Could this be the future for the high street?

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Institutional mortgage lenders are in dire straits and the housing market is descending into the mire.

A government action plan, unveiled last Thursday, said ministers will work with councils to give them scope to launch rescue schemes to help those struggling to make mortgage repayments. But what role can cash-strapped councils play in tackling the biggest housing market slump for a generation?

Several authorities, including Herefordshire Council and Wakefield MDC, already work with housing associations to offer help to those who find times tough. As their financial situation improves, support is removed over time until they become full homeowners once again.

But, in addition to the mortgage rescue schemes heralded by the Facing the Housing Challenge — Action Today, Innovation For Tomorrow plan, a more radical opportunity exists for councils. The possibility of local government actually providing mortgages to those unable to get one through traditional routes is mooted in the consultation paper. This is a role councils have not played since the early 1990s.

Liverpool City Council has taken the early initiative by undertaking a feasibility study into offering of mortgages, the findings of which are due this week.

The early indicators are that the council would not offer mortgages per se, but enter into an arrangement with a private lender, whereby the lender provides finance with the council acting as guarantor. "The problem is not that there is no money, but that banks are terrified to lend. If we can come up with an arrangement where banks feel
secure in lending, it could get the system moving," explained deputy leader Flo Clucas (Lib Dem).

The joint venture's target clients would be first-time buyers and families on low incomes. While a lot of people in these categories are struggling to get on the housing ladder, often they are key workers in secure jobs, representing safe investments.

Elsewhere, London Councils swiftly fol- lowed the action plan by announcing an emergency summit in August which will examine boroughs' role in securing mortgages for residents. London Councils housing spokesman, Jamie Carswell (Lab), agreed with Liverpool that councils could act as mortgage guarantors.

"The housing crisis is the most urgent problem facing authorities in the capital, he said. "We will be looking at the possibility for councils to act as guarantors, mortgage rescue schemes and other ways in which we can help out people facing difficulties."

Councils acting as guarantors may offer banks the security they need to offer mortgages to the low-paid or relatively financially insecure  — but many will ask whether such a scheme offers councils themselves financial security. If the economic downturn continues, could local government, which hardly has too many financial resources at
its disposal, be left picking up the tab for thousands of mortgage defaulters?

Solutions to such questions are vital and will determine whether the idea of councils offering mortgages is consigned to the file on the shelf marked "nice idea, no cash". 

Another possibility is for councils to use their relatively new prudential borrowing powers, thus cutting out the private sector entirely.

Prudential borrowing powers enabled councils to borrow against future revenue streams without the consent of central government, as long as they stayed within certain affordable borrowing limits. The limits are set by individual councils.

The New Local Government Network (NLGN) thinktank is championing the model, insisting that because prudential borrowing rates were lower than commercial lenders' rates, councils would be able to offer homeowners lower interest mortgages.

NLGN director Chris Leslie said: "Councils should use their borrowing powers and act for the wellbeing of their communities, helping neighbourhoods to weather the current housing storm. Public sector mortgages could even allow councils to make a long-term surplus for the benefit of the council tax payer."

The NLGN also pointed out that if the government had already spent £75bn trying to sort out the housing crisis, another couple of billion would not make too much difference.

It appears local authorities can rest assured that such models of mortgage intervention are on a sound legal footing, so long as they stick to offering mortgages at prescribed rates of interest.

Trowers & Hamlins housing law specialist solicitor Suzanne Benson said: "Where local authorities want to provide mortgages directly to individuals they cannot charge less than a minimum set interest rate. This is determined as the higher of either the average interest rate in that area or the national interest rate for mortgages."

The standard national rate of interest is currently 6.89%, but Ms Benson warned that this rate was last set in February 2007 and could be changed before any local authority mortgage plan gets up and running.

If councils opt to get involved in mortgages again, it is imperative that the public sector does not end up picking up the slack for the failings of the private sector, becoming relied upon for 'sub-prime' mortgage provision.

Local Government Association programme director for planning and environment Martin Wheatley said he would approach any forthcoming discussions with the government with an open mind. But he warned: "We need to be careful that we do not create the wrong sort of incentives for the private sector. The first choice must remain that people come to arrangements with their lenders."

No one is claiming that local authorities have the financial muscle to stabilise the housing market on their own, although there is growing consensus that councils have little option but to get involved. 

What's in the action plan?

• 'Rent first, buy later' scheme to support first-time buyers into affordable home ownership. Eligible households, earning £60,000 a year or less, will be able to rent a new home at a discounted rate (80% of market rate or less) for two to three years after which they will have the option to buy a part share.

• It reveals a further 18 local authorities have expressed an interest in setting up a local housing company. The joint venture model, which English Partnerships believes can produce 20,000 houses by 2016, sees a local authority put forward land for private developers. The two partners then take a 50:50 split in the proceeds.

• More funding, beyond the £200m already allocated, to buy unsold stock from house builders to create affordable homes, could be made available.

• Baroness Margaret Ford (Lab) has been appointed to work with English Partnerships and Partnerships UK to help release of surplus sites across the government estate for development.

Reaction to the plan

While housing minister Caroline Flint's action plan kick-started debate on local authorities handing out mortgages again, her proposals received a mixed reception.

Chartered Institute of Housing chief executive Sarah Webb said: "Outright home ownership is a heavy commitment and may not be right for everyone, and we welcome a range of options such as the [rent first, buy later] scheme that is proposed today. The criteria for eligibility will be key and are yet to be clarified, but this scheme as one of a range of measures is good news."

But both the Home Builders Federation (HBF) and the Council of Mortgage Lenders said the measures announced did not go far enough to solve the housing crisis.

HBF executive chairman Stewart Baseley called for "tangible measures to assist beleaguered first-time buyers" such as a stamp duty holiday, mortgage interest relief or a government-backed savings scheme.

Meanwhile, the Campaign for the Protection of Rural England claimed rural concerns were not being addressed.

Its senior planner Kate Gordon said: "There is mounting evidence which suggests that developers will cherry-pick greenfield sites in popular locations over less profitable brownfield opportunities."