Walker Morris partners Louise Power and Karl Anders explain why shared ownership mortgages might be a calculated risk worth taking for high street lenders throughout the UK.
Earlier this year the Office of National Statistics confirmed  that the cost of the average home in England and Wales has risen by 259% since 1997, while earnings increased only 68% in the same period. The average house now costs 7.6 times average annual earnings, compared to 3.6 times in 1997. The gulf is even wider in parts of the South East, where house prices can be 26.4 times average earnings. This affordability gap represents a real barrier to home ownership for many, and has an inevitable knock-on effect for mortgage lending.
With pressures facing borrowers of all ages and across all socio-economic groups today, it is likely that affordability concerns will continue, and even increase, over the coming months and years.
The residential mortgage market has already started to respond – to some extent. Low Cost Home Ownership schemes (such as shared ownership and shared equity arrangements) are now available, but consumer demand already outstrips supply.
At the end of 2016, despite the affordability issues highlighted, shared ownership housing represented only 0.4% of the housing stock in England (some 200,000 properties); 1.3% of total residential mortgages held; and only around 0.7% of the total value of mortgages.
By comparison, shared ownership is popular and working well in Northern Ireland, where lenders have supported the purchase of more than 25,000 shared ownership properties – a vastly greater proportion of the market.
In Scotland, in the period since 2010, there has been a reduction in owner-occupied housing generally. That is thought to have been the result of economic downturn and the difficulty that many prospective purchasers have experienced in securing a mortgage . In addition, shared ownership is not as prevalent in Scotland as it is in England – there is no nationally recognised scheme and only a limited number of individual housing associations and/or developers providing some homes on a shared ownership basis.
Whilst it may be unlikely that the ambitious targets put forward in the Government’s Shared Ownership and Affordable Homes Programme 2016 to 2021 will be met, feedback in relation to shared ownership in particular is clear, with UK Finance (previously, the CML) confirming  that developer housing associations plan to produce 3 times as many shared ownership units per year between now and 2019 as they did in 2015/16. The UK Finance/CML research also suggests, however, that there is a real risk of the market expanding beyond the point at which there is mortgage lending capacity to support it. That, surely, would be a lose/lose situation for lenders and their customers alike.
So, why is there a reluctance on the part of lenders to enter or expand the shared ownership market? Might there, in fact, be real potential for lenders taking a calculated risk to operate within that market and to reap significant financial and reputational reward?
In the 2008 case of Richardson v Midland Heart Ltd , the High Court confirmed that a shared ownership lease is an assured tenancy to which the Housing Act 1988 (the Act) applies. That means that, if and when a shared ownership lease is terminated by enforcement of a court order for possession made under that Act, there is no option for relief for the leaseholder or its lender, with the latter’s security being irrevocably lost.
That somewhat draconian ‘worst case’ scenario has meant that, almost straight off the bat since 2008, shared ownership has had a hesitant, and sometimes even an outright adverse reception from many mortgage lenders. Even today, only around 15 – 20 lenders operate in the market, and the majority of those are small, locally-based building societies.
There is also a long list of presumed risks which many lenders associate with shared ownership, including:
- the perception of a higher risk of default (albeit UK Finance/CML evidence simply does not support this assumption)
- lack of knowledge and understanding of staircasing arrangements
- perceived complexity in arranging a shared ownership purchase (for example, because the purchaser’s solicitors must obtain housing association/landlord approval of the funding arrangement and consent to the mortgage offer; or because of the need to obtain a separate memorandum of staircasing; or because there are sometimes restrictions on eligible properties or purchasers and sometimes restrictions on re-sale; and so on)
- perceived risks and complexity associated with dealing with a housing association landlord if/when the customer falls into rent arrears;
- additional risks and complexity if/when the customer commits any other lease breach (and one which the lender cannot necessarily remedy (unlawful subletting, for example))
- the fact that the closer loan:value weighting on shared ownership arrangements can make such mortgages more expensive and therefore potentially less commercially attractive
- a potentially greater risk of exposure where there are high concentrations of shared ownership mortgages on any one particular site/housing development.
Effective risk management
Possession for arrears or breach of condition
However, in reality, the majority of the apparent risks which are highlighted above are not necessarily specific to shared ownership arrangements, and indeed are common to the majority of leasehold lending scenarios. There are therefore a variety of options open to lenders to protect shared ownership leasehold security.
For example, as an alternative to recovering possession for mortgage arrears, Walker Morris’ Banking Litigation team has recently acted for a number of retail lenders who have adopted a different enforcement policy. This involves seeking possession of leasehold properties on the basis of repeated breach of mortgage conditions where the customer fails to meet their leasehold obligations. There is a high rate of outright possession orders in such cases, which provide a resolution either due to recovery of possession or act as significant leverage to ensure customer compliance. This approach can work as a ‘wake up call’ for customers, resulting in them properly addressing lease and mortgage compliance, and affordability issues generally, where they may previously have been unwilling to do so. As well as resolving the security risk for lenders, this has enabled customers to continue living in their homes. This innovative approach can therefore be adopted as an additional protective option in shared ownership scenarios.
Notice and Mortgage Protection Clauses
Shared ownership leases typically include a provision which obliges shared ownership landlords to give any mortgage lender a certain period of notice prior to possession proceedings being brought, so as to give the lender an opportunity in which to take appropriate action to protect their security. That provision alone can, in some cases, place the lender in a better position than in other residential lease arrangements, where the giving of any notice to the lender (or not!) is likely to be entirely at the landlord’s discretion.
Furthermore, since 2010, housing associations’ shared ownership leases must contain a mortgage protection clause, which protects a lender from significant loss should it have to take possession of the property on default.
There are also practical steps which lenders can take to protect themselves when dealing with shared ownership lending, to address the perceived risks mentioned above. These include, staff training; the use of standard documentation and instructing specialist solicitors. These measures can overcome any perceived problems associated with a lack of knowledge or understanding of how shared ownership schemes and ancillary staircasing and other arrangements work.
From a commercial perspective, lenders may also deploy policy decisions not to lend on too many shared ownership properties within any one housing development, or adopt maximum permitted staircasing percentages. It is also open to lenders to negotiate with housing associations to refuse or remove certain onerous or unnecessary eligibility or sale conditions; and to offer interest rates on shared ownership mortgages which take into account the relevant loan:value weighting. Of the lenders who have operated within the shared ownership market to date, many have reported that there are also corporate social responsibility (and related reputational) benefits to consider.
A key area for improvement, for housing association/landlords and mortgage lenders alike, is, however, the presentation/branding of shared ownership schemes and the drafting of internal and external communications that relate to them. Thoroughly reviewing unclear marketing materials, and simplifying and streamlining the documentation and processes involved, should go a long way towards encouraging profitable engagement in the market at all levels and by all stakeholders.
 Statistical bulletin, Housing affordability in England and Wales: 1997 to 2016
 Housing Statistics for Scotland 2016: Key Trends Summary; CML Housing in Scotland: a key political issue, May 2017
 CML Research, Shared Ownership: Ugly sister or Cinderella? October 2016
  L&TR 31