Note: the original hard copy of this report is 107 pages .

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Managing mortgage stress: evaluation of the Legal Aid NSW and Consumer Credit Legal Centre Mortgage Hardship Service   

, 2011 The MHS is a joint project of Legal Aid NSW and CCLC. It provides legal assistance and financial counselling to people experiencing mortgage stress with a view to assisting them to save their home, or, in situations in which saving the home is not a viable option, minimising loss and ensuring outcomes favourable to the borrower.

6. Discussion

The MHS was developed in direct response to clear evidence of a growing number of defaults on home loans during the GFC, as economic conditions worsened and people lost their jobs, had their work hours reduced or received less income from other sources (that is, self-employment or investments) (Fujitsu Consulting 2008; 2010).76 It was estimated that there would be 469 000 households across Australia in some degree of mortgage stress by December 2010, with as many as 267 000 households in severe stress (Fujitsu Consulting 2010). This would translate to around 32 000 mortgage defaults annually. Higher interest rates coupled with rising costs of living were listed as risk factors contributing to mortgage default. In the current economic climate of increasing living costs and prospects of rising interest rates, there is little doubt that the MHS remains a relevant and important service.

There are several features of the MHS which distinguish it from the legal assistance provided by Legal Aid NSW and the CCLC before the program was established. These include that the MHS: This evaluation has relied upon a number of sources of corporate and program information and follow-up interviews with a modest number of MHS clients.

The following discussion focuses on five broad areas of interest:
The continuing need for the MHS

As at June 2011, the MHS is nearing the end of its planned two-year trial period. In the first 16 months of the program, over 3000 occasions of service were provided by Legal Aid NSW and CCLC. Each month, it has dealt with an average of 37 casework and minor assistance matters and over 250 advices. Some of the indicators of the continuing need for the MHS are:
The MHS as an early intervention strategy

A basis tenet of the MHS is that well-timed but relatively minor legal assistance helps to prevent mortgage hardship problems from escalating to the point at which homes are lost. The MHS aimed to assist clients at early stages of mortgage hardship, ideally before a default notice was issued by the lender. The goal of helping people at the earliest stages of a legal problem's development, or 'early intervention', is based on the notion that it is both more efficient and more effective to assist people before legal problems escalate and become more difficult, costly and time-consuming to resolve. Furthermore, research into mortgage stress indicates that, generally, the earlier people act when they fall into arrears, the less debt they will accumulate (Berry et al. 2010). Looking forward, the MHS may be able to use the stages of enforcement to identify a measurable early intervention goal, such as trying to reach clients before their mortgage hardship matter advances to Stage 3.

Strategies used by the MHS to reach people before their mortgage matters worsened included: The question that needs to be answered is whether these attempts to reach people early were effective. The evaluation found that nearly 60 per cent of all CCLC MHS clients and 55 per cent of the sample of Legal Aid MHS clients had not received a statement of claim (Stages 1 and 2) when they first sought assistance from the MHS. Furthermore, the majority of these clients (37% of all CCLC MHS clients and 39% of the sampled Legal Aid MHS clients) had not received a default notice (Stage 1).

Other evidence of the impact of these strategies includes the high proportion of referrals made to the MHS by financial counsellors (35% of referrals to Legal Aid NSW), lenders (24% of referrals to CCLC) and LawAccess NSW (18% of referrals to CCLC).

Based on the results of this evaluation, the benefits of assisting clients at Stages 1 or 2 appear to be a lower risk of people losing their homes; less intensive assistance needed to resolve mortgage hardship issues, especially with regard to casework and representation at court; and fewer mortgage hardship matters proceeding to court. However, a number of points need to be kept in mind when considering the impact of the MHS's intention to intervene early.

