Help to Buy, negative equity & repossessions - do you still owe money?

socsteve

Hi all,

There's something I'm unsure about that I'd like clarification about. Under the Help to Buy scheme, you need a 5% deposit and the government guarantees another 15% (or is it 20% - websites vary on this?)

If there is a massive crash in the housing market, you could easily get into a situation where the 95% owed is less than the value of your property (or possibly even the 75/80% including the government risk), in which case you are in negative equity.

If there is a big increase in interest rates (which could itself make a house price crash much more likely), many people's homes could be repossessed by the bank/building society. They and the government could lose a lot of money when the homes are sold at auction at knock-down prices.

So, if all this happens, are the mortgage holders liable for the money the government has guaranteed on their behalf, and still owe it if they are bankrupt?

Does anyone know (and can he/she preferably provide a link to a web page as evidence)?

Thanks in advance, Steve.

Thrugelmir

First recourse is always to recover the debt from the borrower. The insurance is for intents and purposes last resort.

With a general tightening in lending criteria including affordability. There's no reason to expect the worse. At least on a repayment mortgage the capital debt reduces every month. So over time the risk of serious losses under the scheme diminish. Lenders also pay a premium to use the scheme ) charged within the interest to the borrower), developers contributed to the first HTB scheme. So possible that the Government will eventually turn a profit.

kingstreet

Presumably you are talking about Help To Buy - Mortgage Guarantee, where the Government guarantees the indemnity fund if it is unable to cover the cost of repossessions?

The guarantee is available from 80% upto 95%. The 20% you are confusing is the maximum equity loan on the Help To Buy - Equity Loan scheme for newbuilds.

In the event of repossession on HTB - MG, the lender is entitled to recover its funds from the borrower, then the indemnity fund if a shortfall ensues. I'm informed the Government will not seek to chase the borrower for the indemnity fund payout, despite its subrogation right to do so.

socsteve

Thanks a lot, Thrugelmir and kingstreet,

I was coming to the end of posting a message to my blog about age discrimination in the mortgage market, specifically about banks reducing the maximum age a mortgage can be completed by about 10 years, irrespective of whether they could afford it and with people living for longer, as featured on Watchdog this evening (actually yesterday since it's past midnight to be pedantic). The program made out that it didn't make any sense and I wrote the blog post to provide an explanation of why I think they did it, bearing in mind they operate to maximise their profits.

I was unsure about how the Help to Buy scheme affected the situation, however, hence joining and posting to this forum. I saw both of your messages before I got to the point of posting it and took them into account.

Can anyone see a flaw in my argument at thatcheroftheleft.wordpress.com/2013/11/06/age-discrimination-in-uk-mortgage-market-due-to-prospect-of-rising-inflation-and-housing-bubble-bursting/ ?

jacobtheamish

socsteve wrote: »

Thanks a lot, Thrugelmir and kingstreet,

I was coming to the end of posting a message to my blog about age discrimination in the mortgage market, specifically about banks reducing the maximum age a mortgage can be completed by about 10 years, irrespective of whether they could afford it and with people living for longer, as featured on Watchdog this evening (actually yesterday since it's past midnight to be pedantic). The program made out that it didn't make any sense and I wrote the blog post to provide an explanation of why I think they did it, bearing in mind they operate to maximise their profits.

I was unsure about how the Help to Buy scheme affected the situation, however, hence joining and posting to this forum. I saw both of your messages before I got to the point of posting it and took them into account.

Can anyone see a flaw in my argument at thatcheroftheleft.wordpress.com/2013/11/06/age-discrimination-in-uk-mortgage-market-due-to-prospect-of-rising-inflation-and-housing-bubble-bursting/ ?

Having read your blog you seem to be confusing the two help to buy schemes (I understand you may now know this, perhaps rewrite your blog so as not to leave mis-information out there). Also lenders SVR's are not directly driven by inflation, most lenders adjust their SVR based on many factors, the Base rate being one of them.
I also wonder why you have suggested it a bad thing for a commercial enterprise to pursue maximum profit, are we in Cuba?

socsteve

Yes, jacobtheamish, I thought the second Help to Buy scheme was simply the first one (on new build properties) extended to properties that had already been built (which incidentally removes the advantage that the first one had in boosting the construction industry in the UK and is leading to a bubble, which is likely to cause a big crash - as many analysts predict). That was how it was presented in the news, so excuse my naivety!

Also, I am fully aware that the mortgage rates (SVRs are "standard variable rates" I presume) are not solely based on inflation; for a start, the various banks are competing with each other for custom (generally wanting to make them competitive compared with other banks, but they tend to lure people in with cheap fixed rates to start with and may have less competitive rates to compensate later).

I plan to post a comment to the blog entry I gave a link to above, clarifying points based on what people post here, but I gave a link to this thread on the MSE forum at the end of that blog entry anyway.

When I said that banks pursue maximum profit, I was stating a fact. I could have pointed out that US banks (issuing subprime mortgages and constructing complex derivatives that hardly anybody understood) caused the 20087-8 credit crunch, rather than economic mismanagement by New Labour (not that I was a fan of that party).

It should have been obvious before copying and pasting the link I put (being a "newbie" here I couldn't use "http://" to make it easier) that I am a socialist since my blog is "thatcheroftheleft"! As it happens, I'm not a fan of the Cuban regime (though it's not as bad as in North Korea and Raul Castro was elected to succeed Fidel, albeit by Communist Party members rather than the entire population) - for the sort of society I advocate, search Facebook for the group "Very Democratic Socialism" (it includes a government elected by proportional representation, which is much more democratic than the current state of affairs in the UK where most people's votes don't count).

