Local Authority Mortgage Scheme: Who Takes the Risk?

Members of Peterborough City Council’s cabinet agreed yesterday to take part in the pilot Local Authority Mortgage Scheme, which will see the authority pay a contribution towards the deposits of first-time buyers.
Source: Peterborough Evening Telegraph 14th June 2011

On Tuesday 14th June at 08:10 on the BBC Peterborough Breakfast Show Council Leader Marco Cereste made the following statement:

On average, on an average I mean there’s first time buyers, so if you say that the average they’re going to be pitching for houses at about £100,000, is the way we see it. They’ve got to find £5,000 themselves, on £100,000 house. We would indemnify the bank which would be Lloyds bank in this particular instance, because the Scheme doesn’t work with any other bank at the moment, for another £20,000,which means that they could get a £75,000 mortgage .. sorry they wouldn’t they wouldn’t need the £25,000 deposit because the Council’s putting £20,000 in. They would have to pay interest on that mortgage as they would normally. (COUGHS) And we’ve calculated that we could help probably about 400 people.

The £75,000 mortgage statement is incorrect. In fact the Council puts the money up to enable the bank to lend 95% at a lower rate of interest than normal.
The correct picture is as follows:

“The bank would pay the council 4.7% interest per year .(on the money deposited with the Bank by Council),. and would only dip into the fund if a borrower defaults.
If the bank incurs a loss on a home bought under the Local Authority Mortgage Scheme guarantee, the council cash would provide the indemnity.”

A Little Bit of Stone

In fact, in the event of non-payment, repossession and a distress sale, the buyer takes the first 5% of risk, the Council takes the next 20% of risk, and the Bank takes a loss if the property falls below 75% market value. The Council is taking on risk that the Bank deems unsafe.

Peterborough City Council makes the following slightly misleading statement:
“Participating local authorities will only incur actual costs if a loss is incurred by the mortgage lender further down the line.”
Help for First-Time Buyers

The statement implies that the Bank is sharing the risk, but in fact the Bank does not lose, the Council loses. In the event the property is repossessed, and sells at 75% market value, the Bank loses not a penny. The Council (aka the ratepayer)  loses everything.


In addition there’s this whole issue around the fact that  the Leader of Peterborough City Council also being Chairman of Larkpoint builders.

Once again, at 08:15 on Tuesday 14th June 2011 in the BBC Peterborough Breakfast Show Marco Cereste make the following statement:
We are talking about first-time buyers, first people on the rung of the ladder. So it means that those people will then help lots of other people, because you’re then unlocking the chain in many instances. So it could have a really serious knock-on. Sometimes there’s two or three people in the chain, which theoretically, I mean, we’ll suck it and see but we’re going to try it. But it does mean that people you know you could unlock twelve hundred,  fifteen hundred, couple of thousand house sales. Now you know that’s a really serious number when you start thinking about it.

One obvious problem here is that during the selection of properties to be sold under this scheme, who will police the chain? What happens if Larkpoint houses are further up the chain, that the house vendors have plans to invest in a new Larkpoint house, and those sales are unlocked by Peterborough’s Local Authority Mortgage Scheme? Marco Cereste is Chairman of Larkpoint. Could he be said to have benefited from the Scheme? It’s surprising that with the best will in the world, and with the interests of first-time buyers at heart, he allows himself to become so deeply embroiled in arguing for the venture.