First, for all the efforts mentioned above, the MHS has no direct control over when a client first seeks assistance. There are always going to be some people who do not contact the MHS until their matters have progressed to court or beyond. They may have done nothing about the matter until that point, they may have tried to deal with it themselves or they may have sought assistance elsewhere before hearing about and contacting the MHS. In some cases, clients will come to the attention of the MHS after they have had their home repossessed. In fact, as we have seen, within the group of clients who were examined in this evaluation were some who had already reached the later stages of mortgage hardship before the MHS commenced operation. This cannot be seen to reflect poorly on the MHS; indeed, even at that point, the MHS can still provide valuable assistance to clients, including the recovery of damages post-sale arising from unjust or unconscionable conduct by the lender. But with the continuation of the service, we may see a decrease in the proportion of clients coming to the MHS late in the process, which may indicate the effectiveness of the early intervention strategies.

Second, the capacity of individual clients to manage their own mortgage issues is an important variable when deciding how to target and structure legal services, including attempts to reach clients early. Legal needs research has clearly demonstrated that socially and economically disadvantaged people and other at-risk groups — such as Indigenous people, people from non-English-speaking backgrounds and people with disabilities — are among those who, for a range of reasons, may not seek legal assistance promptly, or, for that matter, seek assistance at all (Coumarelos et al. 2006; Grunseit, Forell & McCarron 2008; Forell, McCarron & Schetzer 2005). These people may feature more prominently in the group of MHS clients who seek assistance only once a problem has escalated to a level at which it cannot be ignored.78 We found, for instance, that many MHS casework clients were at Stages 3 or 4 and that illness or injury featured more prominently as a reason for hardship among casework clients than advice clients. Also over-represented in this group were people on government benefits and, among CCLC casework clients, Indigenous Australians.

Trying to 'detect' people in mortgage stress through lenders, financial counsellors, LawAccess NSW and other sources should continue as a key referral strategy, in order to put as many people as possible experiencing mortgage hardship in contact with the MHS as early as possible. However, we also stress the importance of the MHS retaining the capacity to assist clients who seek help later, even though the level of assistance required for such clients is likely to be more intensive.

Benefits of the MHS's approach

An attractive feature of the MHS is that it responds to the specific needs of each individual client, providing advice, minor assistance or casework, and/or financial counselling as appropriate. CCLC has financial counsellors as part of the MHS team, while Legal Aid NSW has built strong working relationships with local financial counsellors, as evidenced through the high number of MHS referrals coming from this source. Bundling legal services together with financial counselling appears to result in positive outcomes for clients experiencing mortgage hardship. Future research may examine the particular impact of having financial counsellors as part of the MHS, especially as mortgage issues are rarely experienced in isolation from other financial problems.

The type of assistance provided to each individual client depends upon the circumstances of the loan, the complexity of the matter (including the type of lender and the stage that the matter has progressed to) and the client's personal capacity (for example, their ability to act in accordance with their solicitor's advice or their ability to manage their finances).

In this evaluation we observed a strong relationship between the stage of enforcement that clients were at when they first sought assistance and the type of legal assistance that the MHS provided. Clients at Stage 1 when they first sought help from the MHS were more likely to receive advice than minor assistance or casework. In contrast, a relatively higher proportion of Stage 3 and 4 clients were assisted through casework. For example, CCLC MHS Stage 3 clients were more likely to receive casework than advice (36% compared to 22%). By Stage 4, the need for casework was even higher, with only eight per cent of CCLC clients receiving advice rather than casework. It is interesting to note that by the time a client is at Stage 5 (post-repossession) or Stage 6 (post-sale) there appear to be fewer legal options that the MHS can pursue. Again, advice — rather than casework or even minor assistance — is a more prominent type of legal help for Stages 5 and 6 clients.

These findings point to the flexibility of the MHS: its solicitors and financial counsellors can vary the assistance provided according to each client's needs and the options available at each particular stage of mortgage stress. This flexibility extends to some Stage 1 clients receiving casework rather than advice, and some Stage 3 clients receiving advice rather than casework. The increased use of minor assistance and multiple occasions of advice in responding to the needs of clients is further evidence of the MHS's tailored services.

