Lenders may flee the social housing market because of new government legislation, leaving housing associations with increased borrowing costs and less choice of finance.
Housing Today has learned that lenders fear the implications of a controversial amendment to the Enterprise Bill, which is before parliament, concerning complex insolvency rules.

However, sources close to the negotiations feel that the MPs dealing with the bill "haven't properly thought it through with regard to social housing".

The amendment is intended to help smaller not-for-profit bodies, such as farmers' co-operatives, but instead could substantially raise the risk involved in doing business with RSLs.

One insider said: "It's almost as if the government is giving with one hand and taking away with the other.

"This is a huge issue and people in the housing sector have only slowly become aware of it," he added.

It is also understood the amendment raises longer-term concerns for the ability of RSLs to meet the government's decent homes standard by 2010.

The complex problem centres on the amendment to include industrial and provident societies – a category which includes most RSLs – in the insolvency section of the bill.

This would mean that protection from creditors, which is currently enjoyed by most companies, would be extended to industrial and provident businesses.

Crucially, it would deny lenders their present powers to appoint their own administrative receivers in the event of a housing association failing.

Although this arrangement has never been used, it reassured lenders that if an RSL fails, they will have priority in the recovery of their loan.

The existing arrangement also suits RSLs, as they are protected by the Housing Act 1996. This allows regulators to grant failed RSLs a moratorium of 28 days in England, and 56 in Scotland, before a lender's administrative receiver moves in.

The Council of Mortgage Lenders hopes to meet representatives from the Department of Trade and Industry "at the earliest possible time" to discuss exempting housing associations from the amendment.

Adrian Carter, of law firm Trowers and Hamlins, told Housing Today: "The housing movement should act soon to ensure that they do not lose out.

"The new amended legislation is not intended to hit housing, but I think it will do it by accident," he added.

Carter also said that if the legislation proceeded, lenders were certain to want greater security for their loans.

This would most likely take the form of floating charges, which are already extensively used in the sector, but would become commonplace.

Carter explained: "Floating charges act like a mortgage over everything an RSL owns. They float as they are not fixed on any one asset, but include additional assets as well as intellectual and intangible goods."

This would be a particular problem for RSLs as they frequently take loans with a number of different lenders, each of which would require an individual floating charge.

Bob Wilson, finance policy officer at the National Housing Federation, said: "We would be concerned if anything in the Bill or its amendments caused an increase in the cost of borrowing or a decrease in the number of lenders in the market."