pension333: The latest Help to Buy failure

The government will guarantee up to 14.25% of a high loan-to-value mortgage in exchange for a fee ? but hasn't said what that fee will be

State subsidies for sub-prime mortgages seem a recipe for long-term disaster, as many people have said many times. Subsidies will force up house prices and make it harder for the next generation of first-time buyers to enter the market.

It's a policy that will drive young people towards "indentured servitude", as Albert Edwards, a strategist at Societe Generale, put it.

We'll avoid that well-trodden turf for the time being because there is specific irritation with the government's presentation of Help to Buy, stage two, the part where the state guarantees up to 14.25% of a high loan-to-value mortgage in exchange for a fee. It is the Treasury's failure, so far, to state what that fee will be.

George Osborne, the chancellor, was at it again on Tuesday, declaring: "As of today lenders have the detail they need to go away and get ready for next January's launch."

No, chancellor, the lenders don't have all the details because they don't know the price of the state-backed insurance you are offering. You have merely set out rules you think will prevent high loan-to-value mortgages falling into the hands of those who cannot afford to repay.

But, actually, it's the taxpayer who should be making a fuss. The chancellor has said the scheme will be self-funding in the sense that the banks and building societies will be charged a commercial rate to cover losses that will occur when borrowers default on guaranteed mortgages. But the tension there is obvious. If the fees are set high, the banks won't play. If they are set low, substantial risks will remain with the taxpayer.

The part that should make taxpayers extremely suspicious is that one bank, Lloyds, is cheering even before the price of the insurance is set. "From all the information we've got at the moment, we are definitely in the camp where we will join the scheme," it says.

Have the banks got the nod that will the fees will be set low and thus they'll get (another) bargain from taxpayers?

Nils Pratley

Source: http://www.guardian.co.uk/business/nils-pratley-on-finance/2013/jul/23/help-to-buy-latest-failure-fee

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