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PART 9
November 2009
MORTGAGE RESCUE SCHEME (MRS)
This Part of the chapter gives information and guidance to official receivers on the Mortgage Rescue Scheme (MRS). The Part will concentrate particularly on the interaction between the Mortgage to Rent scheme (which is part of MRS) and bankruptcy, and gives guidance on the matters to be taken into account when such a scheme is encountered.
33.196 Mortgage rescue scheme - general
MRS is an umbrella for schemes designed to assist a homeowner in financial difficulties to avoid losing their home. The schemes are administered by local authorities with the support of organisations such as CABs and Registered Social Landlords (RSL) (housing associations see paragraph 59.76) and funded by central government.
The schemes are designed to be schemes of last resort, after all other support and forbearance options available from the mortgagee have been explored and exhausted. They are triggered when there is a real and imminent risk of the property being repossessed.
33.197 Main schemes available under MRS
Paragraphs 33.198 to 33.200 give an overview of the three main schemes under MRS, as follows:
As the name suggests, the Mortgage to Rent scheme allows a homeowner in financial difficulties to effect a sale of his/her property to a Registered Social Landlord (RSL) (housing association), who will rent it back to them at a rental that is lower than that which would be payable on an equivalent property rented on a commercial basis.
This is the scheme most likely to be encountered by official receivers. Further information and guidance on the scheme is given in paragraphs 33.201 to 33.217.
The Shared Equity scheme is a procedure where an RSL pays between 25% to 75% of the outstanding mortgage, with that portion of the loan being replaced by a charge in favour of the RSL. The interest rate charged by the RSL is 1.75%pa. In reality this scheme is unlikely to have any impact of a subsequent bankruptcy (or visa versa), apart from increasing the likelihood of obtaining an Income Payments Agreement (see Chapter 31.7) by having the effect of reducing the bankrupt’s monthly accommodation cost.
33.200 Mortgage Support scheme
The Mortgage Support scheme effectively allows a homeowner to take a partial payment “holiday” from their mortgage repayments. It is aimed at homeowners who have suffered an “income shock” (such as the temporary loss of a job, or a downturn in overtime payments) and allows them to defer all the repayment element, and up to 70% of the interest element of their mortgage for up to two years.
The amount to be paid each month is agreed between the homeowner, their money advisor (such as a CAB) and the mortgagee and will not change even if interest rates change (either way). The unpaid interest is capitalised and added to the total debt.
Where the homeowner leaves the scheme and the property is repossessed within four years of the homeowner leaving the scheme, the government will pay to the mortgagee 80% of the interest payments that were deferred over the period that the homeowner was in the scheme.
33.201 Mortgage to Rent scheme – general
The operation of the Mortgage to Rent scheme differs depending on the equity position of the property. Paragraph 33.202 provides advice and information where the property has equity and paragraph 33.206 covers advice and information where the property is in negative equity.
33.202 Mortgage to Rent scheme – operation of scheme where property has equity
Where it is agreed by the local authority that the homeowner and property qualify for the scheme, the property is purchased by the RSL at market value. The sale proceeds are used to clear the mortgage and any outstanding charges, with the balance being passed on to the homeowner after deduction of an “equity charge” – see paragraph 33.203.
The scheme is funded by an equity charge of 3% of the agreed sale price. This is to cover the costs of sale and the costs of administering the scheme.
Once ownership of the property has passed to the RSL, they will grant the former homeowner a three year assured shorthold tenancy. The rent charged will be the market value rent (assessed by the RSL) less 20%.
The former homeowner has no right to re-purchase the property, but this is an option available to them at the discretion of the RSL.
33.205 Repayment of debts using monthly surplus
There is an expectation that the former homeowner will use any increase in household monthly surplus, and any surplus arising from the sale of the property, to deal with other, unsecured, debts and, generally, put their financial situation in order.
