George Osborne is edging Britain closer to an American-style government-backed mortgage market by promising to underwrite £130bn of new home loans over the next three years.
Mr Osborne’s advisers insist that the new “Help to Buy” scheme will not lay the foundations for a UK-style Fannie Mae or Freddie Mac. Yet there are striking parallels to the way that the former was set up by FD Roosevelt at the height of the Great Depression, underwriting about one in five US mortgages during its early years.
The two entities enjoyed implicit government backing for 50 years, and were nationalised during the financial crisis of 2008. At that time they were blamed for fuelling the sub-prime loan for relaxing lending criteria to low-income groups under pressure from the Clinton government.
By stepping up government involvement in the UK housing market and helping to bring back high loan-to-value mortgages, Mr Osborne has left himself open to charges that he has not learnt the lessons of the credit crunch.
Janan Ganesh, the FT political commentator, described the move as “foolhardy”. Our comment editor John McDermott described it as a new “Right to Default” policy. An economist called Erik Britton told the Times: “They are building a sub-prime mortgage sector just as they did in the US – we all know how that plays out.”
Grania Long, chief executive of the Chartered Institute of Housing, said the government would have to monitor the impact of the policies carefully to ensure they were increasing new supply and not “simply stoking up house prices”.
Mr Osborne told the Commons that home ownership was now out of reach for many in a “blow to the most human of aspirations”. The schemes he unveiled in the Budget to solve this, badged “Help to Buy”, have two elements.
The first is a new shared-equity scheme where the government will put in up to 20 per cent of the value of a new-build home worth up to £600,000. That is different from the existing FirstBuy scheme where homebuilders and government each put in a small slice of equity.
The even bigger element, however – with echoes of Fannie Mae – is a mortgage guarantee to be offered to almost anyone buying a new or existing property, again up to a cap of £600,000.
The Treasury believes it will support up to 190,000 mortgages a year, marking a huge state intervention in the property market. Interest-only loans and buy-to-let will both be excluded.
“We think the financial system has been impaired and as a result the availability of high loan-to-value mortgages has gone down,” said a Treasury aide. “We want to deal with that.”
The solution will attract comparisons with the American system of state backing for mortgages, although the two are not exactly the same: the US bodies underwrite entire loans rather than just a small portion. The Treasury is at pains to insist that support will be temporary.
Then again, the US government made similar assertions in 2008 when it bailed out Fannie Mae. Five years later, there is no sign of the pair returning to private ownership – and close to 90 per cent of US mortgages are now underwritten by quasi-state bodies.
The British mortgage support scheme will be administered through the existing Northern Rock Asset Management, a wing of the Treasury that controls the nationalised Newcastle lender. Banks will pay a small fee for each mortgage guarantee.
Although £130bn of mortgages could be backed in this way, the government is only in effect guaranteeing an estimated £12bn.
Both elements of “Help to Buy” will allow people to buy homes with deposits of just 5 per cent, which could be a vote-winner.
The government emphasised that this would not be a return to the “bad days of 125 per cent mortgages” of the type offered by Northern Rock.
But there will still be questions of “moral hazard” in terms of encouraging people to buy homes with high loan-to-value ratios in historic terms.
The Treasury says lenders will not be “incentivised to originate poor quality loans” – but they will only have to take a relatively small 5 per cent share of net losses above an 80 per cent threshold.
Some are bound to point out the irony of a government which has forced banks to tighten their lending criteria now enabling a relaxation of mortgage lending terms, with taxpayers potentially on the hook.
One coalition aide captured that dilemma as he argued: “There was too much borrowing before the crash . . . that doesn’t mean no one should be able to borrow money again.”
Nick Pearce, director of the IPPR, a left-leaning think-tank, suggested that lessons from the housing bubble had not been learnt. “For individuals and families looking to buy this scheme will make it easier. However, it continues a strategy based on propping up – indeed inflating prices – rather than getting additional homes built.”
Jim Pickard
Kiran Stacey