Mortgage services provider Exact, born from the remnants of specialist lender edeus, last week warned that no details have been provided by Whitehall about how the two-year mortgage interest holiday scheme for borrowers who have lost their jobs will affect securitised loans.
Alan Cleary, managing director of Exact, says that borrowers on the books of specialist lenders providing buy-to-let, self-cert and sub-prime deals are more likely to go into arrears but there is no guarantee they will be catered for by the scheme because of the way their loans are funded.
Last week the Treasury revealed that the mortgage holiday would work by rolling up mortgage interest payments into borrowers’ outstanding debts.
Cleary warns that this is dangerous at a time of economic turmoil.
He adds that since the scheme increases consumer debt, if borrowers have not got back on their feet when the two-year holiday period ends, they could find their homes are still repossessed.
To make matters worse they will also have to settle the outstanding bills with lenders.
Cleary says: “This is a political manoeuvre designed to boost Labour’s chances at the polls and one that fails to take account of the current market situation.”
And Tony Ward, chief executive of Home Funding, has spotted further flaws in the scheme.
He says that when individual securitisations are set up they have overdraft-style facilities in place so investors continue to be paid even if borrowers go into arrears.
Ward adds: “The facilities will have been sized on the basis of, say, a maximum of three months’ arrears before repossession proceedings start. They simply won’t be extensive enough to deal with a two-year delay.”
Peter Williams, executive director of IMLA, points out that there is a degree of flexibility in securitisations that allows for a certain number of underperforming loans.
The key factor is how many loans in an individual securitisation will qualify for the two-year holiday.
If the total breaches a certain percentage issuing firms might have to go back to investors and renegotiate the pool of loans, replacing affected deals with better performing ones.
Williams says: “There are technical issues to be worked out but within limits the scheme is doable. We are keen to hear more about it because if we can devise a scheme that is useful to lenders we want to make sure it covers securitised players too.”