Make higher LTV deals dependent on insurance
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High LTV mortgages should only be available to borrowers who take out mortgage insurance, the International Monetary Fund has recommended.
In its Global Financial Stability Report published last week, the IMF argues that European regulators should be handed the power to introduce LTV caps. It says absolute LTV limits might be too blunt an instrument as they could exclude potentially creditworthy first-time buyers and borrowers.
But the report adds: “Mortgages that do not meet the strict LTV prudential limit could, for example, still be made available to those borrowers who agree to purchase adequate mortgage insurance.
“Alternatively, bank supervisors would need to assign higher capital risk weights for non-conforming mortgages.”
Mortgage analyst Keith Butler says this is a sensible recommen-dation and reflects what used to be the situation in the UK, when lend-ing over 75% LTV needed a mort-gage indemnity guarantee.
MIGs offer lenders protection if borrowers default. It is usually paid by consumers in a one-off payment on high LTV mortgages.
Butler says: “What is now called a high percentage loan fee used to be MIG but lenders that failed to understand risk properly decided not to take out the insurance but pocket the premium.
“They therefore temporarily in-creased their profits but left them-selves hopelessly exposed to the economic downturn.”
Building society collective Mu-tual One recently signed a deal with Genworth Financial to provide MIG for its members.
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