On the money

last week, i diScussed the latest guidance from the Housing Corporation on regulating a diversified sector (page 15).

I expressed concern that the conditions attached to using social housing assets as security for non-social housing projects were likely to be unacceptable to lenders.

In order to use social housing assets as security, registered social landlords must minimise the risk to those assets. They could:

• Get the lenders to agree that they will not enforce “all monies” security over social housing assets to recover loans
• Use separate pots of security – so social housing assets only secure social housing loans and non-social housing loans are only secured against non-social assets
• Get lenders to agree to non-recourse loans to fund non-social housing (to avoid lenders having unsecured creditor rights over social housing assets if their non-social housing security proves insufficient).

These are the conditions that may well be problematical to lenders, and could lead to significant increases in loan prices. This may defeat the object of allowing social housing assets to support diverse activities.

Even assuming that lenders find this position acceptable, there must be concern that separating loans from security in this way may, ultimately, make lenders more inclined to enforce their security (whether over social housing or otherwise). Inevitably, even if security and loans are split in this way, given that there is a relatively small pool of lenders in this sector, individual lenders are likely to lend on both types of activities.

Associations who have a portfolio of loans and use them to fund cashflow could very easily fall foul of the corporation guidance

Each such loan would inevitably include a cross-default clause. This means if there is a default in relation to one loan, the other loans are automatically in default. So, if a borrower defaults on its non-social housing loans it will also be in default of its social housing loans, placing its social housing assets at risk.

One of the corporation’s suggestions here is that, in relation to non-social housing assets, RSLs seek to negotiate non-recourse loans. A non-recourse loan is one where the recourse of the lender is limited to the assets financed and charged. Non-recourse loans have been used in housing in the past, but not often enough to suggest they are popular with lenders.

Finally, and perhaps most importantly, the detail of the guidance could give rise to some particularly adverse consequences for some of the larger associations. Associations who have a portfolio of loans and use them to “fund cashflow” could very quickly and easily fall foul of the guidance. These associations have a portfolio of loans, secured on various properties, to support their working capital and borrowing requirements.

To date, such associations will not have necessarily taken out specific borrowings, secured on certain assets, to fund their activities in relation to those assets. They simply use their portfolio of assets to support borrowings to fund their cashflow requirements from time to time. In other words, their use of loans is not in any way related to the assets used as security for those loans. If such associations’ activities include diverse activities, their social housing and non-social housing assets and loans will be mixed, and they will not be able to comply with the guidance without radically changing their borrowing practices.