already faced by this group of UK consumers.


100% LTV The news that four lenders are currently offering 100% LTV mortgages, with Aldermore most recently beginning to market a 100% LTV deal does not represent a real glimmer of hope for first-time buyers who are unable to save for a large deposit. It would be wrong to assume that these mortgages are readily available to first-time buyers; in fact, the borrowers who may benefit from such deals are typically those with the ability to offer collateral deposits or guarantor support in exchange of the higher loan to value funding. Furthermore, without a clear, sustainable framework, the system remains exposed to the same prudency flaws that contributed to the credit quality issues in recent years. We disagree with the concept of a true 100% LTV mortgage on a number of grounds. There is currently a real threat that the re-emergence of extremely high loan-to-value mortgages across Europe could lead to a new wave of high risk, low quality residential mortgages or even the emergence of US-styled strategic defaulters. Without a proper framework, people can bet on the housing market without fear of the potential consequences.


Whilst we support credit-worthy first-time buyers being given access to high loan to value housing finance, we believe there should be a requirement for this group to prove they have the discipline to save for a minimum deposit and demonstrate they take a long-term view on their personal financial security. A private mortgage insurance eligibility would provide the certainty to the market stakeholders that adequate prudent origination standards are upheld. High LTV mortgages are highly reliant on accurate valuations of properties and this is never an exact science. As a result, lending the full value of the property introduces an operational risk for lenders from the word go. It means that if the valuation of the property is found to be too high, or the market goes down, the buyer is left in negative equity and the lender has an increased risk of default,


plus a very serious exposure should that default occur. Adequate checks are required to minimise those exposures. In addition, the credit quality of high LTV loans is particularly reactive to economic downturns and that is why banks should be encouraged to acquire the additional protection that mortgage insurance offers. The housing market is cyclical and high


LTV is the most cyclical segment. The UK market is currently in a low volume phase but putting together a robust regulatory framework that incentivises prudency now could have real results across the cycle.


View From The Top The Conservative housing minister Grant Shapps hosted a meeting earlier this year to discuss possible solutions to the first-time buyer crisis, at which mortgage insurance was one of the key measures discussed. It will also be a topic of conversation at conference hosted by the Building Societies Association in late October. Internationally, regulators such as


THE FLIPSIDE by


Chris Gardner, director, Obligo


It’s a few years now since the infamous mortgage indemnity guarantee was dropped as a feature of higher loan to value loans. It was seen as a penal fee charged by lenders to protect the interest of the lender in the event that the borrower paying for the policy defaults. When you break it down in that way it’s easy to see why it became unpalatable for lenders, borrowers and brokers. The notion is that you have to pay for something that affords protection to others. There is something inherently unfair in that. You could argue that all of that is reason enough to resist the return of similar policies now to help move high LTVs forward. At least when the borrower is paying directly for the policy as a defined fee charged.


the International Monetary Fund, G20 and Financial Stability Board are contemplating a move towards a model where risk is taken away from the lender through a third party arrangement, meaning that lenders have more freedom to offer high LTV mortgages to credit- worthy applicants.


Stakeholders in the UK mortgage market continue to call for a change in UK regulation to implement a more certain and positive adoption of the capital incentives associated with the use of mortgage insurance – ideally through a sustainable framework that promotes prudent lending. Canada currently leads by example, with mortgage insurance being mandatory for LTVs over 80%. Despite the apparent return of mortgages typically targeted at first-time buyers, the UK mortgage market remains at a crossroads. The hurdles this group faces aren’t going anywhere soon and the industry needs to find a strong, long- term solution. n


But there are other more relevant and tangible reasons for resisting MIG policies. Rewind to 2008 when financial armageddon hit the world’s banking industry. Governments, banks, investors and regulators with some of the world’s smartest (ok, that’s debateable!) searched for months to find who was holding the risk and therefore the source of economic meltdown. The problem was that the risks had been sliced and diced so many times that nobody knew who had what risk. As a result the actions taken to avert complete meltdown where both late and inadequate. Surely the lesson to learn from all of this should be a simple one. If a lender wishes to take a higher risk and make high LTV loan available then the risk that its taking should be priced accordingly, be easily visible and retained by the lender? A return t o MIG would surely be a return to the slice and dice of risk and as history has taught us no good will come of it.


mortgAge introducer OCTOBER 2011 49


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