Minor assistance, such as a solicitor drafting a letter to the lender, can supplement advice, while leaving the client in control of their matter. The value of minor assistance as an option for Legal Aid NSW, in particular, is that it enables solicitors to provide more assistance than advice only. This may be preferable to providing casework, especially for matters in which it is not essential that the solicitor take carriage of the matter. In this regard, the evaluation noted an increase in the use of minor assistance by Legal Aid NSW without any corresponding rise in casework. Similarly, the majority of CCLC MHS clients received only advice, albeit typically on more than one occasion. These clients retained carriage of the matter but continued to have access to advice from the MHS as their matter progressed.

A range of factors affect the type of assistance provided to MHS clients. As previously discussed, the personal capacity of the client is one such factor. Another is the nature of the mortgage issue itself. For instance, in exploring the types of assistance provided by the MHS, we observed that a higher proportion of casework clients than advice clients had a non-bank lender. Conversely, advice clients had a higher proportion of bank lenders. This was the case for both Legal Aid MHS and CCLC MHS clients.

There are several potential reasons for the above finding. First, it may be that clients who access non-bank loans are more marginalised than those who access bank loans. This is because non-conforming, non-bank lenders may be more willing to lend to 'riskier' customers. However, it also needs to be noted that marginalised clients are more likely to have entrenched rather than temporary financial difficulties. Second, MHS solicitors report that while non-bank lenders tend to be more generous in granting loans, they tend to be more stringent in enforcing mortgage repayments and may have higher interest rates.79This is likely to have more of an effect on those who have to borrow more, may have more trouble making repayments on time, have fewer savings and, therefore, have less in reserve when their income is interrupted (through unemployment, illness or injury). This group of clients would appear to need more, rather than less, latitude from their lender when things go wrong.80

Outcomes and aims

The MHS was established to assist people in mortgage hardship with a view to saving their home or, in situations where saving a person's home is not viable, to minimise their loss and to ensure the best possible outcome for that person. As this evaluation has found, the MHS has provided assistance to a large number of people in mortgage hardship. The evidence also suggests that more assistance for mortgage matters has been provided by the agencies involved than was the case before the program commenced. But what was the impact of this assistance?

One aim of this evaluation was to explore the outcomes for clients assisted by the MHS. While we present some of the results below, we caution the reader that information on outcomes is not comprehensive and is available only for a small set of Legal Aid MHS and CCLC MHS clients. We cannot claim that the findings are representative of the outcomes of all MHS clients; nor can we assume that the MHS was the only factor influencing these outcomes.

Outcomes were recorded for 54 of the 92 CCLC MHS casework clients whose files were closed. Of these, around half retained their home, generally after negotiation with the lender or a hearing at court or tribunal. A slightly higher proportion of a sample of 60 Legal Aid MHS casework clients also retained their home.

We found that one in six CCLC casework clients for whom outcomes were recorded had their home repossessed by the lender. For the sample of Legal Aid NSW clients, the corresponding figure was that one in every nine had surrendered their home to their lender or had their home repossessed.

A preferred outcome to repossession is for the client to sell their house on their own terms. Fifteen per cent of the Legal Aid NSW and 12 per cent of the CCLC casework clients were able to sell their home prior to the lender repossessing it, or were in the process of doing so. However, the MHS did not simply aim to save homes. Where this was not possible or appropriate to the client's circumstances, the MHS aimed to achieve the best possible outcome for the client. Saving a home may not be the 'best' outcome, for instance, if this means that the client would remain in a financially unstable situation.

The follow-up survey found that three-quarters of clients (from both agencies) who had retained their home when their file was closed still owned the property at the time of follow-up. Some continued to pay off their mortgage comfortably; however, for some respondents, it was an ongoing struggle to service their mortgage and keep up with their other financial obligations. For a small number of respondents who had originally retained their home following assistance from the MHS, selling their home had become their best option and the course of action they were pursuing.

Irrespective of whether the home was retained or lost, more than two-thirds of clients in the follow-up survey reported that the legal assistance and financial counselling provided by the MHS had helped them to achieve more control of their financial situation. Indeed, the view of surveyed respondents and of several MHS solicitors was that, in some cases, the clients had to lose their home in order to achieve financial stability.

