Solutions to Foreclosure: Looking Across the Atlantic

The US is not alone in having a housing crisis. Many European and other nations also had a house price run up and bust--many with some forms of expanded high risk lending. The UK has a more homogeneous housing market and also experienced a downturn like the current episode in the early 1990s.

In the UK the foreclosure is called repossession and operates on a national basis as opposed to the US with its state laws administered by county clerks. While lenders generally offer the same workout/modification options to borrowers in default as in the US, if the problem is not resolved then the lender seeks remedy in the courts. The court can grant immediate possession to the lender, but the most common outcome of the judicial process is a ‘suspended possession order’. In short, the debtor puts a proposal to the court to repay arrears over a stated period. If the court considers this acceptable, irrespective of the lender’s willingness to accept the offer, possession of the property is granted to the lender but with the order suspended so long as the payments are made. No further action can be taken by the lender unless the debtor misses a payment.

There are a number of common themes in policy responses in both countries. In UK during 2008 there were a series of policy announcements aimed at reducing levels of repossessions. Four major initiatives include:

(1) the Support for Mortgage Interest scheme, which amended the welfare benefits system to provide improved support to home-buyers with mortgages who lose their jobs;

(2) the Homeowner Mortgage Support Scheme, providing ‘mortgage holidays’ for home buyers who may suffer a temporary fall in income, but are expected to recover at a later date;

(3) the Mortgage Rescue Scheme enabling homeowners facing repossession to remain in their home through a shared equity scheme, whereby a Registered Social Landlord or RSL) will provide an equity loan enabling the householders' mortgage repayments to be reduced; and a related program, and

(4) the Government Mortgage to Rent Scheme whereby the RSL will clear the secured debt completely and the applicant will then become a rent paying tenant of the RSL.

In September 2008 the UK government packaged these and other programs and then announced a ‘Billion pound package for housing’.

Like the US, the UK has increased funding for borrower counseling. In November 2008 it was announced that “£15.85 million ($22) to extend free debt advice [is] to be made available to all consumers across the country” . This builds on expansion of the “debt advice sector” since around 2004, although different to the US, this expansion was initially separate from housing issues and was located in the Government’s anti-poverty agenda (reducing indebtedness). This led to a 2004 action plan for tackling (over) indebtedness (Department of Trade and Industry 2004). The action plan was updated annually and the importance of debt advice has remained a consistent theme. In the 2007 report included: “Free and impartial debt advice is a vital safety net for many vulnerable consumers, improving their ability to manage financial commitments and stave off far more costly consequences” (Department for Business, Enterprise and Regulatory Reform, 2007: 62). In the initial 2004 action plan on indebtedness £45 million ($63) was allocated to increase the supply of free face to face debt advice. While unpacking different spending announcements is complex, somewhere in the region of £80 million ($112) is now committed by the UK Government to increase capacity through to 2011 (Department for Business, Enterprise and Regulatory Reform 2007). As in the US, support is provided both for face-to-face and telephone counseling services.

In the US about $200 million was provided on 2008 as part of the National Foreclosure Mitigation Counseling Program. In addition HUD provides about $50 million for housing counseling, some portion of which is directed towards housing debt.

Like the US, the UK policy response is perhaps far less than the need. For example, in the UK the Mortgage Rescue Scheme applies only in some local areas, and it is estimated it will help just 6,000 households over two years. Both the Support for Mortgage Interest Scheme and Homeowner Mortgage Support Scheme are based on such complex qualifying rules. This is parallel with US experience such as with the FHA Hope For Homeowners program. Congress made the terms strict, in order to prevent the appearance of abuse, including a requirement that 50 percent of any future gain in the home’s value would go to the government—which reduced incentives for use.

A recent Survey by ACORN suggests the US HASP program may more success. In this survey three-quarters of the top lenders say they will participate in the program. Of course, as unemployment rates keep going up no modification could help those homeowners without income to be able to remain in place.

Both countries are engaging in a range of policy experiments. Neither has great data to build on, nor the time to develop pilots before trying new ideas. But stronger research comparing each county’s experience has the potential to help develop better responses in both.