Thrugelmir

socsteve wrote: »

Also, I am fully aware that the mortgage rates (SVRs are "standard variable rates" I presume) are not solely based on inflation; for a start, the various banks are competing with each other for custom (generally wanting to make them competitive compared with other banks, but they tend to lure people in with cheap fixed rates to start with and may have less competitive rates to compensate later).

Interest rates have nothing to do with inflation. Primarily they are driven by the cost to the lender of obtaining the funds to advance. This could be retail ( individuals savings) or wholesale (Corporate organisations ) to name a couple of avenues. Then like any business a lender has to cover the costs of offices , employee costs, regulatory fees , bad debts and taxation. When you are in the position of lending billions of £'s the matter becomes pretty complex. So risk policy has to be very clearly defined at the highest level i.e. board. With around a net 1% margin or less there's no room for misjudgement or bad lending policy.

Mortgage lending isn't highly profitable. As it is a competitive market. Since 2008 the banks have been in decline in lending terms while the mutual lenders i.e. what remains of the Building Society movement has increased it's share of new business.

Thrugelmir

socsteve wrote: »

When I said that banks pursue maximum profit, I was stating a fact. I could have pointed out that US banks (issuing subprime mortgages and constructing complex derivatives that hardly anybody understood) caused the 20087-8 credit crunch, rather than economic mismanagement by New Labour (not that I was a fan of that party).

If you follow the financial news then you'll also realise the US banks confducted much of their dirty business in London. Lehmans, Jp Morgan to name a couple. This was down to Brown promoting light touch regulation in the City. Browns personal affliation with the heads of HBOS and RBS, all now disgraced. Say much about his disappearance from politics even today. As he made the wrong calls totally.

The UK had a credit boom of it's own as well. B&B and Northern Rock were nationalised. RBS and HBOS were 48 hours away from going under. Barclays fleeced their shareholders with a deal in the Middle East. There's still plenty of news to come out I'm sure.

socsteve

Thrugelmir wrote: »

Interest rates have nothing to do with inflation. Primarily they are driven by the cost to the lender of obtaining the funds to advance. This could be retail ( individuals savings) or wholesale (Corporate organisations ) to name a couple of avenues. Then like any business a lender has to cover the costs of offices , employee costs, regulatory fees , bad debts and taxation. When you are in the position of lending billions of £'s the matter becomes pretty complex. So risk policy has to be very clearly defined at the highest level i.e. board. With around a net 1% margin or less there's no room for misjudgement or bad lending policy.

A good summary - thanks! You know a lot more about this than me, obviously, but let's consider "bad debts" which you mention as a factor above. If inflation is high, i.e. prices of goods in the shops, energy bills, etc., are high and ordinary working and lower middle class people find it harder to repay their mortgages - which could result in people's homes being repossessed. So there is at least some link, even if it's not particularly dramatic.

Thrugelmir wrote: »

Mortgage lending isn't highly profitable. As it is a competitive market. Since 2008 the banks have been in decline in lending terms while the mutual lenders i.e. what remains of the Building Society movement has increased it's share of new business.

Unsurprising due to the credit crunch which caused the collapse (and bailing out by governments) of various banks around the world.

Banks have also been stung by various scandals, such as PPI and Libor, which they are being forced to pay big fines (which may or may not make up for the additional profits they made).

socsteve

Thrugelmir wrote: »

If you follow the financial news then you'll also realise the US banks confducted much of their dirty business in London. Lehmans, Jp Morgan to name a couple. This was down to Brown promoting light touch regulation in the City. Browns personal affliation with the heads of HBOS and RBS, all now disgraced. Say much about his disappearance from politics even today. As he made the wrong calls totally.

I follow financial news rather more now than I did then, but I still didn't know that Lehman's and JP Morgan "conducted much of their dirty business in London", as you say. Thanks for the info.

As Labour politicians say to defend themselves, the Tories wanted even lighter touch regulation than Labour.

When Brown accidentally said he "saved the world" in the House of Commons, after implementing the bailout, he corrected himself to say "saved the banks" and really meant "saved capitalism".

Personally, I'm in Left Unity which has its founding conference at the end of this month - see leftunity.org. The question is: will a crisis on the scale of (or worse than from capitalists' point of view) the 2007-8 credit crunch happen again - if it does, there will be big opportunities to achieve socialism (or the far right could make big gains if we fail).

In fact, financial investors at MoneyWeek (who claim to be investors' most popular magazine) are predicting "social and economic chaos" with their "End of Britain" video/letter. Views on that from people here would be useful! My analysis (including links to it) is at the following link - copy and paste into your browser since I'm a newbie:

thatcheroftheleft.wordpress.com/2013/10/18/is-moneyweeks-end-of-britain-just-fearmongering-what-about-us-debt-default-is-socialist-revolution-on-the-cards/

socsteve

I've just edited the post on my blog (as suggested here) to have the following at the beginning:

[EDIT 11/11/13: As pointed out on the Money Saving Expert forum which I provided a link to at the end of this post, I got it wrong about interest rates offered by banks/building societies being based on inflation - there are a number of factors including the base rate set by the Bank of England (although this is partly based on government targets on inflation). The title wasn't particularly good either in talking about "age discrimination" because it is only rational for lenders to discriminate against older people on the basis that they may die before they have repaid their mortgages. However, Watchdog reported that maximum age limits for mortgages to be repaid had been reduced by 10 years by many lenders after the credit crunch, irrespective of ability to pay back, but failed to explain why (which is what I gave an explanation of in this post). I have had very few views of this post in five days according to the blog statistics facility, despite it being the top item on the blog, possibly due to the bad headline. Laura Kuenssberg on ITV News at lunchtime today reported that 2,384 mortgages have been applied for using Help to Buy (there is a separate one for new build properties - search online if you want details) out of 60,000 in total - a drop in the ocean and certainly not worth risking the housing bubble which there is already evidence of.]