I’m referring to the call from the Association of Mortgage Intermediaries recently for the “reinvention” of mortgage indemnity guarantees as part of a package of measures to restart the UK mortgage market.
The truth is the mortgage indemnity guarantee – MIG or mortgage insurance as we choose to call it – has never been away. For a long time some lenders in the UK have recognised the benefits of risk transfer on their high LTV portfolios, reducing volatility on loans that are accepted as riskier.
Until the credit crunch took hold, many UK lenders preferred to retain the risk on their balance sheet – in contrast to continental insurance market has thrived.
Admittedly the product has moved on since the last economic downturn. Today, lenders with mortgage insurance are able to transfer the risk of their high LTV loans and pass that benefit to borrowers with products that allow lower down payments.
So mortgage insurance facilitates earlier access to home ownership by bridging the natural concerns of lenders and the demand from first-time buyers.
We don’t advocate a return to LTV ratios in excess of 95% as we believe a borrower should have some of their money at risk. But in accepting the risk of default on high LTV loans, we require lenders to apply stringent lending criteria and we conduct regular audits to monitor the quality of portfolios.
By acting as a second pair of eyes on the origination and performance of mortgage loans, mortgage insurance can offer that additional seal of quality.
That’s what we see in Canada, where a statutory requirement for mortgage insurance on all loans over 80% LTV is widely recognised as bringing stability to that market – compared with the situation just over the border in the US.
The Canadian model came about by an expansion of the National Housing Act in the early 1950s. Before that deposits of 50% were the norm. The government’s aim was to make home ownership affordable with a small down payment by protecting lenders against loan default losses.
Stability has been achieved by the adoption of prudent lending criteria, standardisation of premiums across lenders and the pooling of risk across geographic locations. Furthermore, the mandatory aspect removes the risk of adverse selection.
Each of these features is helping homebuyers access mortgage finance at the lowest possible cost.
Indeed, Canadian borrowers with a high LTV can get the same interest rate as a borrower with a low LTV because they have mortgage insurance.
Back in the UK, as possibly the last true specialist provider of mortgage insurance, we’re actively engaged in the debate.
Increased lending volumes are good for business and wider use of mortgage insurance to help more first-time buyers would bring benefits to all layers of the market.
We join the AMI and other respected commentators with our own call for a loan-by-loan insurance scheme, in public-private partnership with the government.
Evidence from Canada would indicate that this model would stimulate new lending in a prudent and sustainable way.