Last week, Exact called on the Government to provide funding for local authorities to provide mortgage lending. Is this a workable solution to the shortage of mortgage lending?
Murphy: Assuming that there would not be limitations on the funding being provided by the Treasury to lend directly into the market via local authorities, this in theory seems like an excellent proposal.
However, there must be a substantial number of specialist lender operations who have the infrastructure and operational capability to fulfil a given level of lending as well as the skill sets required to manage the risk side for any scheme rules.
Perhaps more importantly, it offers another method of bringing a little more competition to the market.
Cuming: This is a fundamentally flawed idea recalling a lending model that worked effectively decades ago when it was targeted to assist local authority tenants to exercise their right to buy. Local authorities no longer have the expertise or infrastructure to manage a mortgage business so this is not a workable solution.
The Government has already provided billions of pounds of funding to banks, so providing more through a different avenue that is not geared up to lend is not the answer.
The solution has got to come from freeing the lines of credit through the existing distributors and that will come through a flexible approach that assesses applications based on affordability, credit profile and property. Currently there is a rigid approach that concentrates predominantly on equity.
Bien: Giving money to local authorities to distribute would not necessarily solve the shortage of mortgage lending because the shortfall is so great and local authorities alone would not be able to bridge the gap. But it might be a useful alternative to the handful of big high-street lenders who are doing the bulk of mortgage lending at the moment.
One question, however, is whether local authorities have the appetite or knowhow to lend in those areas where the high-street banks are failing to lend – namely to those who don’t have big deposits.
By giving money directly to local authorities to lend, the Government may be able to better control the level of lending being done but ensuring that those banks which it has taken stakes in do this is perhaps a simpler solution.
The Association of Mortgage Intermediaries is calling for the reintroduction of mortgage indemnity guarantees as a way of making loans less capital-intensive for lenders and so increasing the supply of loans to all sections of the market. Would reintroducing Migs be a good idea?
Murphy: In the event of a forced sale of a property with a high loan to value, one issue for lenders is that their potential exposure to loss is increased in what is still a reducing house price market.
If insurers can be persuaded to offer cover for this sector of the market, which may require some form of Government guarantee in terms of being responsible for the first slice of any losses, this may encourage some lenders to re-engage in this vital sector of the market. Brokers have argued that for first-time buyers without access to higher-LTV products, the market will continue to slide as they are unable to access it. If products in this sector were again accessible, this would be likely to put a floor in the market, allowing confidence to start to rebuild.
Cuming: Mortgage indemnity guarantees have not actually gone away, they have been renamed higher lending charges. However, they are not used as extensively through insurance companies as some lenders now take the risk in house. In the past, lenders would take all the risk of loss up to a level, typically 75 per cent and then would share the risk of loss above that with an insurer taking the lion’s share.
The main barrier to a reintroduction of that model would be the appetite of the insurers, which I feel would simply not be there. However, even if there was the will, my fear is the insurers would set overly cautious policy parameters which would continue to restrict lending.
Bien: Yes, reintroducing Migs is a good idea and would enable borrowing at high LTVs once again. Lenders are reluctant to lend at 90 or 95 per cent because of the threat of negative equity and the amount of capital they need to supply such a loan.
By offering an insurance policy that is paid for by the borrower, lenders can rest assured that their money is safe. It would enable lenders to offer more loans at higher LTVs and therefore slightly lower rates than borrowers have to pay at the moment, which should encourage more first-time buyers – the lifeblood of the market – into the housing market.
What measures do you hope to see in the Budget next month targeted at the mortgage market?
Murphy: Ideally, the stamp duty land tax needs reforming. The Government has used stamp duty over recent years as a soft target for boosting Treasury coffers by hiking the tax payable at trigger points which has increased revenue dramatically.
With the near-collapse of the housing transaction market, now would seem like a sensible time to reform the whole tax in respect of property, as the revenue the Treasury now generates must have more than halved in the last 12 months.
Surely, it would be better for a smaller take on a larger volume of transactions and to change the current charging structure to one where the higher rate is only charged on the incremental amount, in the same way as income tax is applied.
Cuming: I would like to see the temporary increase of the stamp duty threshold to £175,000 to be extended beyond September for at least another 12 months. However, realistically, beyond that, I feel there is very little specific help the mortgage market can receive from measures introduced in the Budget. Overall, actions taken need to ensure people feel more confident about the future. If, as a result of the Budget, consumer sentiment improves, that should feed through into improved activity in the mortgage market.
Bien: It would be great to see something positive happen in the short term to assist the mortgage and housing markets. Too many reviews and reports are circulating, taking a long-term view, but what is required is that lenders urgently start lending again.
Estate agents are reporting increased interest from potential buyers since January but if they cannot get the finance they need, it amounts to nothing.
It would be good to see the announcement of some form of Mig from the Government and insurers, the removal of stamp duty on all purchases for the foreseeable future, the abolition of Hips, ways in which the securitisation market could reopen for business and the ringfencing of toxic debt. That should be good for starters.