Brokers and lenders are warning that the Government risks creating a UK version of US-backed institutions Fannie Mae and Freddie Mac unless the Government puts in place a proper exit strategy for Help to Buy 2.
Speaking at the Mortgage Industry Conference and Exhibition in London last week, Council of Mortgage Lenders chairman Nigel Terrington noted that in the space of a few months the housing market has gone from a situation where homeowners were seen as an “endangered species” to talk of a housing bubble.
But he warned that the Government must not become “addicted” to the scheme, and that the second phase of Help to Buy, which offers lenders a Government gurantee on up to 15 per of the loan, “has been put in place with exceptional speed”.
Terrington said: “The CML has called for a carefully enunciated, agreed and well-managed strategy for exit. It is important that Help to Buy does not morph into the US scheme Fannie Mae. It must be a time-limited intervention to correct what is seen as a temporary market failure.
“It must be a temporary fix and not a permanent feature.”
Speaking at the same event, Leeds Building Society chief executive Peter Hill said it could be argued Help to Buy has already done its job.
He said: “Help to Buy has been a tremendous catalyst to take the conversation onto a much more positive plane and to really make consumers appreciate that actually there are high LTV loans available in the market and that lenders are active. In that context, it seems to have had a tremendous impact.”
Terrington is not the only to be concerned that the Government has the right strategy to wean the market off Help to Buy. Criticism of the scheme emerged when the first part of the scheme launched in April, from the International Monetary Fund, former Bank of England governor Lord Mervyn King, and the Treasury select committee among others.
Even the UK’s biggest lender, Lloyds Banking Group, has got in on the act, with chief executive António Horta-Osório saying Help to Buy will create a bubble without more homes.
Former senior executive at US government-backed lenders Fannie Mae and Freddie Mac Cliff Rossi, now a professor of finance at the University of Maryland, also warned the Government in April to approach its Help to Buy scheme carefully and to ensure taxpayers are not left with significant losses.
He said: “The Government needs to go in with its eyes wide open about what its risk exposure is over the long term.”
Rossi added the US experience demonstrated that once a government intervened in the housing market, it would be harder for it to step back.
Coreco director Andrew Montlake agrees with the concerns raised. He says: “I have been saying this for some time now. It is the easiest thing in the world to introduce these schemes but the harder point is to wean people off them.
“One thing Help to Buy has done is to increase confidence in the market. It is hard to say how many more 95 per cent mortgages are out there because of the scheme but yes, it has had a big effect. But that does beg the question: is there much need for the second phase of Help to Buy?”
Montlake added it would be preferable to withdraw its mortgage guarantees through a phased process, perhaps by lowering the maximum loan size from £600,000 or possibly removing London properties from being eligible.
John Charcol senior technical manager Ray Boulger says: “Nigel is absolutely spot on. Fannie Mae and Freddie Mac were started on a temporary basis back in the 1930s and we still have them, that clearly is a danger.
“With private insurers now able to offer capital relief to lenders much as Help to Buy does, it does seem to offer a realistic alternative to the Government scheme and that should help in putting together an exit strategy. It would have to be managed in stages I feel, but again, it is something that will need to be looked at if we are to avoid the same scenario as Freddie Mac and Fannie Mae which have been around for almost 80 years.”
London & Country associate director for communications David Hollingworth says: “Nigel’s comments are fair. We do not want to be celebrating the success of a new scheme in the short-term only to find that we are running into difficulties further down the line.
“You would hope that thoughts about how that will be exited are already on the table. I am sure the private insurers will be looking at that carefully and will be ready to take up the guarantee once the government decides to withdraw.”
Hollingworth also pointed out that lenders who are not using the Government guarantee have already improved their rates at 95 per cent LTV so the post-Help to Buy market should therefore be ready to support the increased demand.
He says: “Help to Buy has already allowed other lenders to sharpen up their 95 per cent deals, either because the scheme has fuelled competition but probably because they feel they could price their own products more competitively without getting inundated.
“So even where the guarantee is not being used, we can see a benefit for borrowers.”