The mortgagee protection clause (MPC) in a shared ownership lease enables the banking industry to continue to lend against shared ownership leases, but where applicable it can result in claims by lenders and subsequent losses for housing associations.
Here we outline what you need to know about the impact of the MPC and what to do if your organisation is faced with a claim.
What is an MPC claim?
If a shared ownership tenant fails to keep up with its mortgage repayments, then the lender may repossess the shared ownership property. As part of the repossession process, the lender may decide to staircase to 100% and sell the property on the open market, rather than wait for the housing association to nominate a buyer.
If the lender would make a loss as a result of doing so (provided the loss falls into certain categories), the MPC means the housing association must effectively cover this loss by a corresponding price reduction payable by the lender for staircasing to 100%. This is known as the lender ‘making an MPC claim’.
It is very important to note that;
- A lender can only rely on the MPC against the housing association if the housing association has approved the mortgage in question – either formally or informally.
- A lender can only claim under the MPC if it suffers a loss in connection with the repossession, final staircasing, and sale on the open market.
- In practice, lenders don’t always 100% staircase if they repossess. Sometimes the lender will just re-sell the tenant’s existing equity share without 100% staircasing.
How does the MPC claim process work?
Assuming that these initial three hurdles are cleared, the lender can only claim for certain things, including the sum of the original mortgage which is not yet paid off, between 12 – 18 months’ interest, any litigation or bailiff’s expenses in evicting the tenant, and both legal and estate agent fees incurred during the sale of the property.
The lender will work out how much the staircasing would cost them and deduct their MPC claim from this amount. This means that the housing association will receives less than they would have done originally and in effect, indemnifies the lender.
Strictly speaking, the housing association can recover the MPC claim from the defaulting shared ownership tenant. In practice, this is unlikely ever to happen.
What is the impact of recent statutory changes?
The Homes and Communities Agency (now Homes England) has model forms of lease which are followed by most providers of shared ownership. There are certain fundamental clauses appearing in all shared ownership leases which cannot be altered or removed, and the MPC clause is one of these fundamental clauses.
Before 2015, the fundamental clause only allowed for 12 months interest, however, in 2015 the Homes and Communities Agency agreed to increase this to 18 months interest for all leases moving forward.
Your solicitor should ensure that the lease reflects these changes and the lender is not attempting to to claim more than it’s entitled to.
What steps can be taken to avoid a claim?
If a shared ownership tenant is falling into rent and mortgage arrears, sometimes the lender will offer to step in and pay the rent to stop the housing association from forfeiting the lease. If you have been contacted about this, it may be beneficial to you (and the shared ownership tenant’s credit rating) to open an early dialogue with all parties and discuss buying back the property and having the leaseholder voluntarily vacate, rather than face an MPC claim.