Pre-Budget Submission: Introduce a Repayable Mortgage Assistance Payment for borrowers in arrears

Brendan Burgess

Brendan Burgess

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Overview

  • Renters who are struggling with their rent get a Housing Assistance Payment (HAP).
  • However, mortgage holders get no assistance with their mortgage payments.
  • Mortgage holders who would meet the income criteria for HAP, should be given a Repayable Mortgage Assistance Payment – RMAP.
  • This would be paid as a repayable loan secured as a second mortgage on the home.
  • It would be repaid by the recipient
    • When their income recovers
    • When they sell their house
    • By their estate after they die
  • Interest would be charged on it.
  • It would be far better than the Mortgage to Rent Scheme
    • It would be far cheaper for the Exchequer
    • It could apply to far more borrowers
    • The mortgage holders retain ownership of their home
  • In April 2018, the UK converted their Support for Mortgage Interest from a welfare payment to a repayable loan. See Appendix for details.
 
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The Benefits of an RMAP

  • It would greatly reduce the psychological stress on mortgage holders in arrears.
  • It would make it easier for the lenders to restructure mortgages sustainably.
  • In most cases, the cost to the Exchequer would be recovered in full as it would be a loan rather than a welfare payment.
  • In cases where it is not fully recovered, the cost to the Exchequer would be low as mortgage rates are comparatively low. It certainly would cost the Exchequer much less than Mortgage to Rent.
  • It would reduce the level of arrears which is good for the lenders. And as the taxpayer owns about 50% of the mortgages in Ireland, it would be good for the taxpayer.
RMAP would be a huge help to people reaching retirement who still have a mortgage balance

Many people who had their mortgages restructured during the last crisis are going to reach retirement with a balance on their mortgage. Many of these will be able to repay that balance from retirement income. But many will not. Typically, they might have a mortgage of €50,000 on a property worth €250,000. It makes no sense to repossess that house. There is no risk to the lender. But the Central Bank rules classify this mortgage as unsustainable. An RMAP would make it sustainable.

Comparison of the cost of HAP with RMAP

I have chosen two case studies at the opposite end of the value spectrum – in one, RMAP is great value for the Exchequer, in the other it is not good value.

Case study 1 Couple with three children living in Dublin with a small mortgage on a cheap tracker

Income: €30,000
House value: €400,000
Mortgage: €100,000

1659532450132.png

With so much equity, the full RMAP would be recovered by the Exchequer.

The mortgage size and interest rate can be increased and it would still be far better value for the Exchequer than HAP.

Case study 2 A single parent with a big mortgage at 3% SVR living in Donegal (the lowest HAP area)

Income: €25,000
House value: €150,000
Mortgage: €200,000

1659532517583.png


This shows that HAP would be better value for the Exchequer than RMAP only in a few very extreme cases – a big mortgage at a high mortgage rate in a low HAP county.



RMAP would have a much wider application than Mortgage to Rent

The only government assistance available to borrowers in arrears at present is Mortgage to Rent.

MTR has a very limited application

  • The house must be in negative equity
  • The person must qualify for social housing
  • The house must be suitable for their needs
  • The person must be prepared to give up ownership of their home
  • The person must have their income permanently impaired with no hope of recovery
As a result of these restrictions, only 1905 MTRs have been concluded in the 8 years of its existence. A further 635 are being actively progressed. Even if all these go through, it is unlikely that more than 2,000 MTRs will be done in total.

RMAP would apply to a far wider range of people

  • It would be paid to people with positive equity in their homes
  • It would be paid to people whose incomes are above the MTR limits
  • It would be paid to people whose houses are worth more than the MTR limits
  • It would be paid to people who would not qualify for social housing
  • It would be paid to people who qualify for social housing, but whose home is too big for their housing needs
RMAP would be far cheaper for the taxpayer than MTR

  • For a typical €300,000 house, the council pays around €18,000 rent whereas the interest on a €300,000 loan at market rates would be about half that. Where the borrower has a tracker mortgage, the interest would be about €3,000 a year.
  • And, of course, the RMAP would be a repayable loan.
How would the banks react?

A lender would find it much easier to restructure and reschedule a loan if the borrower were to receive RMAP.

The lenders would be much less likely to be forced by the Central Bank to sell the mortgage to a vulture fund.

But an RMAP scheme would not solve the problem caused by the Central Bank’s ridiculous system for classifying mortgages as non-performing.
 
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The problems with Mortgage to Rent

