Oct 2011 – Repossession or assisted voluntary sale?

Paul Smee, director general of the Council of Mortgage Lenders, looks at the issue of assisted voluntary sales of homes - an alternative option to repossession for struggling borrowers

Last month saw the publication of a report focusing on a challenging question for the lending industry, one that we believe deserves wider and more careful consideration.

In what circumstances should a borrower in arrears and with no chance of recovering his position be encouraged to sell his home voluntarily, rather than going through the ordeal of having it taken into possession through the courts?

It is a question that lenders and money advisers have so far found difficult to get to grips with. This is partly because it typically arises only at an acutely sensitive time for the borrowers and lenders concerned, at the point when home-ownership is no longer sustainable and options may be limited and difficult to confront. But it is precisely because the choices are stark at this stage that we need a frank debate about how we can get to the best result for the borrower, and how lenders and money advisers can help.

The report sparking this debate has been published by the National Homelessness Advice Service and Shelter. The fundamental question it explores is whether assisted voluntary sales (AVS) could smooth a potentially difficult transition from home-ownership to another form of tenure.

The report, researched by the University of York, argues that, in the right circumstances, AVS may be a better option than mortgage possession. It also highlights some of the challenges to be confronted before AVS can be used in the most appropriate way.

For borrowers, one of the key difficulties may be in understanding (or even accepting) that owner-occupation is no longer sustainable. The report argues that, once borrowers understand their position and what AVS entails, they often see advantages in the approach. They see it, for example, as a way of avoiding the stress and stigma associated with a court action for possession. The potential for lenders to help with matters like up-front estate agents’ fees is also welcome, with AVS seen as providing breathing space to manage one’s way out of home-ownership, organise alternative housing and avoid litigation.

Debt advisers

With many home-owners apparently unaware of the option of AVS, there is an implied role for housing and debt advisers. Borrowers need to understand all their options earlier in the process, when they may have more scope to manage their way out of home-ownership. Advisers can help the borrower face up to the unpleasant reality that home-ownership is no longer sustainable, and offers an exit route that does not have to end with court action.

Local authorities

The report also argues that local authorities could make it easier for borrowers to choose AVS by making sure that it does not unfairly restrict their future housing options. As things stand, even if a borrower would prefer a voluntary sale to possession, they may decide against it because they fear the local authority will rule that they have intentionally made themselves homeless, and are therefore not entitled to help with re-housing.

Lenders

Finally, lenders could help by exploring the potential for developing a more consistent approach to AVS across the industry, with a clearer understanding of how – and in what circumstances – it fits in the range of options they can offer to borrowers in difficulty.

At the moment, individual lenders often take different approaches to AVS, partly because it is not yet fully developed as a concept, and partly because the profile of customers in arrears differs from one firm to another. The report also says lenders are concerned about managing borrowers’ expectations on how much help they are able to offer.

Some lenders remain uncertain about the merits of AVS, do not see much demand for it, or consider it too problematic to be effective. Those who are prepared to consider AVS may still have reservations about it. And others who are interested in exploring its application could benefit from an industry-wide approach focusing on how it could work in practice.

The report says that lenders need a clearer understanding of the regulatory, reputational and commercial implications of AVS, which are seen as pitfalls by some firms. But there may also be reputational and business benefits for the industry, with AVS offering the potential for a lower number of cases of possession and reduced losses through negative equity (with houses sold by the occupier likely to realise a better price than empty homes that have been taken into possession).

With arrears and possessions set to rise in the challenging economic conditions ahead – and lenders under pressure both to show forbearance and to ensure this does not stoke prudential concerns – the time is ripe for wider debate of the potential of AVS. We will facilitate debate, and we will be considering the issues with lenders. In the meantime, I would be delighted to hear your views at paul.smee@cml.org.uk.