Taxpayer funding for mortgages: good news for whom?
On Monday, David Cameron will announce a significant housing scheme including some sort of mortgage indemnity scheme for new build homes.
There are many many questions about such a well-intentioned scheme designed to help rebuild the broken lower rungs of Britain’s housing market.
The structure described in this morning’s FT, sounds distinctly like a taxpayer backed tranche of a Collateralised Debt Obligation for, errr, non-prime borrowers.
Also, crucially, will it actually be guaranteed that new house build will go to first time buyers, rather than landlords?
And then there is the really big question: is this a stepping stone towards a government-backed mortgage market such as the American Fannie Mae and Freddie Mac to prop up housing prices.
As it’s a beautiful winter’s day, I now turn this blog over to a special guest blogger for his thoughts on that:
“On the question of guarantees all I can say is the Federal Reserve, for the last 30 years have been pointing to the great dangers of offering government guarantees to mortgages.
They pointed out that if you offer a government guarantee to a mortgage, remember they spent a very long time trying to press the argument that Fannie Mae and Freddie Mac were not guaranteed by the Federal Government, they could see the risk that if people believed it then they would be able to attract funds more cheaply than any other source, mortgage funding would go through that source and the Federal Government would end up in a situation where it would find it very difficult to avoid guaranteeing it and that’s the problem they find themselves with now.
We don’t guarantee lending to other forms of borrowing; we don’t guarantee lending to manufacturing borrowing, there is no reason why in the long run you need to have any guarantee of lending to the mortgage market.
And it would be a very dangerous move to move to a situation where the government saw its major role as guaranteeing lending. How can – why should the taxpayer take on the risk of borrowing by individual borrowers some of whom are risky it’s the lenders who should take the risk and assess for themselves the riskiness of that lending.
And what we saw in the first half of 2007 was that not enough attention was paid to monitoring the riskiness of that lending. The last thing we want to do is to tell lenders it doesn’t matter if they monitor the riskiness, the Government will guarantee it. So that’s not the route to go down.
We are going through a difficult adjustment in the housing market. The sooner we can make that adjustment the better. But pretending that there’s some magic solution here is not the answer.”
My guest blogger is in fact the verbatim words of Mervyn King speaking in August 2008, at a time when Gordon Brown was pushing a UK-style Freddie/Fannie through the Crosby mortgage review. Fannie and Freddie collapsed into US nationalisation three weeks later.
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