The mortgage industry is split on whether increased use of mortgage indemnity guarantee insurance will ease lenders’ concerns about lending at higher loan-to-values.
Mig is an insurance policy which compensates the lender if a borrower defaults on a loan. In the past, this type of policy has been used when lending to high LTV borrowers which tend to be first-time buyers who are seen as a greater risk to lenders. Migs have steadily declined since the 1990s.
Last week, housing minister Grant Shapps called together leading industry figures to discuss how more could be done to help FTBs. Mig was discussed as a way of creating an incentive for lenders to lend to FTBs.
Genworth Financial president of mortgage insurance for Europe Angel Mas, who attended the meeting, says it has been proved in the past that Mig encourages lenders to offer higher LTVs because it reduces risk to lenders.
Mas says: “International experience has shown that one way to incentivise banks in the past has been through mortgage insurance. If the lender takes out a Mig and is prudent, then everybody wins. But the regulator and the Bank of England must adapt to the reality that you can lend at higher LTVs, which is theoretically more risky, by having this private guarantee.”
Mas says in Italy, lenders use Mig to offset the risk of higher LTV lending and it means banks do not have to carry as much capital to back the loan because the risk is reduced.
He says: “In Italy, Mig is not compulsory but it provides an incentive, so the market remains open and banks have a capital advantage.”
Chadney Bulgin mortgage partner Jonathan Clarke says he is surprised that more lenders do not use Mig to provide protection against high- LTV lending. He says: “When I started in the industry, Migs were quite common. I am surprised lenders have not turned to them as a way of approving more 85 to 90 per cent LTV mortgages.”
However, Clarke says lenders could be struggling to get reasonably priced Mig policies in the current economic climate.
He says: “House prices have been a little bit wobbly and that, comb-ined with possible interest rates rises, might make the cost of Migs astronomical.”
The Council of Mortgage Lenders, which was represented at the meeting with Shapps by director general Michael Coogan, welcomes Mig being considered as a way of helping FTBs.
The CML says Mig has a role to play but it is wary of the industry simply reaching for obvi-ous options as a solution to the problem and wants it to adopt a “creative” approach.
If I Were You managing director Rob Clifford says he is concerned that borr-owers would have to shoul-der the cost of such schemes. He says: “The whole principle of Mig was greatly discredited because costs were effectively passed on to the consumer but most of the benefit was provided to the lender. That seemed fundamentally unfair.
“I would be supportive of some sort of insurance proposition that gave lenders the comfort they are seeking but we need to be very cautious about any model which seeks to pass on the cost directly to the consumer.”
Clifford says he is more supportive of top-up loans as a way of helping FTBs.
He says: “I am far more in favour of top-up or secon-dary lending solutions, where the borrower openly borrows from an alternative source for some or all of the deposit, but lenders need to be more comfortable with the lack of a personal stake from the borrower.”
Both Legal & General director of housing and external affairs Stephen Smith and Alexander Hall chief operating officer Andy Pratt do not see Mig solving the problem.
Smith says insurance firms should not be part of the decision process for approving a loan.
Pratt says Mig is an old-fashioned solution to a modern problem. He says: “The whole financial services world has moved on since Mig was created but it is encour-aging that the housing minister is calling for some sort of innovation to help first-time buyers.”
In Canada, it is a requirement for lenders to take out a Mig when lending above 80 per cent LTV. It is backed by the government, which provides a guarantee to the insurance company.
Pratt says such a scheme could be helpful in the UK but thinks it would be difficult to achieve.
Clifford says he would prefer to see the Government extending its key workers initiative, which helps people working in certain public sector jobs, such as nursing and teaching, to buy a home.
He says: “The criticism of that scheme has been that the qualification criteria has been far too onerous. So a big caveat I place on that suggestion is that it has to be widely available to FTBs.”