100% LTV mortgages signal false hope for first-time buyers

Back in 2006 there were more than 200 mortgage products on the market offering 100% loan-to-value but they disappeared with the credit crisis. However, they are now making a comeback.

Aldermore recently launched a 100% product that allows a relative of the borrower to act as a guarantor.

However, the return of these products does not represent a real glimmer of hope for first-time buyers who are unable to save for a large deposit, warns Genworth.

The specialist insurer says it would be wrong to assume that these mortgages are readily available to first-time buyers. In fact, argues Genworth, the borrowers who may benefit from such deals are typically those with the ability to offer collateral deposits or guarantor support in exchange of the higher loan to value funding.

In addition, without a clear, sustainable framework, the system remains exposed to the same prudency flaws that contributed to the credit quality issues in recent years.

Angel Mas, president of mortgage insurance Europe at Genworth, commented: “We disagree with the concept of a true 100% LTV mortgage on a number of grounds and warn lenders and first time buyers about the development of such products.

“There is currently a real threat that the re-emergence of extremely high loan-to-value mortgages across Europe could lead to a new wave of high risk, low quality residential mortgages or even the emergence of US-styled strategic defaulters, due to relaxed lending criteria by banks and default becoming a cheaper and easier option. Without a proper framework, people can bet on the housing market without fear of the potential consequences.

“Whilst we support credit-worthy first-time buyers being given access to high loan-to-value housing finance, we believe there should be a requirement for this group to prove they have the discipline to save for a minimum deposit, and demonstrate they take a long-term view on their personal financial security.

“Implementing mortgage insurance would provide the certainty to the market stakeholders that adequate prudent origination standards are upheld.

“High LTV mortgages are highly reliant on accurate valuations of properties, and this is never an exact science. As a result, lending the full value of the property introduces an operational risk for lenders from the word go.

“It means that if the valuation of the property is found to be too high, or the market goes down, the buyer is left in negative equity and the lender has an increased risk of default, plus a very serious exposure should that default occur.  Adequate checks are required to minimise those exposures.

"In addition, the credit quality of high LTV loans are particularly reactive to economic downturns, and that is why banks should be encouraged to acquire the additional protection that mortgage insurance offers.

“The housing market is cyclical and high LTV is the most cyclical segment. The UK market is currently in a low volume phase, but putting together a robust regulatory framework that incentivises prudency now could have real results across the cycle.

“Mortgage insurers like Genworth can enforce a high quality of mortgage originations, ‘police’ the system, and ensure that only quality high LTV loans are originated as has been the case in Canada and a number of other markets.”

Date: September 8, 2011
Author: Joanne Atkin