Following the publication today of the Help to Buy: mortgage guarantee scheme rules, below are some comments from Angel Mas, President, Mortgage Insurance Europe at Genworth:
Concept of Help to Buy 2
We agree with the concept of using guarantees / insurance as internationally recognised and tested tools that help banks get comfortable with the risks associated with lending high loan to value mortgages and reduce the high capital requirements associated with those loans. However, using Government resources to directly guarantee high loan to value mortgages creates a reputational issue for banks, when they come to claim on the guarantee. It will be hard for banks to move public opinion away from the memory of bank bail outs if they are claiming taxpayers' money to cover mortgage debt that has gone bad. £12 billion is a significant contingent liability for Help to Buy 2 especially as private capacity offered on commercial terms is readily available in this market.
While the actual commercial fee rate isn't included in the final rules which is somewhat surprising – it will be notified to lenders prior to the Commencement date – we anticipate it will be at the lower end of any 'commercial' pricing range, without incorporating the capital consumption and realistic administration costs that any enterprise would have to incur in the open market. The pricing structure is designed as a 'one size fits all', not taking into account individual lenders' risk profiles, as commercial guarantors would. The problem with this is more prudent lenders will end up subsidising the rate for more aggressive lenders. And if those more prudent lenders do not participate in Help to Buy, the 'one size fits all' rate would be clearly insufficient. The risks of insufficient rates for the taxpayer are clearly illustrated by the example of the state backed US mortgage insurer (FHA) in the US which will be requiring taxpayer additional capital injections.
It is also critical that Help to Buy does not crowd out the existing private mortgage insurance market, which offers a similar product to protect against high loan to value risk and incorporates all the experience associated with underwriting these risks for many decades. The fee is not the only important factor here – if a capital relief solution is only developed to suit the Help to Buy scheme, then this will affect the ability of the private sector to compete and may raise State aid issues.
Again, while there is no mention of capital relief in the rules, it is essential the Government and regulator do not create a capital relief solution which only works for the short-term Help to Buy scheme. Help to Buy is a temporary scheme to address a permanent problem. High loan to value lending consumes three times more capital than low loan to value lending, and Basel III rules will only increase pressure on bank capital. The capital relief solution needs to be sustainable, predictable and simultaneously available to the private sector to allow us to compete.
The continuation of the private mortgage insurance industry in the UK is critical to ensure that the temporary Help to Buy scheme remains temporary. As Morgan Stanley has said, a transition from the State scheme to a private mortgage insurance scheme is in line with international precedent, and is the right path to provide an 'exit strategy' for Help to Buy without destabilising the market by a sharp withdrawal of high loan to value lending when the scheme comes to an end.
The Rules can be found HERE.