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Should The Government Rescue Adverse Credit Mortgages?

May 24, 2008
The Federal Government's apparent willingness to support the market for adverse credit mortgages in the United States raises the question as to whether the UK Government should consider doing the same. The House recently passed a allowing the Federal Housing Administration of providing insurance to lenders on mortgages that are in danger of becoming delinquent. While final legislation is still not a sure bet it begs the question of whether a similar scheme would work in the UK.

The housing crisis which has gripped the US over the last year or so has seen thousands of adverse credit mortgages - or sub prime mortgages as they are called across the pond - find their way into default and render the mortgagors homeless. Such home loan products were easy to obtain in the early part of the decade due to lax lending criteria and a property hungry public. What goes up must go down and the American property market has plummeted on the back of mortgage defaults and mass repossessions.

The Federal Government is keen to avoid a major recession and has been searching for ways to keep people in their homes and financially independent. A raft of hefty interest rate cuts have helped but repossession levels are still too high and entire neighbourhoods are being left as ghost towns. It seems that millions of home owners are paralysed by their mortgages and are finding it difficult to keep up with their monthly repayments. This seems to particularly be the case for borrowers with adverse credit mortgages who somehow obtained home loans despite their shaky credit scores.

In order to avoid a crippling recession Congress and the Senate seem willing to back a program that will allow the Federal Housing Administration to insure lenders regarding the home loans held by borrowers who are deemed the most risky. There would of course be strict and slightly complicated criteria involved in selecting the borrowers who would qualify for the insurance and it would in no way be a simply hand out of federal funds. Instead, the adverse credit mortgages would be guaranteed to be repaid by the Government in the event of the borrower becoming delinquent.

The purpose of such legislation is to restore confidence in the financial markets so that lenders feel more confident in dishing out money to mortgage applicants. The purpose of such a scheme would not be for the Federal Government to shovel billions of dollars of taxpayers' money into the hands of irresponsible lenders and financially impaired home owners. It is likely that only a small percentage of the insured loans would be required to be paid out meaning that the Government is simply attempting to stoke the fire of the financial markets rather than completely fund its return to form.

If a successful plan can be devised it may be worth the UK Government considering a similar scheme. It is clear now that the UK housing market is experiencing similar problems to its American counterpart so there is little reason why a similar program couldn't work in the UK. When confidence has been restored to the housing market adverse credit mortgages may once again be made available to borrowers who genuinely require them and who are worthy of a home loan.
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