BLOG: Mortgage indemnity and cliché pie
Gideon O certainly scattered enough through his Budget yesterday – ‘difficult decisions’, ‘tough but fair’ etc, etc. But our responses tend to be somewhat cliché ridden too – how many times did you hear ‘the proof is in the pudding’ or ‘the devil is in the detail’ on TV and radio yesterday?
Of course, clichés are often clichés because they’re true. And when it comes to the proposed mortgage indemnity guarantee scheme, guess what? The devil really will be in the detail. We don’t have all the details yet, because they haven’t all been decided, but that the success or failure of the scheme will rest on a number of key particulars, including the following:
Firstly, how much banks have to pay to use it. The Government has simply said that lenders will have to fork out ‘a commercial fee for each mortgage in the scheme. This fee will be set so that the scheme is self-financing’. If that fee turns out to be too high, lenders just won’t bother.
Secondly, can lenders get capital relief from the FSA? That is, will they have to hold less capital on their balance sheets against higher LTV mortgages if they have the Government indemnity? This is in no way obvious. Looking at the indemnity introduced for NewBuy in March last year, only those banks ‘internally rated’ for capital adequacy qualified for capital relief, and a year later only one bank – Barclays – has received it.
As you may know, there are two types of ratings for capital adequacy purposes. One is a ‘standardised’ rating of the bank’s credit risk. The other is a more sophisticated approach employed in the main by many of the big banks, who have the resources to internally rate their own credit risk.
To qualify for capital relief using the indemnity scheme on NewBuy, a lender has to be internally rated. So small, but active players in the NewBuy market, such as Aldermore, for example, cannot get credit relief.
It is possible that the same principle could be applied to the new indemnity scheme. And even those banks that qualify could take a year to get it. Wouldn’t it be sad if a scheme introduced by the Government to boost the housing market was undermined by the regulator?
Needless to say, that would set the cat among the pigeons and get Mr O’s goat, leaving him between a rock and a hard place, with his work cut out, needing to go back to the drawing board and burn the candle at both ends…or would he just throw in the towel?