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Former Fannie Mae exec warns Govt over Help to Buy risks

House Modern Home UK Property 480

A former senior executive at US government-backed lenders Fannie Mae and Freddie Mac has warned the Government to approach its Help to Buy scheme with its “eyes wide open” to ensure taxpayers are not left with significant losses.

Chancellor George Osborne announced the £3.5bn Help to Buy shared equity scheme as part of last month’s Budget. The scheme allows borrowers with a 5 per cent deposit to qualify for a 20 per cent loan from the Government on new build properties worth up to £600,000. The loan is interest-free for five years and repayable on sale.

Osborne also set out plans for a £130bn mortgage guarantee scheme as part of Help to Buy which will be available for new-build and existing properties. Lenders will be able to buy a Government guarantee where borrowers are putting down a deposit of between 5 and 15 per cent.

Cliff Rossi, now a professor of finance at the University of Maryland, has told The Daily Telegraph there are several critical steps for the Government to reduce the potential risk of Help to Buy to taxpayers.

He said: “The Government needs to go in with its eyes wide open about what its risk exposure is over the long term. “

Rossi stressed the need for the Government to accurately assess the risk of default, and charge the bank an appropriate fee, or “lenders will think the Government does not know what it is doing and it could end up sitting on a lot of potentially risky loans”.

He also called for the Government to ensure it continues to monitor the ability of the borrower whose mortgage has been guaranteed to repay the loan.

Rossi added: “It is so easy to say we will set up this process to manage the risk. But the circumstances of borrowers can change quickly.”

Rossi backed the Government in choosing only to guarantee some of the loan, but said the US experience showed once a government intervened in the housing market, it would be harder for it to step back.

Capital Economics property economist Ed Stansfield told the newspaper: “In the worst case scenario, it pushes house prices up, so when interest rates do go up, we have another bloodbath in the housing market.”

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  1. The Budget for Homeowners is an absolute farce and a train wreck waiting to happen. This American needs to be heeded.

    So you want to buy a house for £550,000, your own deposit will be £27,500 but the Government will hand you £110,000 repayable when you sell. At no interest? At no inflated proportion on the sale to reflect the increase in value? And what if you stay put for a lifetime? Just think a £500,000 house in the North East is a Castle. Indeed currently Savills are offering a Grade B listed Scots baronial mansion, including a separate cottage, outbuildings and 24 acres for £495,000!

    The whole thing seems predicated on the Government hoping that the lenders will lend responsibly, but what happens when/if people lose their jobs? We are currently in a recession, the UK is not growing, and real incomes have actually gone backwards. Apart from buying the house, people are going to get into further debt buying the carpets, the curtains, the stamp duty, the conveyancing and all the other things that are involved in buying a house.

    Perhaps the Government should have not bothered with this scheme and just abolished stamp duty? Maybe that would have been a lot more sensible! What is this going to do to house prices?

    Perhaps it ought to be looked at from the other way; we need to encourage moves to make house prices decline rather than increase. Indeed perhaps a significant rise in interest rates might have been a good idea all round, not least for the savers who subsidise those who wish to live in debt. Then those who have money may feel inclined to spend as they are receiving a decent return on their savings, rather than encouraging those already in debt to get in deeper. Those that don’t have the money can’t afford the price of the ticket – even with Government help.

    It is an oddity and perversity of the UK psyche to be so obsessed with home ownership. Travelling through Europe where rental is much more common I haven’t noticed a marked detriment to living standards. Indeed even with the current Euro crises, most people in France, Germany, Belgium, Holland and even Italy and Spain (if they are not unemployed) enjoy what appears to be a better standard of living and lifestyle than we do in the United Kingdom.

    Do not forget what prevailed in the past when the UK did not have the highest personal debt ratio in the world and we had a reasonable savings ratio. 40 odd years ago interest rates were fairly similar to what they are today. The mortgage rate in 1969 was 4.5%, but you had to earn in a week what your mortgage repayment was in a month – compare that to the requirement today! Moreover you had to have the sufficient deposit with the Building Society and you had to be saving with them for at least 2 years so they could judge your financial stability. Wives income was not taken into account and please don’t even think of applying as a civil partnership. Furthermore you were compelled to pay for a Mortgage Indemnity Guarantee – an insurance policy on behalf of the lender to insure against the borrower defaulting on the loan. But those were back in the days when our balance of payments was monthly headline news and we relied and looked for a positive figure as we actually had a manufacturing base that exported. Now our economy is entirely based on people going shopping with money they don’t have.

    Unfortunately the press is also complicit in hiding the harsh realities of life to an ever more mollycoddled public. In Victorian times you went to prison for debt, nowadays you are almost rewarded for it.

  2. Harry
    The pearls falling from your lips will surely fall on stony ground and be ground to dust by the swine of self interest!
    If only there was not an age barrier to becoming a government advisor…………………….!!

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