Front line: A tweak in time
First Published 20 October 2016
It would only take a minor legal reform to save thousands of households from the threat of being repossessed
Free legal advice and the plan to expand mortgage rescue schemes run by local authorities may offer some crumbs of comfort to the thousands of householders in danger of losing their homes through arrears.
But the government could take much more effective action to lift the threat to people in arrears through a relatively minor legal reform.
Under the present law, if a mortgage lender seeks a court order to obtain possession of the house of a borrower in default, the court is empowered to adjourn the proceedings if that borrower is likely to be able to pay off the arrears ‘within a reasonable period’ while continuing to make regular monthly payments.
An important decision of the Court of Appeal in 1996 ruled that the ‘reasonable period’ could be the whole of the rest of the mortgage’s term. So if a person fell into arrears five years into a 25-year mortgage, the court could spread the payment over the remaining 20 years.
This power of the courts however only applies where lenders go to court. A decision of the High Court in October last year re-affirmed that lenders do not have to go to court to get possession. They can structure the loan so as to avoid the need for a court order.
The law on second or subsequent mortgages and other secured loans was amended in 2013 and came into effect last April. Although the steps required for recovery of any arrears are more cumbersome than for first mortgages, lenders can only enforce an agreement by first obtaining a court order. Once the matter comes before a court, the court has similar powers to reduce payments as on a first mortgage. In addition, the court has considerable powers under a ‘time order’ to provide for the debt to be paid ‘at such times as the court having regard to the means of the debtor thinks reasonable.’ It can also cancel payments altogether in certain circumstances.
The first reform that is needed is to extend the duty to seek an order from the court for repossession of a home to all lenders and not just lenders of second mortgages and other consumer loans. The second reform would be to extend the time to pay a consumer credit debt to first mortgages. The courts cannot extend the term of a first mortgage: they must operate within the term provided by the lender. But an amendment could give the courts the power, in determining the reasonable period to pay arrears, to extend the length of the mortgage up to a maximum of 50 years. This would automatically reduce the monthly payments on a mortgage although it would increase the amount of interest payable.
Such a proposal is likely to be opposed by lenders as an interference with the freedom of contract. But the principle already exists in relation to consumer credit loans and the practice would be met by a further proposed reform. This would be in the form of a government guarantee to pay the difference between the monthly payment for the term originally provided by the lender and the new monthly payment of an extended mortgage fixed by the court. The payment would be on a sliding scale: 100 per cent of the difference for the first two years; 75 per cent for the third; 50 per cent for the fourth and 25 per cent for year five.
In return, lenders would agree not to seek repossession for the five years or apply different interest rates to these mortgages than to any other of their mortgages. After the five years, lenders would be entitled to go back to court and ask for the length of the mortgage to be reduced -possibly returning to the original term of the mortgage. The same rules would be applicable to consumer credit loans.
The cost to public funds will be manageable and probably less costly than having to provide for a huge influx of homeless people. Banks and building societies would avoid the considerable cost of repossession orders. And the government would be seen to be helping the deserving -homeowners and their families -without ‘rewarding’ the banks whose reckless policies contributed to our present plight.
The whole reform could be brought about in a short Mortgage Arrears Relief Act which could be in place by Christmas.
is professor of law at Birkbeck College.