Alongside the £3.5bn in equity loans for the purchase of new build homes valued up to £600,000 from April 2013 announced in the Budget, the Government has also offered to fund a guarantee scheme for high loan to value (LTV) mortgages (between 80% and 95% LTV) from January 2014.
The initial proposal is for the guarantee fund to be capped at £12bn, which it is suggested will underwrite £130bn of mortgage loans over three years.
Priority actions to benefit the mortgage market:
Peter Williams, Executive Director of IMLA – whose members account for more than 70% of mortgage lending via intermediaries – has highlighted a number of areas where attention should focus as the details of the Treasury scheme are finalised over coming months:
Avoid unnecessary new rules
“We are already hearing that Government wants to see scheme rules including strict loan-to-income criteria in place over and above what is already coming in via the Mortgage Market Review (MMR) rules on affordability.”
“We understand why it might wish to do so given that it will pick up most of the bill for any poor lending. But the last thing the market needs is two sets of rules with all the potential for error, cost and delay that would entail. The aim must be to create an accessible scheme that does not overburden the broker and lender communities with excessive rules and requirements. The new MMR rules should be sufficient to protect Government and consumers.”
Support lender competition without distorting the playing field
“It is also essential that the guarantee scheme is implemented without further distorting the competitive landscape between lenders. Some smaller lenders have already been edging towards higher LTV loans because of pressure lower down the range from large lenders who have taken advantage of cheap funds under the existing Funding for Lending Scheme.”
“The guarantees now mean larger lenders can also go up the LTV curve and feel secure about it. Internal Ratings Based (IRB) banks can do this too in the knowledge that it is highly likely the guarantee will be taken into account and used to offset the higher capital requirements for high LTV loans.”
“The regulators resolved not to offer standardised lenders any benefits under the current NewBuy scheme guarantee but it is vital this is revisited, otherwise standardised lenders will be disadvantaged right up the LTV curve. Providing capital relief to all lenders involved in the guarantee scheme is a must.”
Plan an exit route far in advance
“Once the operational details are finalised, there needs to be clear and decisive thinking about potential exit routes from the scheme. This is a very big State intervention – not unlike the Canadian mortgage guarantee scheme which has existed since the 1950s.”
“While Canada has avoided the strains so evident within the US market where Fannie Mae and Freddie Mac both became dominant players with all the risks that entailed there are important lessons to learn from both countries. There will undoubtedly be
pressures to retain the guarantee as a permanent feature of the UK market, but this would need very careful consideration.”
“It will be essential to look at how Help To Buy impacts the overall market and submarkets, and how it affects the competitive landscape. IMLA will play its part by regularly reviewing progress and drawing on members’ insights to inform discussions about the consequences for lenders and the wider market.“