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.”