Guarantee scheme won’t attract private backing

So, the old Mortgage Indemnity Guarantee scheme is said be making a comeback in a new form, with the government - i.e. taxpayers like you and I - underwriting the risk.

The lessons about risk sharing and fair pricing of the late 1980s and early 1990s indicate there could be an argument for private insurance companies to enter this market rather than further burden the public purse. But the key issue is capital.

The requirement for capital to be set aside against the risk of the next economic downturn is too great for private companies unless the risks involved are specifically defined.

Lenders must recognise that they have to pay the correct price and share the appropriate risk with underwriters and borrowers.

I fear the economics will not stack up. Customers will not be prepared to pay more for their mortgages either through higher insurance premiums or through more accurate risk-based pricing of loans.

And if the government steps in, where is the money going to come from? It sounds as if it is planning to use public money to underpin lenders with little or no prospect of making a return on this investment, and there is always the possibility of making a massive loss – ask anyone who wrote MIG cover last time around.

The fact is that lenders must rebuild their capital bases before they can enter into risky high LTV lending. At least with the current government intervention in the banking sector there is some prospect of taxpayers recouping their losses.

Rob Hayes



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