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Budget reaction: Experts warn new Govt MIG scheme will fail without capital relief

Mortgage experts say the Government’s £130bn mortgage indemnity scheme will not be effective unless the FSA grants capital relief on loans.

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Chancellor George Osborne announced the new MIG scheme in this week’s Budget, which is designed to help aspiring and existing homeowners with small deposits through Government-backed loans.

Critics argue more lenders will be willing to lend at higher loan-to-values if the FSA reduces the amount of capital they have to hold against higher LTV loans. Presently, lenders have to hold around eight times more capital at loans over 90 per cent LTV than for loans under 60 per cent LTV. Under the Government’s NewBuy scheme, Barclays is the only lender to have secured capital relief.

A Council of Mortgage Lenders spokesman says: “Without capital relief, the cost of the commercial fee lenders will have to pay to gain the benefit of the scheme could make it uneconomical.”

Home Funding chief executive Tony Ward says: “Lenders have got to be able to get regulatory capital relief for this to be a success.”

An FSA spokeswoman says: “We are in discussions with the Government on issues including capital relief.”

Chancellor George Osborne unveiled the new mortgage indemnity guarantee scheme in this week’s Budget, open to all homebuyers for the purchase of any residential property.

The scheme, first revealed last month by Money Marketing, builds on NewBuy, which provides a joint guarantee from the Government and a participating housebuilder to borrowers wishing to purchase a new-build home.

The new scheme, which is open to all lenders, has the capacity to support up to £130bn in high loan-to-value lending and will run for three years from January 2014. Unlike NewBuy, it is available on new and existing homes.

The Government will offer a guarantee of up to 15 per cent on the purchase price, with the borrower putting down a deposit of between 5 and 15 per cent to create a total limit of 20 per cent. The scheme is available on properties worth up to £600,000.

Lenders will purchase the guarantee from the Government, the price of which will be decided at a later date.

However, it will be influenced by the LTV of the mortgage.

The guarantee will last for seven years and lenders will take a 5 per cent share of net losses above the 80 per cent threshold, to ensure they do not lend recklessly (see example below).

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If a borrower defaults on a £100,000 loan and the lender is able to recover £85,000, the borrower would have lost their £5,000 deposit, while the Government and lender will shoulder a £9,500 and £500 loss, respectively.

If, for example, the lender is able to recover only £65,000 from the same loan, the borrower will still lose their £5,000 deposit, while the Government will shoulder a £14,250 loss.

The lender, however, will shoulder a £750 loss within the guaranteed threshold, plus a further £15,000 loss on the part of the loan not within the guaranteed threshold.

The Treasury says its liability is expected to be no more than £12bn.

Each participating lender will pool the loans they wish to place in the scheme and the Government guarantee will apply to the pool.

Mortgage Advice Bureau head of lending Brian Murphy says: “With £130bn worth of mortgages promised, a sustained increase in lending volumes is on the horizon – but in the meantime, there is plenty of scope to improve the targeting of the Funding for Lending scheme and encourage higher-risk lending.”

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  • Tom Cleary 21st March 2013 at 12:55 pm

    Anon – They will pay. In the rate.

  • Geoff Laird 21st March 2013 at 12:16 pm

    Whilst this is an excellent initiative to aid property movers , I believe that the borrower should be required to pay a single premium based on the difference between the base loan and the amount required excluding their own deposit: it shouldn’t be a freebie , the revenue can then go in some small way to justify the guarantee being provided by the Government.
    The original MIG arrangement worked reasonably well with the indemnity being provided by leading Insurers and only became unstuck when lenders started to compete for an ever increasing share of the mortgage cake and dropped their prudential stances in assessing an applicants suitability and which then caused issues when loans defaulted amidst falling house prices which had become inflated by the liberal lending to almost anyone who wanted to get on the housing ladder. Whilst this will hopefully not be repeated in the current regulatory climate I feel that there does need to be a payment by the borrower for having the benefit of this lending concession.

  • peter stimson 21st March 2013 at 10:05 am

    I would have thought it fairly obviuos that capital relief would apply here

    The issue in the past on MIG schemes is that the insurance provider has often been BBB rated or below, meaning that the insurance carries little weight with either the regulator or the rating agencies as the insurer invariabley has a lower rating than the issuer

    If the same logic is applied, the UK gvmt is still AAA rated by 2 of the 3 main agencies and therefore much more highly rated than any of the banks whose loans they will be insuring

    in short, if you don’t trust the gaurantee given the state, no MIG scheme will ever work!