The follow-up survey also indicated that MHS assistance may have contributed to some further positive outcomes for clients, including changing attitudes and empowerment to deal with mortgage issues. In addition, survey respondents reported a reduction in the considerable stress that they had been under prior to seeking assistance, feelings of increased confidence and capacity with regard to managing their financial issues in the future, willingness to take action or seek help when faced with mortgage difficulties in the future and recognition of the need to respond to future mortgage issues early, instead of 'burying their heads in the sand'.81 We cannot quantify the extent of these client views, but they do provide an insight into some of the potential added benefits of the MHS.

Future monitoring and evaluation

This evaluation of the MHS was a relatively small-scale project, limited in its scope and resources. However, within these limits, it has attempted to go beyond simple measures of processes and outputs. In particular, it has attempted to examine the outcomes for clients in terms of what the program set out to achieve and to identify the stage of enforcement as a variable that affects the delivery of legal assistance to clients experiencing mortgage hardship.

If the MHS continues into the future, and we are of the opinion that it should, we suggest that Legal Aid NSW and CCLC continue to monitor the operation of the program and give further thought, in particular, to the outcomes of the MHS and their measurement. Further, wherever possible, the collection of program information should be incorporated into the day-to-day administration of the MHS. We would like to offer a number of suggestions, listed below.
  1. Legal Aid NSW and CCLC continue to record stage of enforcement not only at the time when clients first contact the MHS but also at each subsequent occasion of service.
  2. An 'early intervention' goal for the MHS should be to assist clients before their mortgage hardship matter escalates to Stage 3. Ongoing monitoring of MHS clients' stage of enforcement in the future should indicate a growing number of clients being assisted at Stages 1 and 2, with a corresponding decrease in the number of clients assisted at later stages.
  3. The MHS needs to retain the capacity to assist clients who are already at later stages of mortgage hardship (Stages 3 to 6) when first detected, including those with more complex needs.
  4. The effectiveness of the MHS be considered primarily in terms of achieving the best possible outcome for each client rather than solely in terms of saving homes. While saving homes remains a legitimate goal, other positive but not necessarily compatible outcomes include clients selling their home on their own terms and clients achieving greater financial stability.
  5. Consideration be given to the ongoing recording of outcomes for a small but random selection of clients over time. One way to do this would be for Legal Aid NSW and CCLC to randomly select five clients each month whose file was closed six months earlier. These clients would be asked a set of follow-up questions about their current circumstances (for instance, based on the follow-up survey used in this study), including whether they still owned their home and about their current financial situation. If a client could not be contacted or refused to participate, this would be recorded and another client substituted in their place. This would provide a solid basis for better attributing outcomes to the program and for measuring client satisfaction with the legal assistance provided through the MHS.

76  Fujitsu Consulting is a consulting firm that has monitored and reported on mortgage stress in a series of reports (see Fujitsu Australia 2011).
77  It was not possible to compare CCLC advices before and after the commencement of the MHS.
78  Indeed, both Legal Aid NSW and CCLC identify these as target groups for their services because of the difficulties they experience in accessing justice and legal services (Consumer Credit Legal Centre (NSW) Inc. n.d.
79  Legal Aid NSW n.d.).
80  CCLC reported that some non-bank lenders are trying to wind up their businesses and are therefore no longer lending and are very reluctant to give hardship variations, which have the effect of extending loans. Further, with regard to interest rates, particularly in the period when the Reserve Bank rates were falling in response to the GFC, many non-bank lenders did not drop their rates in line with the Reserve Bank and bank lenders. This was due to dependence of non-bank lenders on overseas markets for their funds.
81  By contrast, MHS solicitors report that banks tend to adopt a more conservative approach to granting home loans but perhaps, because of these more stringent entry conditions, tend to provide more latitude in terms of missed payments and are somewhat more sympathetic in their hardship provisions.