By mbaxter 8 Dec 2008 [3 Comments | 91 views]
Related articles
The Government’s latest fit of generosity towards hard-pressed homeowners, while an understandable reaction by a Government desperate for voter support, may prove impossible to implement and merely defer the pain of the housing correction.
The scheme will allow people in arrears with mortgages of up to £400,000 to have the interest deferred for two years, all paid for by the long suffering British taxpayer.
The idea is to discourage banks and building societies from repossessing properties because the Government will underwrite the deferred interest in the hope that the homeowner will be able to find a new job and resume mortgage payments by the end of the two year deferral period.
But the scheme will be beset by problems from the outset: it will increase moral hazard and do nothing to assist the root causes of our present troubles.
With cutbacks in tax offices, it is difficult to see who will undertake the task of weeding out fraudulent claims from individuals who have savings of more than £16,000 but who try to game the system.
Where an individual has ‘self certified’ their income, with no requirement for proof of earnings, how can they prove their loss of employment? As for individuals already on debt management plans, the offer of yet more interest-free credit is like handing a punchbowl to a drunk.
More importantly, by deferring the inevitable collapse in house prices next year, the Government is merely postponing the pain for everyone. Better to undergo cold turkey now, than to defer it for another few years. Many City economists believe the market needs to fall another 30 per cent before house prices stabilise.
It is also not clear how much the scheme will cost the taxpayer. Ministers talk of a £1bn contingent liability, including up to £100m for repossessions.
In any event, most banks (apart from Northern Rock perhaps) dislike repossessions because they are expensive and often leave both lender and borrower out of pocket. Royal Bank of Scotland has already agreed to defer repossessions until after at least six months of arrears and the other quasi-nationalised banks, HBOS and Lloyds TSB, are bound to be leant on by the Government to do likewise.
While the prediction by the Council of Mortgage Lenders of 75,000 home repossessions in 2009 represents a tragedy for all concerned, it is the inevitable consequence of the borrowing binge which was allowed to continue unregulated and for far too long.
Check out the best mortgage deals on Defaqto’s mortgage comparison tool:
http://www.defaqto.com/consumer/mortgages.aspx
Well said. Normally defaqto’s articles are much more balanced than this one. I’m glad to see the writer has nailed their colours to the mast today.
You talk about a government “desperate for voter support”. Quite so. I believe this to be no more than a cynical way of deferring the inevetable rise in repossession figures beyond the next election.
This commentary is a little too damning. As companies fail and more people lose their jobs leaving them without income to fund their mortgages, what are we going to do throw them all into the street? Admittedly, the current proposals seem to have flaws but solutions should be found to rectify these rather than doing nothing at all.
The country seems to be in an economic mess with no easy solutions and only time and prudence will cure our ills but over many years – I have no doubt. It is essential that we tackle the social fallout as well as a plan to one day escape from the mess we currently find ourselves in.
When will the Government wake up, the reason we are in this position is because of the housing market and keeping property at an artificial rate will not cure the problem. As you say there has to be an adjustment which is going to be hard for many but if this adjustment is put off it will be back time and time again. Would it not be better for repossession and the mortgage company to be helped by the government to keep the people in the house and charge them a rent? The real money needs to be put in things that will generate money for the country, it was once said export or die I believe we are back there again and we as a country have to start paying our way.