The Council of Mortgage Lenders say the Government’s new mortgage indemnity scheme will not lead to lenders offering riskier loans.
The paper laying out the proposals, Laying the Foundations: A Housing Strategy for England, outlines how house builders will deposit 3.5 per cent of the sale price in an indemnity fund for each home sold through the scheme. The Government will provide additional security of 5.5 per cent. The house builders contribution will be held by the lender for seven years and interest will be payable on it.
Funds will be returned to the developer after the seven year period minus a portion of any losses on the loans in the scheme. A central administrator will create “silos” of funds that apply between lenders and house builders.
In the event of repossession, and the house being sold at a loss, the lender will be able to recover 95 per cent of any shortfall through the scheme. Public money will only be at risk if the borrower and the fund cannot cover costs.
The CML, which helped Government develop the proposal, says borrowers and lenders have an interest in making the scheme work and that FSA rules and lender discretion will still apply to the lending decision and the subsequent management of the mortgage.
The CML says borrowers’ own liability remains exactly the same as on any other mortgage and that the fund does not indemnify them. The borrower will still be required to repay any shortfall if their home is repossessed but if they are unable to meet their liabilities the lender will be able to offset 95 per cent of its losses against the fund.
CML director general Paul Smee says: “UK lenders will not be compromising the quality of their lending or increasing their risk of loss through this scheme. It will however allow credit-worthy borrowers to obtain higher loan to value mortgages on new build properties without requiring the level of deposit which has become usual in recent years.”
Shadow Communities and Local Government Secretary Hilary Benn says the MIG plans must not be another “false dawn”.
He says: “With the average age of first time buyers projected to rise to 44 people need help getting mortgages. Labour has been calling for action on mortgages and a Mortgage Indemnity Guarantee Scheme is an idea first proposed by Labour in Scotland. People are relying on the Government to get this right. It would be yet another false dawn if the scheme artificially raised house prices or further risked the stability of banks.”