Unfortunately the Government has failed to understand that to successfully launch an innovative scheme like Homebuy it is necessary to work with the providers, in this case mortgage lenders, rather than announce details that not a single lender has signed up to.
Of the 5 lenders who had been discussing the scheme with the Government two, Abbey and Alliance & Leicester, pulled out on the same day the Government announced further details of the scheme. That left just three lenders still considering participating, Halifax, Nationwide and Yorkshire B S.
A glaringly obvious omission from the ODPMs press release about the new Homebuy schemes was the lack of any endorsement from the CML or even a single lender. The Government claimed they were happy that a maximum of only three lenders were now going to offer the scheme. Of course they would say that, wouldnt they, and no doubt if one of the remaining three lenders pulls out they will claim to be happy with only two!
The three Homebuy schemes consist of a 75% mortgage and a 25% equity share, with half of the equity share funded by the Government and half by the lender. A key question with any equity share scheme is what level of rent, if any, is charged on the equity share. The Government has stipulated this should be a maximum of 3% on two of the three Homebuy schemes but merely said the maximum will be less on the third scheme.
A key consideration for lenders will be that this type of scheme takes them into virgin territory. Until now they have just lent money secured on the property. Now they are also being asked to invest directly in property. There is clearly a correlation between the two activities and therefore logic in the concept. Bearing in mind the homeowner will be responsible for all the costs of maintaining the property a 3% rent compared with a competitive mortgage rate of around 4.5% would suggest property values only need to increase by an average of around 1.5% p.a. for the lender to make the same return from the equity share as from the mortgage lending.
This calculation would be reasonable if the Government funds the slice of equity share from 87.5% to 100% and the lender the slice from 75% to 87.5%. However, it now appears more likely the Governments current intention is for the risk on the 25% equity share to be shared equally by the Government and the lender. This would obviously increase the lenders risk very significantly. From the Governments perspective, whether this scheme makes or costs the taxpayer money will depend on property price movements but whether property speculation is a legitimate use of taxpayers money is an interesting question.
One anomaly with this scheme is that the Government, either through ignorance or incompetence, has excluded certain lenders, including one in the top ten that is interested in participating. This is because only deposit takers are allowed to participate, whereas the obvious definition to qualify would be authorisation by the FSA as a mortgage lender. Maybe the ODPM doesnt yet realise that the FSA now regulates residential mortgages!
Mortgage regulation, however, poses difficulties for this scheme as the provision of finance will be part regulated and part not. The mortgage will only be available in conjunction with the equity share but the equity share will not be covered by FSA regulation. Therefore it seems to me it will be necessary to make reference to the equity share in the KFI. There was no mention of this in the ODPM press release. Does this mean the Government hasnt thought of this yet or that they havent yet been able to agree a solution with the FSA?
With so many unanswered questions and the lenders IT developments likely to take months, the likelihood of Homebuy having a successful launch on the planned start date of 6/4/06 looks negligible. In fact this scheme looks likely to be about as successful as CAT standard mortgages! Notwithstanding these minor details, no doubt the ODPM press release for April 2006 congratulating itself on a successful launch has already been drafted.