PART 10
April 2013
MORTGAGE RESCUE SCHEME
This Part of the chapter gives information and guidance to official receivers on the Mortgage Rescue Scheme (MRS), concentrating particularly on the action to take when the official receiver encounters a bankrupt who has taken part in, or is considering taking part in, the Mortgage to Rent scheme, which is part of MRS.
The MRS is administered in the public sector. Part 11 gives information and advice on the similar private sector ‘sale and leaseback’ or ‘sale and rent-back’ schemes.
31.3.296 Mortgage rescue scheme (MRS) – general
MRS is an umbrella scheme for two 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 the charity Shelter, CABx and registered social landlords (‘RSL’) (housing associations) (see paragraph 59.76).
The MRS scheme operates in Wales on a slightly different basis. Where there is a material difference, this is explained in the appropriate paragraph.
31.3.297 MRS – qualification criteria.
The MRS is designed to be a scheme of last resort, after all other support and forbearance options from the mortgagee have been explored and exhausted. It is triggered when there is a real and imminent risk of the property being repossessed and consequent homelessness. For the homeowner to qualify for assistance certain criteria must be met, such as:
31.3.298 Schemes available under MRS
The schemes available under MRS are:
A scheme formerly available under MRS, the Mortgage Support Scheme (see paragraph 31.3.314), has been discontinued, but a similar Support for Mortgage Interest scheme (‘SMI’) (see paragraph 31.3.315) has partially replaced it. SMI is not, though, part of MRS, being administered by different organisations.
31.3.299 Mortgage to Rent scheme
As the name suggests, the Mortgage to Rent scheme allows a homeowner in financial difficulties to effect a sale of his/her property to an RSL at a market value, who will rent it back to them at a rental that is lower (typically, 20% lower) than that which would be payable on an equivalent property rented on a commercial basis.
Guidance on how a Mortgage to Rent scheme should be treated in bankruptcy is provided in paragraphs 31.3.305 to 31.3.310.
31.3.300 Mortgage to Rent scheme – equity charge
The general operation of the Mortgage to Rent scheme and specific disbursements in connection with the transfer are funded by an equity charge of 10% of the agreed sale price (the homeowner will receive 90% of the agreed sale price and the RSL will retain the other 10%).
The equity charge covers the costs of the RSL in dealing with the transfer of the property and the operation of the scheme generally.
31.3.301 Mortgage to rent scheme – equity charge where there is no equity
Where there is no equity in the property there will, in the normal course of things, be no possibility for the RSL to receive its fee (the equity charge – see paragraph 31.3.300) from the sale proceeds.
The RSL will therefore attempt to have the mortgagee agree to accept 90% of the sale price of the property (rather than the 100% they would be entitled to under the charge), with the remaining 10% being used for the equity charge. Where the mortgage will not agree to this, there is a facility for the equity charge to be paid by the local authority, on a case-by-case basis.
31.3.302 Mortgage to Rent scheme – granting of tenancy
Once ownership of the property has passed to the RSL, they will grant the former homeowner a fixed contract tenancy for at least one year, with security of tenure being for a much longer period in practice. The rent charged will be below the market rate for the area (assessed by a surveyor engaged by the RSL) – typically 20% lower.
31.3.303 Mortgage to Rent scheme – repayment of debts
Monies received by the homeowner from the RSL will be used to repay the secured charges. If there is any surplus, the homeowner will be encouraged to use it to repay unsecured creditors, assisted by a money advisor.
Following the making of a bankruptcy order, the official receiver should make enquiries as to how these monies were disbursed. Particularly, consideration should be given to payments made to any associates of the bankrupt which could be considered to have been made in preference to the general body of creditors (see Chapter 31.4A, Part 2).
31.3.304 Mortgage to Rent scheme – valuation
The RSL will carry out a valuation of the property prior to the transfer of the property to satisfy the homeowner that the property is being transferred for market value. This official receiver should obtain a copy of this valuation where there are any doubts regarding the transfer or the amount of monies received.
31.3.305 Mortgage to Rent scheme – transaction at an undervalue?
The retention of 10% of the sale proceeds by the RSL (see paragraph 31.3.300) throws up the question of the transaction being a transaction at an under-value (see Chapter 31.4A, Part 3) or a transaction defrauding creditors (see Chapter 31.4B, Part 7). The Service takes a position that official receivers should not challenge a transaction carried out under the Mortgage to Rent scheme for a sale at market value less 10%. This is for the following reasons in particular:
31.3.306 Mortgage to rent scheme entered into between petition and bankruptcy
A disposition of property between the presentation of the petition for bankruptcy and the vesting of the estate in the trustee in bankruptcy is automatically void unless agreed to (or ratified) by the court [note 1] (see Chapter 31.4B, Part 5).
