Dec 2011 – Step in the right direction

Paul Smee, director general of the Council of Mortgage Lenders, discusses the government’s recently announced mortgage indemnity scheme

How will the success of the government’s recently announced scheme to underwrite mortgages be measured?

As expected, the CML – and individual lenders – were put on the spot to provide an instant assessment, once the government’s participation had been announced. But now the initial media excitement has blown over, it’s worth reflecting on what success for the scheme would look like.

The first point to make is the extent to which media coverage of the housing strategy focused on the likely success or failure of the proposed mortgage indemnity scheme. It was another reminder of how passionately people view home-ownership, and the plight of the first-time buyer. The second point is that measuring the success of this part of the strategy will be far from straightforward.

Helping buyers

The government has said the scheme could support “up to 100,000 prospective buyers who are currently frozen out of the housing market because of the need for large deposits.” But it has not referred to this – or any other – figure as a target, even though that is how some commentators will choose to interpret it.

Even if there were agreement on what number of loans in the scheme would constitute success, and over what time period, judgements would still be difficult. We will never know with certainty, for example, how many loans that are accepted into the scheme would have been advanced anyway, though perhaps on different terms.

Of course, arguments like these did not deter some commentators from making snap judgements about whether the indemnity scheme would succeed or fail. We are no different! Our view is that it represents a real opportunity to bring some life back into part of the housing market.

Evaluation

The government has said it will evaluate the scheme after two years, and assess whether there has been an appropriate, and positive, effect on the demand and supply of new-build properties. In our view, that approach is generally correct, both on the timescale and the criteria for judging whether the scheme has broadly succeeded or not.

Even so, however, we must not forget that there is potential for the policy to deliver benefits over a much longer period. The problems created by a shortage of housing will not be solved in two years, and we stand ready to work with the government on a package of measures to address the challenges over the longer term.

At this stage, however, we need to focus on where we can make a contribution to help the government deliver on housing strategy objectives that we, as lenders, can support. That is why the CML has already begun to work with lenders wanting to participate in the scheme to address some of the immediate issues. One of these is how to protect lenders against the potential for the scheme to skew prices in the new-build sector.

Mortgage indemnity

The working group of members which had been working on the mortgage indemnity project prior to the government’s announcement will now continue to drive it forward. But we are looking for others interested in the issue or in offering the proposed product to join this group. So, do please let me know if you would like to participate in this work.

A key factor in determining the success of the scheme will be the stance taken by the regulator. We are optimistic that the Financial Services Authority will take a positive view of government involvement in the scheme and allow appropriate capital relief for lenders taking part.

A favourable approach by the regulator will enable lenders to make more mortgages on a 95 per cent loan-to-value basis more readily available. At the same time, we have been emphasising that lenders will continue to uphold lending criteria, and reminding the wider world that 95 per cent of borrowers with 95 per cent mortgages succeed in keeping up with their payments.

We must not forget, however, that a mortgage indemnity scheme on new-build properties in England (which, we hope, will also be replicated in Scotland, Wales and Northern Ireland) will not force consumers to buy, or lenders to lend. Borrowers will need to make their own assessment of their ability to fulfil the commitment they are taking on, and must be encouraged to continue to act responsibly. Lenders, meanwhile, will only offer mortgages where a proper assessment of risk – based on the borrower’s circumstances and the property – stacks up.

A long-term shortage of housing in the UK is the root cause of many of the problems we face today. It has pushed up costs for buyers and for those renting privately and left us with inadequate provision of social housing. On balance, therefore, the government’s indemnity scheme is a step in the right direction, helping builders sell more homes and encouraging them to construct more housing. We therefore welcome it, and will work with members and the government to deliver the best possible outcome.