HC Deb 23 July 1985 vol 83 cc456-7W
Mr. Hind

asked the Secretary of State for the Environment what plans he has to seek to stop moves by local authorities to dispose of their mortgages en-bloc to institutions in order to circumvent limits on capital expenditure.

Mr. Patrick Jenkin

Local authorities have normally retained mortgages until they have been redeemed by the individual borrower in the same way as private sector lenders such as the building societies and the banks. Last autumn, however, I welcomed the initiative which a number of local authorities and new town corporations were taking to speed up this process by arranging for building societies to offer replacement loans to the authority's borrowers individually enabling them to pay off their council mortgages. The borrower is free to decide whether or not to enter into a new mortgage contract with the building society, which may offer better terms. And the local authority gets the advantage of an earlier capital receipt.

Recently, however, some authorities have packaged their mortgage loans and sold them direct to financial institutions, without consulting the borrowers, in order to generate in a short time large blocks of additional capital receipts. This is an artificial transaction and should not count as an addition to capital receipts. Moreover, the borrower may have no say in the matter, and may be unaware of the transaction until after the event. We believe that local authorities should not sell a mortgage without the prior consent of the mortgagor.

Accordingly, the Government propose to legislate at the earliest opportunity to give home owners with a local authority mortgage the right to decide whether or not the local authority may dispose of its interest to a specified purchaser. A transfer without consent would be invalid. In order to give interim protection to such mortgagors, our intention is that the legislation conferring this right should have retrospective effect as from midnight tonight.

We shall also consider whether the borrower's consent should be required before a local authority sells a mortgage of industrial or commercial property; we shall consult on this.

Some sales of mortgages have taken place on terms which may leave the local authority with a continuing financial risk in relation to the mortgage. Such transactions are, in substance, the equivalent of expensive borrowing rather than a genuine disposal of assets.

Subject to further consideration and consultation on the practicalities, we intend to legislate to require that any sale of a mortgage should provide for the transfer of risk to the purchaser, if it is to be treated as a capital receipt; but any requirement of this kind would not have effect from today.

My Department is writing today to local authorities and other interested organisations to draw this announcement to their attention, and to consult on the details of the proposal. My right hon. Friend the Secretary of State for Wales is writing in similar terms to Welsh local authorities.