Genworth Financial has warned that the economy faces a systemic risk from lenders offering 90% LTV loans without some sort of mortgage indemnity guarantee.
The mortgage indemnity provider warns that where lenders are accepting a parental guarantee to encourage first-time buyers onto the housing ladder, in a falling market such a guarantee becomes worthless as both the borrower and their parents’ source of income are at risk.
Other countries such as Canada have a system whereby a mortgage indemnity is a mandatory requirement and as a result its housing market has stayed relatively stable.
Angel Mas, president of mortgage insurance for Europe at Genworth, says the Canadian model shows mortgage insurance works.
He says: “Maximum arrears in the Canadian system are below 1% and the first and secondary markets have remained open. The concept works but there is need for a political will to do this.”
In Italy lenders are not compelled to take out MIGs but if they do they don’t have to put as much capital aside as they would normally have to for a high LTV loan as it would be treated like a lower LTV loan.
The problem lenders across Europe face is that the capital that has to be put aside for high LTV loans is significantly more than for lower LTV loans.
Only a small number of UK lenders have MIG guarantees on high LTV loans and the net result is that these deals are more expensive.
Mas argues that lenders are not being prudent by failing to have some sort of MIG in place.
Mas adds: “Lenders that take out insurance are penalised because they can’t compete on risk and price.
“People are preaching prudence but they are competing on risk. Whoever is willing to compete on risk gains market share, but then you are back to where we were two years ago.”
A spokesman for the Council for Mortgage Lenders says mortgage insurance should not be mandatory as it would be forced on home owners who don’t need it.
He says: “Help is needed for mortgage payments so insurance has a role. But mortgage payment protection has been tainted by perceptions of that kind of cover in other sectors. We would look at proposals for incentivised insurance but as the government is committed to deficit reduction I’m not sure how it would work.”