grim. House prices are falling steeply and mortgage lending is as weak as a kitten, with approvals down almost three-quarters (74%) on last year. In addition, unemployment is rising as tens of thousands of jobs are cut each week.

What's more, with little or good news on the horizon, it's likely that mortgage arrears are likely to rise -- even if the Bank of England cuts its base rate again this Thursday. Of course, this gives the government a giant headache, as the last thing it wants is to read more headlines about sharp increases in the number of homes being seized by banks.

Hence, the government is desperate to do all it can to keep owner-occupiers in their homes. Thus, it will be pleased by these three events:

1. City watchdog tells lenders to be fair

The Financial Services Authority (FSA) has written to the bosses of all mortgage lenders, giving them until 31 January to ensure that customers in arrears are treated fairly. It has ordered banks and building societies to review their policies on mortgage arrears and repossessions, with the aim of improving weaknesses in this area.

Under its `Treating Customers Fairly' principle, the FSA can take action against financial firms which fail to follow the spirit and letter of its regulations. The FSA is particularly concerned about the actions of firms which lend to low-income customers and those with poor credit ratings, the so-called `impaired credit' market.

As the FSA makes clear, `repossession should be a last resort', so struggling borrowers can look forward to improved treatment. Otherwise, the regulator will crack down by fining or reprimanding offending firms.

2. RBS doubles its grace period

In last week's Pre-Budget Report, the Chancellor announced that leading lenders had agreed not to repossess residential properties within three months of owners going into arrears.

On Sunday, Royal Bank of Scotland (the UK's seventh-largest mortgage lender, with a 5.7% market share in 2007) announced that it would not take legal action against borrowers until they are six months in arrears. Other lenders recently agreed to allow three months to go by before taking legal action against borrowers who have fallen behind with their monthly repayments. Thus, the owner of NatWest is giving its customers twice as much leeway.

Then again, since the spectacular failure last week of RBS's latest right issue, taxpayers now own 57.9% of the struggling bank. Hence, it comes as no surprise that the new boss of RBS wants to get on the good side of ministers and taxpayers by taking some of the strain off borrowers in difficulty. Think of it as a `quid pro quo' from RBS for taking £20 billion of taxpayers' cash!

Obviously, this is good news for RBS/NatWest borrowers who have recently lost their jobs and are worried about losing their homes, too. By holding fire for another three months, RBS has given these homeowners extra breathing space to find another job, get back into work and start tackling their mortgage arrears. This pledge will last until the end of 2009 at least.

Then again, as arrears mount up in the face of a sickly housing market, this could backfire and simply delay the inevitable for the worst-off borrowers. With house prices falling every month for more than a year, selling further down the line could mean getting a lower price. Thus, some borrowers would be better off selling up quickly, rather than taking their chances on a future recovery.

I've no doubt that other mortgage lenders will follow in RBS's footsteps. In particular, there will be government pressure on the nationalised and part-nationalised lenders: HBOS/Lloyds TSB (£17 billion bailout), Northern Rock and Bradford & Bingley (both fully nationalised). So, expect these banks to give their borrowers a six-month grace period very soon...

3. Improved benefits for out-of-work homeowners

The government has also announced improvements to Income Support for Mortgage Interest (ISMI), one benefit paid to out-of-work owner-occupiers. In September, the government announced that it would cut the waiting period for ISMI from 39 weeks to 13 weeks from April 2009. Last week, it brought forward this improvement to January. Hence, throughout 2009, this benefit will kick in six months earlier than it did this year.

At the same time, the maximum mortgage on which ISMI is calculated will be increased from £100,000 to £200,000. This upgrades ISMI to account for the large increase in mortgage borrowing and house prices since ISMI was last changed in the early Nineties. This is a positive step for people who are unemployed or off sick and worried about their mortgage interest.

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