The RSL should be advised of this provision but, assuming that the transfer meets all the normal requirements of the Mortgage to Rent scheme, the official receiver should not object to any application for ratification, for the reasons given in paragraph 31.3.297.
31.3.307 Mortgage to Rent scheme – operation of the scheme post-bankruptcy
Where the bankrupt wishes his/her property to enter the Mortgage to Rent scheme, and that property interest vests in the official receiver as trustee, he/she should not have any principled objection, but should explore the possibility that the property can be realised for more than the 90% of market value that the RSL will offer. In reaching this conclusion, the official receiver should take into account the likely costs of sale (generally, 3% of the sale price – see paragraph 31.3.263) and the increased likelihood of a income payments agreement where the bankrupt enters the scheme. The official receiver should ensure that he/she is satisfied regarding the accuracy of the valuation in reaching this conclusion (see paragraph 31.3.304).
In reality, unless there is a ready buyer willing to pay market value (or more) then the Mortgage to Rent scheme is likely to be the best outcome for the property interest.
31.3.308 Mortgage to Rent scheme – conveyance of property post bankruptcy
Where a property being conveyed under 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 be involved in the process of 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 resting with the official receiver, as trustee, and the official receiver would, therefore, need his/her own legal representation in the conveyance. Unless the official receiver has his/her own local arrangements for this, TLT Solicitors (see Annex C) may be used.
The solicitors should only be engaged if there is an undertaking from the purchasers (or the MRS facilitators) to pay the costs of instruction.
31.3.309 Mortgage to Rent scheme – surplus following post-bankruptcy transfer
Where a property has been transferred under the mortgage to rent scheme post-bankruptcy any surplus would be a post bankruptcy asset. Reference should be made to Part 4 to assist in calculation the bankrupt’s share of the surplus, where there is any dispute or uncertainty.
31.3.310 Mortgage to Rent scheme – shortfall following post-bankruptcy transfer
Any shortfall arising from the bankrupt participating in the Mortgage to Rent scheme will be a bankruptcy debt (see Chapter 40, paragraph 40.119), subject to any deed of acknowledgement, or similar (see paragraph 31.3.36).
31.3.311 No right to re-purchase the property
There is no right, under the Mortgage to Rent Scheme, for the former homeowner to re-purchase the property. He/she may be allowed to do so, for market value, at the discretion of the RSL.
31.3.312 Equity Loan Scheme (known as ‘Homebuy’ in Wales)
The Equity Loan Scheme is a procedure where an RSL pays between 25% and 75% (maximum of 50% in Wales) 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 fixed at 1.75%pa. A homeowner is eligible for this scheme where:
31.3.313 Equity Loan Scheme – equity charge
The RSL will charge 3% of the loan to fund the costs of administration of the loan, which amount is added to the value of the loan. It is unlikely that it would be appropriate to challenge this fee (as a transaction at an undervalue, for example), and it is likely to be in the interests of the creditors for the official receiver to agree to the fee being added to the loan (post-bankruptcy) as this is likely to preserve the property for the estate and increase the likelihood of an IPA.
31.3.314 Mortgage Support Scheme – now discontinued
The Mortgage Support Scheme was a scheme that allowed a homeowner to take a partial payment ‘holiday’ from their mortgage payments. It was aimed at homeowners who had suffered an ‘income shock’ (such as a downturn in income due to the loss of a job), and allowed then to defer all repayment and 70% of interest payments.
The government would compensate the mortgagee if, following any repossession, the deferred interest payments were outstanding.
The Mortgage Support Scheme was discontinued on 21 April 2011, but has been partially replaced by the SMI scheme (see paragraph 31.3.315).
31.3.315 Support for Mortgage Interest scheme (SMI)
The SMI scheme allows homeowners who are on income related benefits to get assistance in paying the interest on their mortgage debt (providing the debt is no more than £200,000, or £100,000 where the homeowner is on Pension Credit). The assistance is normally paid directly to the lender. Assistance can also be obtained on loans taken out by the homeowner in respect of certain repairs and improvements to the home. The scheme is administered by Jobcentre Plus and the Pensions Service.
The SMI scheme is not part of MRS.
Where a bankrupt is being assisted under the SMI scheme, it will not have any direct impact on the bankruptcy, except for a small possibility of an (increased) IPA/IPO.
The official receiver should, though, inform the organisation of the making of the bankruptcy order.
[Back to Part 9 – Matrimonial or civil partnership proceedings – bankruptcy only] [On to Part 11 – Sale and rent back schemes]