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Shared ownership could be the new sub-prime

Some lenders are starting to classify shared ownership mortgages as sub-prime as borrowers begin to staircase down instead of up, the Communities and Local Government Committee has warned.

As part of its Housing and Credit Crunch report, the committee says housing associations are seeing reduced sales because of lenders’ changing attitude.

Staircasing refers to the practice of selling a portion of a property to the co-owner. Until recently owners could only staircase up but under the government’s housing rescue plan those at risk of repossession are also given the option of stair-casing down.

The committee’s report says: “We were told that the reduction in mortgage availability, partly as a result of some lenders classifying shared ownership mortgages as sub-prime, had resulted in reduced sales for associations.”

Under the government’s shared ownership scheme first-time buyers earning less than £60,000 can purchase a proportion of a property with the remainder belonging to the organisation to which rent is paid, typically a housing association.

The idea behind the initiative is that borrowers do not need a deposit. But some lenders are starting to ask for substantial deposits which is missing the point, according to Peter Williams, executive director of the Intermediary Mortgage Lenders Association.

He says that referring to these borrowers as sub-prime may be overstepping the mark but lenders are changing their attitude towards shared ownership as many new-build properties were originally overvalued, making them riskier investments.

Williams says: “Under shared ownership, borrowers typically take out a 50% mortgage and rent the other 50% from a housing association. But lenders are starting to treat these as 100% LTV loans and in the current climate such loans are seen as risky so some lenders have stopped offering them.

“Lenders are disregarding the fact that the shared ownership initiative includes a mortgagee protection clause that protects them from losses in the event of borrowers defaulting.”

He adds: “Lenders are starting to ask borrowers for significant deposits but the whole purpose of low-cost home ownership schemes is to help consumers who do not have significant deposits get into the housing market.”

Abbey, which still offers shared ownership mortgages, says it has tightened criteria but still classes the deals as prime.

Nationwide also says it treats the deals as prime and writes them on its prime residential book.

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