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Homeward bound

31 May 2019 / legislation Print

Homeward bound

Significant changes have been made recently to the mortgage-to-rent scheme. Increased property valuation limits have been introduced, as well as greater flexibility in respect of household composition.

In addition, the scheme has been opened up to private-sector participants who can deliver mortgage-to-rent at greater scale to thousands of homeowners in long-term and unsustainable mortgage arrears.

Mortgage delinquency

The changes made to the scheme mean that mortgage-to-rent is likely to be the predominant solution to mortgage delinquency.

For the first time since the start of the mortgage arrears crisis, there is now a deliverable solution in place to assist homeowners in the greatest need of support.

The mortgage-to-rent scheme was introduced in 2012 following a recommendation in the Keane Report.

Under the scheme, a homeowner in mortgage arrears would become a social-housing tenant of an ‘approved housing body’ (AHB), paying a differential rent based on their income.

The basic mortgage-to-rent model was sound. Homeowners gained certainty around their long-term housing needs.

From the State’s perspective, it allowed for the provision of alternative housing for homeowners at risk of losing their home in a period of acute supply difficulties.

Uptake

The rate of uptake for mortgage-to-rent with AHBs to date has been low, but it has always been acknowledged that mortgage-to-rent should be a solution for a greater number of homeowners.

From the introduction of the scheme in 2012 up to the end of the first quarter of 2019, only 459 mortgage-to-rent cases were completed by the various AHBs (despite total applications of 4,475 during the same period).

The failure of the scheme in terms of numbers participating was often attributed to the multitude of stakeholders involved and excessive bureaucracy.

However, there are more straightforward explanations for the scheme’s shortcomings in this regard. A substantial number of mortgage-to-rent cases do not complete for the simple reason that none of the AHBs express an interest in acquiring the subject property.

There are limitations, for example, in the geographical areas covered by the AHBs. In addition, local authorities had not been progressing applications if the property was in an area with no future social-housing need.

These limitations are not very satisfactory to homeowners seeking a resolution in difficult circumstances.

The number of completed mortgage-to-rent applications over the seven-year period referred to above (459) must also be viewed in the context of the latest mortgage arrears and repossession statistics published by the Central Bank.

Arrears

As at the end of the fourth quarter of 2018, there were 27,998 mortgages in arrears of two years or more. Over the course of the final quarter of 2018, only 236 orders for possession were made by the courts.

Long-term arrears cases continue to persist, quarter on quarter, despite the improving economy, and repossession cases are still getting mired in the courts system.

There has clearly been an enduring requirement to introduce proper measures to address the problem of long-term mortgage arrears.

Debt write-downs and repossessions in the numbers required have not been a feature of the Irish experience, and this is unlikely to change.

This was all identified in the Government’s action plan for tackling the housing crisis, Rebuilding Ireland, which was published in July 2016. Improving mortgage-to-rent was an obvious and potentially high-yielding solution, and a review of the scheme was commissioned.

The Government’s Review of the Mortgage to Rent Scheme was subsequently published in February 2017. The review recommended a number of changes to the scheme.

Access

The changes were aimed at making the scheme quicker, more transparent, and easier to navigate and access.

The review also concluded that the financial model for the scheme might not be capable of delivering the number of successful cases that should benefit from the scheme over time.

It was noted that alternative funding options were available and that the inclusion of private-sector participants could allow the scheme to operate at high volumes in order to meet the needs of more homeowners.

Criteria

A number of the revisions recommended in the review in respect of broader eligibility criteria and higher valuation limits have been introduced.

After taking account of capacity within the AHB sector, Home for Life was approved in July 2018 as the only private-sector participant in the expanded scheme.

To take part in the expanded mortgage-to-rent scheme, homeowners must:

  • Have completed the mortgage arrears resolution process with their lender,
  • Be eligible for social-housing support in the local authority in whose area the property is located,
  • Not own any other property,
  • Live in a property that suits their needs,
  • Have a property in negative equity, or positive equity of no more than 10% of the open market value of the property, to a maximum of €15,000,
  • Not have cash assets worth in excess of €20,000, and
  • Have a long-term right to remain in Ireland.

In addition, certain property valuation limits apply. The property must be of a value no more than €365,000 for a house and €310,000 for an apartment or townhouse in the areas of Dublin, Kildare, Meath, Wicklow, Louth, Cork and Galway.

The maximum values for the remainder of the country are €280,000 for a house and €215,000 for an apartment or townhouse.

Net household income

In terms of income qualifications, the key criterion is that net household income does not exceed the income limit for social housing within the relevant local authority.

The income limits vary by local authority, but are in a range from €25,000 to €35,000 for a single person (after deduction of taxes).

Further allowances are in place for additional adults and children in the home. The maximum income allowed is €42,000 (net of tax).

The social and economic benefits to be derived from mortgage-to-rent are obvious, and the scheme offers an effective solution to a complex issue. The scheme’s aim is to prevent homeowners from losing their homes.

Affordable

Following the sale of a homeowner’s property to an AHB or Home for Life, an income-based affordable rent is payable by the homeowner, who then becomes a tenant in the property.

The proceeds of sale of the property go towards the outstanding mortgage debt. Subject to prior agreement with the lender, the residual debt will be written off.

In addition, homeowners are granted an option to buy back the property. The property will be maintained and repaired by the landlord as part of the lease arrangements entered into.

Successful mortgage-to-rent applications also put a stop on costly enforcement actions taken by lenders, and avoids the social cost of a homeowner having to find alternative accommodation in an already crowded private-rental market.

Crisis

It is over ten years since the mortgage arrears crisis first hit. The level of repossessions and debt write-downs has simply never materialised at the expected rates.

The changes to the mortgage-to-rent scheme, and the benefits that private-sector participants can bring in terms of scale of operation, constitute the first meaningful actions to properly deal with the most persistent mortgage debt.

Viable solution

The focus of all stakeholders is now on mortgage-to-rent as the only viable solution that can be delivered at the level required.

Thousands of homeowners at the most serious risk of repossession have finally been given an opportunity to make a fresh, mortgage-free start in their existing home.

Raymond Lambe
Raymond Lambe
Raymond Lambe is a senior associate in OSM partners