33.206 Mortgage to Rent scheme – operation of scheme where property in negative equity
Where a property is in negative equity, the RSL and money advisor will attempt to agree with the mortgagee that the property be sold at market value. Obviously, this will mean that there will be a shortfall following the sale – which the mortgagee has the option of converting to an unsecured loan or writing-off the debt. If the mortgagee will not agree to this then the scheme cannot proceed as the RSL will not purchase the property for more than market value.
The scheme is only available to those homeowners who have negative equity no higher than 120% loan to value.
If possible, the RSL will get the mortgagee to agree to accept 97% of the market value of the property, with the remaining 3% being used to provide the “equity charge” (see paragraph 33.203). Where the mortgagee will only accept 100% of the market value then the equity charge may be paid out of a fund of money held for this purpose by the local authority.
The position with the property post-purchase (see paragraphs 33.204 to 33.205) is the same as for properties with equity – except that, obviously there will be no capital surplus available to deal with unsecured creditors.
33.207 Mortgage to Rent – considerations for the official receiver where the bankrupt enters into the scheme prior to bankruptcy
In circumstances where a property has been sold in the years leading up to the making of a bankruptcy order, it is usually incumbent on the official receiver to establish whether there has been a transaction at an undervalue or, indeed, a transaction defrauding creditors.
The Act provides that, where a bankrupt has entered into a transaction for no consideration, or for consideration that is significantly less than the value of the property transferred, in the five years prior to the presentation of the bankruptcy petition, the court has power to set that transaction aside [note 1]. It is this provision that many commercial “sale-and-leaseback” schemes may fall foul of (see Part 10).
Similarly the Act provides that, where a person has entered into a transaction for no consideration, or for consideration that is significantly less than the value of the property transferred with the purpose of putting the property transferred beyond the reach of creditors, the court may make an order restoring the position to what it would have been if the transaction had not taken place. There is no time limit on such an order [note 2].
33.208 Mortgage to Rent scheme – transaction at an undervalue?
In both transactions at an undervalue and transactions defrauding creditors, for a successful recovery there is a requirement that the property be transferred for no consideration, or for consideration that is significantly less than the value of the property transferred. One of the features of the Mortgage to Rent scheme is that the property is transferred to the RSL at market value. This being the case, a challenge by an official receiver, as trustee, under either of the sections of the Act detailed above is unlikely to arise.
The official receiver should, however, obtain a copy of the valuation carried out prior to the sale of the property to the RSL and, where there is doubt over the accuracy of the valuation, carry out further enquiries (such as viewing the sale prices of similar properties in the area on web-sites such as www.nethouseprices.com) to satisfy himself/herself of the precision of the valuation.
The professional valuation should, ideally, have been carried out by a chartered surveyor (a member of RICS - http://www.rics.org/uk). Where the valuation has been carried out by an estate agent, the official receiver should expect to see valuations from at least two estate agents. Official receivers should not hesitate to verify the valuation (having the purchaser cover the costs) where there is any doubt.
33.209 Mortgage to Rent – position of equity charge as regards a transaction at an undervalue
The purchase price is actually market value less the 3% equity contribution intended to cover the costs of the transfer (see paragraph 33.203). This is unlikely to be considered to have brought the transfer within the scope of the provisions relating to transactions at an undervalue and transactions defrauding creditors in the Act – as these sections require that the purchase price is “significantly less” than the value of the property transferred. Additionally, the official receiver would normally make an allowance for the costs of sale when assessing a property transfer, and this allowance is currently calculated at 3% of the value of the property.
33.210 Disbursement of surplus funds
Following the making of the bankruptcy order, the bankrupt may be required to account to the official receiver for any surplus arising from the operation of the scheme in respect of their property [note 3] [note 4]. As outlined above (paragraph 33.205), generally speaking, there is an expectation that this surplus would be used to clear unsecured debts. The official receiver should consider how these payments have been distributed to creditors (particularly, associates of the debtor) to satisfy himself/herself that none have been made in preference to the general body of creditors. Any payments made in of this nature are liable to recovery under provisions relating to preferences in Act (see Chapter 31.4A).
