Then the industry heavyweights stepped in. The Council of Mortgage Lenders quickly followed Bank of England governor Mervyn King in warning the scheme could boost house prices without having an impact on supply.
The press – including this magazine – has also picked its share of holes in the government’s latest initiative. But is it time to cut Help to Buy some slack?
For this week’s Marketwatch, our commentators are:
University of Maryland academic and former housing finance official Dr Clifford Rossi, who argues UK policymakers have learnt from the mistakes of the US mortgage market
Lloyds Banking Group mortgages director Stephen Noakes, who says there is already strong market demand for Help to Buy products
First Complete sales operations director Toni Smith, who suggests a controlled rise in house prices could help those in negative equity get buying and selling again
Dr Clifford Rossi, academic and former Fannie Mae and Freddie Mac official, University of Maryland
Just as the US is starting to reverse course on the amount of direct government involvement in mortgage markets, the UK appears poised to head in the other direction with a Help to Buy program aimed at assisting first-time and high loan-to-value (LTV) borrowers.
During the housing crisis in the US, the government surged in to prop up mortgage markets primarily by scaling up the federally guaranteed Federal Housing Administration (FHA) and Fannie Mae and Freddie Mac housing finance agencies. Such a role for the government can be effective, so long as government guarantees are priced correctly and the programs are targeted to those underserved by private credit markets.
In the US, the FHA experienced significant adverse selection by lenders taking advantage of mispriced mortgage insurance premiums and a full government guarantee, leaving the government technically underwater in its $1tr mortgage insurance fund.
Conceptually, the public-private risk sharing approach of the UK guarantee scheme is an improvement over the US FHA experience in this regard. Requiring private lenders to take a 5% stake in losses above 80% LTV ensures they have “skin-in-the game” to originate high quality mortgages.
One of the important lessons of the US housing crash was that financial incentives matter and the Help to Buy program appears to have taken that to heart.
Stephen Noakes, mortgages director, Lloyds Banking Group
We are very supportive of innovation in the housing market and believe the two-pronged Help to Buy scheme will provide a much needed boost.
There are two elements at work here. First, there’s the newly launched equity loans package, which provides more options for those who might find affordability a challenge. The important point with this scheme is that all monies are coming from Government, with no contribution from builders. We’ve seen strong demand for this product since our launch in April; a point reiterated by a number of major house builders.
The second part of the scheme is the equity guarantee, which addresses the accessibility aspect and when it launches in 2014 will provide a genuine solution to the challenge of raising a deposit. Taken together I’d hope they will get more people on, and moving up, the property ladder.
We have seen good evidence of strong market demand for this second initiative through sales of our current Halifax New Buy and Lloyds Lend a Hand products, and the advantage of Help to Buy is it will materially improve both distribution and awareness.
There is always the potential risk in any demand-side initiative of increasing house prices. As such it’s important the Government monitors the impact of the scheme, and also liaises with planning authorities to release more land for housing development.
Toni Smith, sales operations director, First Complete
Only the shared equity part of the Help to Buy scheme is in operation at the moment. While it is supposed to be open to all, many developers are restricting it just to their registered brokers so many of brokers are excluded from participating in it.
However, be it because of the publicity around Help to Buy or because of a general uplift in the market, brokers across First Complete have seen a definite upswing in customer demand for house moves and remortgaging over the last couple of months.
Once the mortgage insurance guarantee (MIG) scheme is in place it is very likely to lift house prices, as it will make it easier for people to buy houses across all LTV bands, which will increase demand without a corresponding increase in supply.
The positive of increased house prices is it will help those who have been trapped in a negative equity situation, finally enabling them to sell, or move house.
As long as this is in a controlled way and for a limited period of time, this will be no bad thing. However, it may also mean the government fails in its objective to make houses more affordable, as the raised prices will mean first-time buyers need even larger deposits.
