Preventing Repossession

Sarah Teather MP has said that the government should do more to protect families from repossession (LibDems). Some caution is necessary. This doesn't seem to be a specific policy proposal. But the idea seems to be to tighten up the law to make it harder for lenders to repossess homes (there's a lot of reading between the lines here). This is probably cheap in terms of public money but someone will have to bear the cost of any eventual policy. Banks are a convenient scapegoat.

There are two problems with a purely legal solution. Repossession is generally a last resort anyway, particularly in a depressed property market. In which case, the policy doesn't amount to much more than formalising existing practice. In other words, it's a populist gimmick.

Assuming though that it does genuinely dissuade lenders from repossessing homes, this still carries a cost. Principally, it makes mortgages less secure from the lenders perspective. It is harder and more costly for them to get their capital back. Arguably, it is desirable for banks to exercise more prudence about who they lend money to, but it is naïve to think that these costs won't be passed on to the beleaguered home-owners. Credit will become more difficult and more expensive to access. They will find it harder to refinance their mortgages. They will eventually find it harder to sell their houses as buyers find financing more expensive.

So either there is no real value to such a policy or the cost will ultimately be borne by the people the policy is intended to protect.

This is not to say that the government shouldn't be protecting some home-owners. The important thing though seems to be to allow people to remain in their homes, not necessarily to remain the owners of them. We should use public money (we're borrowing enough of it) to buy up the houses and bring them into public ownership. Any equity the delinquent borrower had built up could be wiped out - but that is as it should be - and the lender may have to write off some of the value of the debt - but they lent unwisely in the first place. The ex-owner would then continue to live in the property and pay rent to the government.

It would have to be financed with public borrowing, but that borrowing would be secured against tangible assets, moreover which are bought at a trough in the market. The government's obligation to the lessors could be capped, say at five years, after which they would have to either buy the property back, move or see the property pass to a private letting company. This would allow the principal (and potentially some return) to be recovered in a reasonably short term.