33.211 Mortgage to Rent – considerations for the official receiver where a bankrupt wishes to enter the scheme
Apart from circumstances where the bankrupt is at risk of having his/her property repossessed by the mortgagee, the Mortgage to Rent scheme may also come into effect where the official receiver, as trustee, has, or is likely to instigate possession proceedings when dealing with the property as an asset of the bankruptcy.
That said, it would be for the relevant local authority to determine whether a property is eligible for the scheme, and it is not envisaged that the official receiver would become involved in the process until it had been agreed by the local authority that the property qualified for the scheme.
33.212 Entering into scheme after bankruptcy cannot be a transaction at an undervalue
The provisions relating to undervalue transfers of property (see paragraph 33.208) cover the period up to the presentation of the petition for bankruptcy. Under other provisions in the of the Act, dispositions of property in the period between the presentation of the petition for bankruptcy and the vesting of the estate in the trustee in bankruptcy are automatically void unless agreed to, or ratified by, the court [note 5] (see Chapter 31.4A).
33.213 Official receiver to be satisfied that property sold at a market value
Where the bankrupt wishes to enter into the scheme after bankruptcy the official receiver would need to be satisfied that the property was being transferred at a fair market value. The considerations regarding valuation outlined in paragraph 33.208 are relevant here, and the official receiver should require sight of a professional valuation prior to agreeing to the bankrupt entering into the scheme.
33.214 Conveying the property in a Mortgage to Rent scheme (amended July 2010)
Where a property being transferred as part of a the Mortgage to Rent scheme is jointly owned, the legal title to the property remains with the joint owners and, therefore, they retain their power to convey the property. The official receiver need not get involved in the conveyance.
Where the property is solely owned by the bankrupt, the legal title to the property would vest in the official receiver as trustee. The bankrupt would have no power to convey the property – this power would rest with the official receiver, as trustee. The official receiver would need his/her own legal representation in the conveyance. Unless the official receiver has his/her own local arrangements for this, TLT Solicitors in Bristol may be used for the conveyance (see Annex 1).
The solicitors should only be engaged if there is an undertaking from the purchasers (or the MRS facilitator) to pay the costs of instruction. These funds may come from a third party or from the 3% equity contribution (see paragraph 33.203) or the local authority ‘fund’ held for this purpose (see paragraph 33.206).
Any surplus arising from the bankrupt’s participation in the scheme would be an asset in the bankruptcy estate. The bankrupt’s share of the surplus should be based upon the extent of his/her interest in the property at the date of the insolvency order. Reference should be made to paragraph 31.3.10 for further details on how to calculate such an interest.
33.216 Dealing with a shortfall
Any shortfall arising from the bankrupt participating in the scheme would be a debt in the bankruptcy. Where the lender will only agree to the bankrupt entering into the scheme if a new, un-secured loan, is taken on (post-bankruptcy) to deal with the shortfall the official receiver can, in reality, have no objection to this course of action. The official receiver should, though, confirm that the bankrupt has taken independent advice on his/her position as the action may be viewed as being against the spirit of the bankruptcy process.
33.217 Increased likelihood of an Income Payments Agreement
Participation in the scheme will result in a reduction in the bankrupt’s monthly housing cost as the rent charged by the RSL is typically 20% lower than an equivalent commercial rent charge, and is likely to be lower than that formerly paid to the mortgagee. From the point of view of the official receiver, as trustee, this is a beneficial outcome as it will increase the chances of (or amount payable under) an Income Payments Agreement (see Chapter 31.7).
33.218 Enquiries into circumstances leading to bankrupt entering MRS
Where appropriate, the official receiver should make enquiries into the circumstances that led to the bankrupt becoming in a position of negative equity – particularly where further borrowing (rather than a reduction in the value of the property) was the cause. The official receiver should be satisfied that the disbursement of any further borrowings can be accounted for.
[Back to Part 8 - Miscellaneous points] [On to Part 10 - Sale and Leaseback Schemes]