The new MPC regime
Changes to the Mortgagee Protection Clause within shared ownership leases should, hopefully, encourage more lenders to lend on these properties. Harry Peradigou of Matthew Arnold & Baldwin LLP explains
The shared ownership house purchase scheme was set up to help people who otherwise would not be able to do so get onto the property ladder. Many housing associations (HAs) have long waiting lists of people wanting to purchase a shared ownership property. Most of the applicants are unable to purchase via the conventional routes - either because they cannot raise the 10-15 per cent deposit needed or because they cannot obtain the funding to assist with the purchase. The scheme also assists those people in ascending the property ladder, as and when they can afford to do so.
A HA will agree to sell a property to someone from its list, but the HA retains a share in the property whilst the buyer owns the other share. Using the common split of 50 per cent each, a lender will provide a mortgage on the basis of the 50 per cent share being purchased by the buyer, and the buyer will pay an enhanced rent to the HA until the buyer acquires the remaining 50 per cent share from the HA. The purchase of this additional share is known as “staircasing”. The purchase of the HA’s share does not necessarily have to be of the full 50 per cent. The buyer can choose to buy, say, 25 per cent and then the last 25 per cent at some stage in the future when able to raise further funds.
MPC
One of the most fundamental clauses within a shared ownership lease, so far as lenders are concerned, is known as a “Mortgagee Protection Clause (MPC). Lenders will not lend against a shared ownership property unless it is present. This clause limits any shortfall which a lender suffers should it need to repossess, staircase the lease and sell the property. In the current economic climate, this clause has been vital to lenders.
At the current time, an MPC will provide that if the lender suffers a shortfall on sale, then subject to the lender paying open market value for the HA’s share in the property, the open market value will be reduced by the following:
1. The principal sum due under the mortgage.
2. Up to 12 months’ unpaid interest.
3. All sums reasonably paid to enforce its security. This will normally consist of agent’s and legal fees.
4. All sums paid to clear arrears of rent and service charges.
The basic premise is that the lender, by setting off these deductions, will not pay the full market value for the HA’s share, thereby reducing the shortfall it would otherwise suffer.
Not withstanding this provision, many lenders are still suffering shortfalls. This is because, quite often, the 12 months interest allowed is insufficient. Some transactions, from the instigation of proceedings to eventual sale, will often take longer than 12 months.
Furthermore, lenders cannot reclaim early repayment charges, capitalised interest or administration fees that may be charged to the borrower’s mortgage account as deductions. Together with the reduced property prices, these factors and limitations have meant that even with the MPC, lenders have been suffering larger shortfalls than anticipated.
The changes
However, lenders “fear not” - help is nigh. All shared ownership leases granted on or after 6 April 2010 will be in an amended form where the homes have been funded by the Homes and Communities Agency. This should therefore cover all New Build HomeBuy properties in
This new regime sees the expansion of the MPC - a sort of new and improved “super MPC”. Under the new provisions, all of the deductions mentioned above can be made but lenders can now deduct 18 months’ interest.
However, the most significant addition is that lenders will be now able to deduct fees and costs incurred in enforcing the lender’s security up to a maximum of 3 per cent of the market value of the leasehold interest at the time of enforcement (i.e. 3 per cent of the staircased interest.)
Lenders will also now be able to claim early repayment charges, administration fees, capital and capitalised interest in addition to the fees and costs of enforcement, provided that collectively with the fees, etc, they do not exceed the 3 per cent maximum referred to above.
Incentive
The new super MPC is designed to encourage lenders to recommence lending on shared ownership properties. It is also hoped that it will be an incentive to other lenders, who in the past may not have lent on shared ownership properties, to start doing so.
Of advantage to buyers is that lenders may not insist on the borrower paying for expensive mortgage indemnity policies to cover potential shortfall on enforcement.
In the spirit of reviving the economy, this will be a welcome change for many mortgage lenders. It is hoped that it will assist in changing the perception of some lenders that shared ownership properties are high risk properties and not desirable as security.
Harry Peradigou is an associate at Matthew Arnold & Baldwin LLP
