Yesterday, after the Queen's Speech, Gordon Brown announced his latest cunning wheeze to buy votes for the next election. It's quite simple: if you have a mortgage up to £400,000 and your circumstances are reduced, eg your income goes down, you may postpone interest payments on your mortgage at the taxpayers' expense for two years.
The way it works is you pay reduced mortgage interest payments, or no payments at all, and the missing payments get added to your loan. The government guarantees these payments to the lender.
Apparently eight large banks have bought into the scheme so far; although only in principle. They were quite surprised yesterday to learn they were already totally on board. Of course the government-owned Northern Rock doesn't have much choice.
At first sight this scheme isn't so silly. A lot of people are very close to the finance edge; they have big loans and require both his and her incomes to make the payments. One loses his or her job and it's repossession time. And then the state would have to pick up the pieces with benefits and the like, especially if there are children. Even from the taxpayers' point of view it may be financially cheaper to pay (or at least offer guarantees) so the family can stay in their home.
Doubtless people working in property such as estate agents, lawyers, developers and the like are also hoping this scheme will put a floor under house prices and bring the market back to life.
And the whole scheme isn't expected to cost a lot of money: best case £100m, worst case £1bn. That's not much in the context of government planning to borrow £120bn this year.
However looked at in greater depth some problems become apparent. For example only the "first charge holder" can use the scheme because only they can extend the term of the mortgage, but most repossessions are due to second charge holders from other loans secured on the property calling in their marker.
In any event the big tsunami of repossessions coming soon isn't due to owner-occupiers not covering their mortgages, it's the buy-to-let market collapse where amateur landlords are out of their depth, unable to access any of the cheap loans now available because they don't have sufficient equity (or any equity) in the investment property. As the recession bites these landlords are also finding it increasingly difficult to find anyone to rent their properties. There are between 500,000 and a 1,000,000 empty homes in the United Kingdom so they are squeezed between a rock and a hard place - property value is falling, so equity is falling, hence mortgage costs are rising, meanwhile rent is falling because tenants are scarce.
The scheme is also open to abuse. Anyone who wants to live "rent" free can access the scheme before eventually allowing their house to be repossessed after a couple of years. This could be very attractive to people with mortgages far greater than the value of their homes, and remember 125% mortgages were not unheard of a couple of years ago. Factor in the near 20% reduction in values over the last year and run that forward a couple of years and people could easily be owing twice or even three times what their house is worth. Two years rent free followed by a wiping of the debt might seem like an easy option.
Another problem with the scheme is the banks have to find the money to fund it. Contrast this with a repossession and forced sales where the bank suddenly has a lot of money coming in. New loans are already thin on the ground. If this scheme is used on any scale the banks are going to be very short of cash. Let's look at some numbers.
We expect 75,000 repossessions next year (CML estimate) and let's assume an average mortgage of £100,000 costing 6,000 a year in interest payments. (Forget about capital repayments - that's so last century!) That's £450 million the banks haven't got. Assume each repossessee uses both years' of grace, that's £900m not being lent out in new mortgages. Hence money will get more expensive and push even more people into the scheme.
But the real problem with the scheme is the message it sends to everyone who isn't over-mortgaged. It says: you who have been prudent, cautious and sensible are now going to pay for those who were profligate. These prudent people are now struggling to get a 2% return on their savings while the feckless are getting a lot of free money thrown at them. It seems likely their money will be going abroad where it is no longer exposed to the falling sterling and a decent return can be had. The prudent people may be going with their money. And who can blame them? Why should they be expected to pay for the imprudent who borrowed without any thought of tomorrow?
This scheme also sends a bad message to the wider world; the world of people Gordon Brown needs to buy UK debt to fund his massive spending splurge. These people will see ever reducing interest rates as an indicator the government has no plans to defend the value of sterling and ever more debt-funded bail-out schemes as an indicator that the UK is bad place to be putting your investments. It's by no means clear that Gordon will be able to get the world to pay for his grandiose plans.
And it's not really likely that house prices will be stabilised by this measure. House prices are a function of the availability of credit and of jobs. Both of these are shrinking and this scheme won't stop that. And anyway, house prices need to fall; houses are currently far too expensive.
But viewed in purely political terms, this scheme makes sense. Plenty of people with large mortgages are afraid they may lose their jobs. The reassurance the scheme provides will inculcate a feel-good factor (alright, maybe just a feel-less-bad factor) by the protection it provides. Even from people not actually using the scheme that should be good for some votes.