How Mortgage to Rent Works

  • A mortgage holder is in deep mortgage arrears and negative equity - probably making no repayments at all on their mortgage
  • A private company buys the house from the borrower at a discount to market price and pays the proceeds to the lender.
  • The lender writes off the mortgage shortfall
  • The private company rents the house to the local authority at market rent - typically about €1,500 a month (?)
  • The local authority collects a local authority rent from the now tenant.
What is wrong with this?
  • The local authority is renting expensive properties on a long-term lease from a private company
  • The rent charged to the tenant is much lower than the rent being paid by the local authority
  • As the mortgage holder was paying very little to the lender, they are probably going to pay very little if anyting, to the local authority.
  • But the private company doesn't care. Their rent from the local authority is guaranteed.
  • The mortgage holder loses ownership of their home. The private company benefits from any uplift in property values.
  • The Mortgage Holder is effectively skipping to the top of the Housing List. While other people waits years on the Housing List, the Mortgage Holder gets a house of their choosing, their former home, paid for by the Council.
  • If the borrower's finances improve they can't get their house back so they don't have much incentive to increase their earnings.
  • With the increase in property values, many people in deep arrears are now in positive equity and won't participate in the Mortgage to Rent Scheme as they will lose their equity.
Why a Repayable Mortgage Assistance Payment is much better than Mortgage to Rent
  • The borrower retains ownership and thus retains responsibility for its maintenance unlike a MTR scheme where the tenant expects everything to be done for them.
  • It's much easier to administer
  • It can be short-term and discontinued when the borrower's circumstances improve
  • It has much wider application
    • The borrower would not need to be in negative equity
    • It could help out older borrowers who reach retirement with a mortgage balance outstanding (e.g. those on split mortgages and interest-only mortgages.)
  • It can be scaled up or down depending on need
    • Some people without any income would need the full amount
    • Others with a low income, might just need a supplement.
  • Mortgage Holders would have a loan and it would be in their interest to repay it.
 
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Appendix Support for Mortgage Interest in the UK​



Up until April 2018 SMI was an ordinary welfare payment i.e. it was not repayable.

Around 104,000 qualified for it – 40% of whom were pensioners.

  • It was paid directly to the lender.
  • It was paid to people on means-tested benefits who were not in full time work.
  • There was a two year time limit on it for those of working age.
  • There was no time limit for pensioners.
  • There was a waiting period of 39 weeks.
  • Loan cap: £200,000
  • It was paid at 2.6% of the mortgage amount, irrespective of the rate charged by the lender.
In April 2018, it was changed from a welfare payment to a loan

  • Interest is charged at the UK Government’s cost of borrowing
  • It was repayable when the house is sold or the recipient dies
As of March 2020

  • Only 21% of those formerly claiming it, have applied for it now that it is repayable.
  • 75% have declined the loan and are no longer receiving SMI
  • 4% have not decided or could not be contacted.
It’s very interesting that making a Social Welfare payment repayable cuts the demand by 80%!

Sources:

https://www.gov.uk/government/publi...terest-smi-from-a-benefit-into-a-loan#history
 
Brendan Burgess said:
The borrower retains ownership and thus retains responsibility for its maintenance unlike a MTR scheme where the tenant expects everything to be done for them.
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This is a really important part. The borrower still feels like it's their own home and has an incentive to maintain it in good shape and it's cheaper for the taxpayer.

Over decades this can make a huge difference to the residual value.

The ability for the state to have a call on private homes is not without downsides but already exists. The Fair Deal recoups hundreds of millions from estate sales fairly seamlessly. Low-interest loans are also a better option for remediating housing defects too.
 
Excellent stuff Brendan. It would be important to get this in place while the current government is in office as an SF led government would be less ideologically sympathetic to such a scheme.
 
Hi Purple

Thanks.

I see it as a practical issue rather than an ideological issue.

I met with the Junior Minister for Housing Damien English, in 2019, and he thought it was a great idea. His civil servants seemed to agree but were very defensive of the Mortgage to Rent for some reason.

In 2020, I sent it to Heather Humphries, Minister for Social Welfare, Michael McGrath, Minister for Public Expenditure - whom I have also explained it to when meeting him on other issues. I had dealt with Michael McGrath's economic team on the mortgage rates issue, so sent it to them as well.

But no action from any of them.

An insider suggested to me that the MTR costs only 30 million a year , so they can't be bothered with it. It will just never get onto their agenda.

Brendan
 
I like the idea of changing renters HAP payment to a repayable loan (but that's not the topic here). I cannot ever see that happening in Ireland.

So this would be a monthly payment, paid to mortgagees until their income recovers (otherwise the debt is taken from their estate or house sale)? Would it be paid directly to the bank in order to service the first mortgage?

I presume that there would have to be limits in line with the normal Central Bank mortgage limits. And the overall debt would have to be limited to the value of the house?
 
I am not proposing any change to HAP.

I am simply pointing out that people who rent property get help from the state when they can't afford it, but people who rent money don't get help. That is inequitable.

Yes, it would be paid directly to the bank. The Mortgage Interest Supplement was treated by a lot of borrowers as a social welfare supplement and not paid to the bank.

The Central Bank mortgage limits are for new mortgages. This would be for existing mortgages in mortgage arrears.

Brendan
 
People renting money are doing so because of their own choices. They weren't forced to take out a mortgage. Why should the State bail them out instead of spending money elsewhere?

I take it that your RMAP would only be available for a principal private residence?

I think the payment should be limited either to a percentage of the original mortgage monthly payment and/or the amount of the arrears and/or for a number of months/years.
 
Páid said:
People renting money are doing so because of their own choices. They weren't forced to take out a mortgage. Why should the State bail them out instead of spending money elsewhere?
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Hi Páid

If they lose their home, the state will have to turn to the Mortgage to Rent Scheme and pay a fortune to one of the private companies.

We generally encourage home ownership in this country for fairly good reasons.

If we help renters, why should we not help home owners?

And the help is very limited. It's a loan rather than a welfare payment which is paid to renters.

Brendan
 
I recall that argument being made (a long time ago on AAM) against helping people on an SVR who could not switch for whatever reason.

I'm not saying i agree with it.
 
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