Checkmate executive chairman Stephen Knight, who plans to launch his lender in 2009, says by offering insurance such as MIGs the market could be re-ignited.
Knight says: “Things have to be resolved by something different happening. The Government needs to extend guarantee it already gives under the HomeBuy scheme to 95 per cent LTV first-time buyers. It’s the equivalent of the Government giving out a MIG; where the premiums paid buy the many fund the losses created by the few. And the Government could surely make some money out of it.
“But it is not so outrageous because the Government is already in that market – it guarantees in the HomeBuy scheme and it offers unsecured loans to students.”
Checkmate Mortgages commercial director Peter Stimson says: “If you can issue loans where the lending typically above 75 per cent is covered by an insurance policy, the risk is substantially diminished if not reduced altogether – in other words a genuine hedge with a third party firm underwriting the risk.
“In the 2000’s, many lenders began to effectively self-insure by putting the MIG premiums aside and calling them Higher Lending Charges or similar, because it was argued that lenders often charged higher rates anyway above 75 per cent, so why double charge with the addition of a MIG?
“Well quite simply, the risk premium in the form of a higher rate a lender charged above 75 per cent, as we are now discovering, in no way compensated adequately for the default probability and ultimate loss severity that higher LTV loans actually posed.”
Stimson says loans of 90 per cent LTV or above have a default probability of at least five times that of loans below 75 per cent LTV and in a falling market, the ultimate losses are many times that amount.
He says with a MIG, securitisation can even be considered once again: “Even if you assume that you do not currently have the ability to trade loans in the markets, lenders should have the ability to gain significant regulatory and capital relief with this hedge underlying the loans, making the whole lending process cheaper and more efficient.”
This call was reiterated by the editor of the UK Housing Review and professor at York University, Steve Wilcox at this year’s Building Societies Association UK Housing Review launch.
Wilcox says: “MIG was a key part of the last downturn, but now the hit has been taken by the mortgage lenders.
“Should the Government be proposing a return to MIGs? Even to key workers at least, it should be considered. It’s policy that’s time has come round again.”