MPs wrong to predict return to sub-prime excess from Help-to-Buy says John Charcol

10th May 2013

As base rates stay on hold, borrowers and potential borrowers may be wondering what it means for them and in particular whether the two new help to buy schemes may help. Ray Boulger, mortgage expert with John Charcol has some interesting views – first that the Help to Buy scheme could stimulate further activity. He is much more cynical about Government plans to guarantee a percentage of their funds to help borrowers get higher loan to value mortgages. He says that lenders can already access insurance to cover such lending but it counts significantly against their capital. However he is also critical of the view of some MPs that we could see a return to the worst excesses of sub prime borrowing saying they do not have a great understanding of the mortgage market. The note is below

“It appears from this week’s no change decision from the MPC, on both Bank Rate and the size of the QE programme, that the committee considered The Chancellor’s exhortations to stimulate the economy, even at the expense of inflation if necessary, were adequately reflected in its current stance, following the extension of the Funding for Lending scheme.

“Only two lenders are currently actively supporting the Help to Buy shared equity scheme, but at least two more are set to do so this month. The major builders are reporting strong interest in the scheme and the knock on impact is likely to generate additional increased activity in other areas as some buyers attracted by the scheme will buy with a different mortgage and maybe in some cases not even a new build property. Likewise, as the scheme is now open to non first time buyers, subject to them not owning any other property they will not be selling, additional housing market activity will arise from the homes of these movers coming on the market.

“The increased demand will incentivize builders to complete current developments more quickly, thus allowing them to bring forward the opening of new sites, subject to planning constraints. Thus it looks promising that progress is being made on the Government policy to increase the rate of house building, although more needs to be done.

“The second part of Help to Buy is much more controversial. This is the mortgage insurance scheme due to launch on 1 January 2014. The Government plans to offer mortgage insurance to lenders wishing to offer 95% LTV mortgages but the timing of this part of the announcement in the budget seems to have been driven almost solely by the desire for a good Budget headline rather than after undertaking a serious consideration of the wider implications and the logistics of implementation.

“The proposal is that this scheme will be available for remortgages as well as purchases. Therefore it would be more appropriate to call it “Help to Mortgage” rather than “Help to Buy,” but perhaps The Chancellor thought that wouldn’t have quite the same cachet! Fortunately for The Chancellor he doesn’t have to comply with the FCA’s requirement that all promotions should be “clear, fair and not misleading!”

“Suggestions from some economists that this scheme will result in the return of the sub prime mortgage demonstrate a remarkable lack of knowledge about the current state of the mortgage market. There may be good reasons to criticize the scheme but claiming it will result in a return to sub prime lending merely devalues the criticism as coming from someone who doesn’t understand how the mortgage market actually works. The reality is that even with mortgage insurance there will be many more hoops to go through to secure a 95% LTV mortgage than one with a bigger deposit.

“Nevertheless there remain many questions over how this scheme can be successfully implemented and there remains a big learning curve for the Government. A particular challenge will be agreeing the lending criteria to qualify for the scheme. For example will this be done individually with each lender or will there be blanket minimum criteria set by the Government. The draft proposals suggest borrowers will need a certain, but so far unspecified, minimum credit score to qualify for the scheme. However, most 95% LTV mortgages currently on offer outside any of the Government schemes are from smaller building societies, many of whom don’t credit score, although of course they will all do a credit check.

“Most of the building societies which have come back into the 95% LTV arena are already buying mortgage insurance, which is freely available from the private sector. However, a major constraint on how much of such lending they are able to do, even with mortgage insurance, emanates from the failure of the regulator to allow lenders who buy mortgage insurance to obtain capital relief. This appears to be the only rationale reason for the Government to get involved in offering mortgage insurance.

“Rather than nationalising high LTV mortgage lending criteria, which is effectively what the Government will have to do if it offers mortgage insurance, perhaps a better solution would be to address the root cause of the problem, which is the very large amount of capital lenders are required to hold against high LTV mortgages.

“If the Government believes the Basle 3 and other regulatory capital rules it has signed up to are appropriate, taking the wider economic implications into account, it is illogical for it to introduce a scheme to get round rules it has adopted. On the other hand if it believes the current capital rules are too strong it should introduce less stringent requirements, thus eliminating the need for what I will call the “Help to Mortgage” scheme.

What Should Borrowers Do?

“The cost of fixed rate mortgages is still falling, especially 5 year fixes, which now start at 2.49%. Not only has the price one has to pay for 5 years worth of mortgage payment security never been lower but fixed rates are generally lower than comparable variable rates, despite the scope for any further fall in Bank Rate being negligible. Many people on SVRs, most of which are between 4% and 6% will now be able to reduce their mortgage payments significantly, as well as buying peace of mind, by remortgaging on to a 5 year fixed rate.”

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