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Does the Govt MIG scheme expose taxpayers to unnecessary liabilities?

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A number of crucial details are lacking from the Government’s plans for a new mortgage indemnity guarantee scheme and the industry is questioning whether it will end up employing too much risk to help borrowers.

Chancellor George Osborne unveiled the new scheme in last week’s Budget. The Government will offer a guarantee of up to 15 per cent on the purchase price of a new or existing property worth up to £600,000. The borrower must put down a deposit of between 5 and 15 per cent to create a total “deposit” of 20 per cent. The scheme is available to first-time and existing homeowners.

The MIG is open to all lenders and has the capacity to support up to £130bn in high loan-to-value lending. It will run for three years from January 2014.

Lenders will purchase the guarantee from the Government. The price will be decided at a later date, but it will be influenced by the LTV of the mortgage.

The guarantee will last for seven years and lenders will take a 5 per cent share of net losses above the 80 per cent threshold, to ensure they do not lend recklessly.

The Treasury says its liability is expected to be £12bn.

Each participating lender will pool the loans they wish to place in the scheme and the Government guarantee will apply to the pool.

Certain details of the scheme have not yet been confirmed. It is not clear whether lenders will be granted capital relief on loans at higher LTVs, what lenders will be charged in exchange for the Government’s underwriting, and what the eligibility criteria will be for borrowers.

Critics of the scheme have been quick to draw comparisons with the higher risk lending which defined the US sub-prime market, where applicants were able to borrow well beyond their means.

However supporters say a better comparison is with Canada’s system of mandatory mortgage insurance, where mortgages above 80 per cent LTV are backed by the Government and which helped to shield Canada from the worst of the sub-prime crisis.

Genworth Mortgage Insurance Europe president Angel Mas says: “Using the Government guarantee for new high loan-to-value mortgages will expose the UK taxpayer to unnecessary liability – potentially a multi-billion pound loss if there is a late 80s/early 90s-style property crash.

“Given the role of irresponsible lending in the recent crisis, this seems an oversight that puts the taxpayer at unnecessary risk, while leaving the Government in the hands of the banks when it comes to ensuring prudent lending standards are maintained under the scheme.”

Grainger head of corporate affairs Kurt Mueller says: “The risks associated with the scheme and who can access it have yet to be clarified. How risky are they as a borrower and is this now sub-prime Britain? It is going to come down to the due diligence process. The devil is in the detail and the details have not been published yet.”

John Charcol senior technical director Ray Boulger says a downturn in house prices would place taxpayer money at risk but effective communication between the Government and the private sector would go some way towards ensuring a greater take-up of the scheme and a mitigation of risk.

The Council of Mortgage Lenders says lenders must be granted capital relief on loans for the scheme to be a success.

In a statement the CML says: “The scheme will need to ensure that all lenders will be able to gain capital relief in recognition of the risk mitigation offered by the Government guarantee. Without capital relief, and depending on the size of the fee, the cost of the commercial fee that lenders will have to pay to gain the benefit of the scheme could make the scheme uneconomical.”

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