Is it a ‘solution’, in conjunction with the Funding for Lending scheme, to the current mortgage market problems? Or an innovative financial experiment to address unique and challenging market conditions where the benefits exceed the potential risks to taxpayers?
Fundamentally the Help to Buy scheme marks a major shift from supporting housebuilding and growth in the economy to a policy of supporting individual aspiration to homeownership – a populist approach to attract voters with a general election coming up? But it is potentially an expensive intervention if the economy does not improve its projected growth trend, or if higher inflation leads to interest rate rises and more mortgage defaults in the medium term.
Why intervene now? I doubt that the mortgage industry was actively lobbying for this intervention, although the Council of Mortgage Lenders welcomed the scheme in principle, as trade bodies invariably do when a government ‘helps’ their sectors.
The Treasury’s outline of the scheme suggested a few possible drivers:
• To build on the momentum of the Funding for Lending scheme which is due to end in early 2014.
• To provide support for three years in the belief that the absence of higher loan-to-value lending is a cyclical feature rather than a long-term market adjustment (on which market views may differ).
• To address the fact that homes now sell on average once in 25 years, which the government believes is unlikely to be consistent with a well–functioning market.
Are these compelling reasons why the government should intervene in this way now, and what may be the unintended consequences for borrowers, lenders, the economy and taxpayers?
The Help to Buy mortgage guarantee has been variously described as a political master stroke, akin to Margaret Thatcher’s Right to Buy scheme. A mortgage market ‘game changer’ and a charter for rich people to buy second homes assisted by poorer taxpayers.
Some commentators have also suggested that when Help to Buy is fleshed out and launched in January 2014, its cost and complexity will deter lender participation.
It is too early to make a proper judgement as the Treasury has only published an outline with skeletal details. However I was struck by the juxtaposition of the Budget announcement and the publication of the Financial Conduct Authority’s first Risk Outlook for 2013/2014 a few days later.
The FCA has taken over part of the regulatory responsibilities of the FSA and it has been keen through its Risk Outlook and annual business plan to flag up its immediate and medium-term priorities.
In its list of priority conduct risks, I wonder how the FCA would view the impact of the government’s public policy objective to help a new generation realise the dream of homeownership by introducing a mortgage guarantee?
How will the Help to Buy scheme be structured to avoid over-exuberant borrowing and the wrong consumer outcomes if household incomes have shocks or if local house prices fall? The FCA comments in the Risk Outlook that prices are already out of line with fundamentals. So there is a real risk of future local and regional house price falls, which is being hidden by the strength of the London and southeast markets.
How will lenders be able to demonstrate that they are lending responsibly in the post mortgage market review world in providing higher LTV loans with the guarantee if they would not be prepared to do so without it? And if a mortgage guarantee for the lender is the answer, why does it have to come from the government rather than private insurers in the UK market?
And, finally, what will be the market impact of an intervention covering £130bn of mortgages other than the creation of a contingent liability of £12bn for hard-pressed UK taxpayers?
Already market expectations are that the scheme would create an artificial stimulus to house prices and transaction numbers. So is the scheme actually designed to bailout existing borrowers in negative equity (around 630,000 in January 2013 according to FCA estimates), allow more mortgage prisoners to be able to transact (by remortgaging to another lender), and also support first-time buyer aspirations? All of the above, but will these intended consequences be the actual consumer outcomes?
With arrears and possessions figures trending down in 2012, some in government may believe that the worst market impacts of the housing downturn and credit crunch are behind us. I doubt that is the view of the mortgage industry which is managing borrowers in difficulties through various forbearance strategies. I know that it will not be the view of the FCA which has announced a new thematic review in 2013 to look at the conduct risks in firms’ strategies for mortgage arrears and forbearance management.
As lenders will need to take possession of the property to crystallise a loss to claim under the government guarantee, will there be a perverse incentive on lenders to move away from using forbearance in the future? If so home repossessions could create a downward spiral in house prices in affected localities, something which has been so far avoided since the UK went into recession.
So what checks and balances are needed to avoid unintended consequences? A few features have already been announced.
The scheme will not apply to buy-to-let lending and commercial loans. It will only extend to repayment mortgages, not interest-only loans (a significant limitation in coverage), and will not cover internal refinancing with the same lender, but will cover remortgaging where the borrower moves between lenders.
A key principle is that the scheme should not incentivise irresponsible lending. Two features are included to achieve this outcome: the lender must pay a commercial fee for the guarantee, and it must retain 5 per cent of the net loss for an 80 per cent LTV limit.
Based on my knowledge of many lenders’ attitude to mortgage guarantees, I suspect that the ‘commercial’ fee will be a major disincentive, limiting lenders’ willingness to participate in practice. As yet it is unclear what ‘commercial’ means and how much cost lenders will bear, or how much will be passed on to consumers to pay.
There are nine months to negotiate the terms of the scheme and launch it in early 2014. In my view it does not look positive that the Help to Buy mortgage guarantee scheme will help the mortgage market, or many aspirant homeowners.
Michael Coogan is ambassador and strategic adviser to Deloitte, chairman of Shaping Tomorrow and past director general of the Council of Mortgage Lenders
Key points
The Help to Buy mortgage guarantee scheme was part of a package of measures in the Budget covering enhanced support for the new-build sector.
How will lenders be able to demonstrate that they are lending responsibly in the post mortgage market review world?
A key principle is that the scheme should not incentivise irresponsible lending.
