We thoroughly commend Fylde Council's decision to offer support to
first time buyers wanting to get onto the housing ladder under the new Local Authority Mortgage Scheme (LAMS) Fylde has just adopted.
It originally stemmed from a national initiative, but it is up to individual councils to decide whether to join in or not. About 26 councils in the UK have taken it up, and another 35 are about to join.
Last September, the council agreed to spend the £3,000 needed to join the scheme and have a report and other documentation provided for them. As a result of checking all that, officers came to the view there was no impediment in principle to Fylde
Although the national aim is chiefly to do with stimulating the housing market, Fylde's consideration of this has (mostly) displayed its traditional concern for young couples getting started in life.
So how does it work?
Well, assuming everything is in order, (Fylde won't be doing the vetting for a mortgage, that responsibility stays with the mortgage provider), first time buyers will only have to find a deposit of 5%.
The council, in effect, underwrites part of the mortgage
given by the provider, (either a bank or building society), with an indemnity of 20%, and the bank provides the remaining 75% (although in reality, the bank effectively advances 95% on the back of the local authority indemnity).
This means that the couple will only have to put 5% in, but they will get a much more beneficial rate of interest - as though they had put in 25%. It will no doubt be a great help to those couples who benefit from it.
The expectation is that it will also have a knock-on effect on house sales, as house-buying chains are released and other home transactions can flow up the line as the bottom link is made.
Under the scheme, FBC will provide a mortgage indemnity for the first five years of the mortgage, up to a maximum of 20%.
The ones in Fylde will be 'cash-backed', meaning that Fylde has to deposit the money for the indemnity with the mortgage
provider, but it will earn interest at between 2.9% and 3.28% interest.
In the curious world of local authority finance, this is actually a higher rate of interest than the money Fylde gets on its main deposits (which have to be much more risk-free), and the term can be extended for up to a couple of years if the mortgage
were to be in arrears in the last six months of its term.
The terms and conditions, and the selection of recipients for the mortgage and so on will remain with the mortgage provider - so borrowers will have to meet the usual criteria of the participating bank or building society.
So where is Fylde getting the money from and how much will it cost?
Well, it's going to use some of the money it got from developers who have not been willing (or able) to provide the relevant proportion of 'Affordable Houses' on a site they're building. When this happens, they make a deposit with FBC equal to what
the cost of the Affordable Houses would be, and Fylde is supposed to provide the houses with this money.
At present Fylde had about £1.99 million in this ring-fenced 'Section 106' money in a reserve account, and it's planning to put around £1m of that into this new scheme. More is coming in all the time as new developments are built.
After the five years of the scheme (and assuming no defaults), the money from each mortgage returns to the Council (presumably the bank is satisfied that the mortgagee will have demonstrated an ability to repay and is willing to pick up the 20% itself
from then on).
However it's unlikely to be lent out again like this, because there seems to be a legal restriction that will prevent Fylde from recycling the money again into another loan guarantee. So it will probably then go into bricks and mortar
at that time.
Fylde had to consider what criteria it would implement as conditions under which loan guarantees would be made.
In the end it has settled for:
- beneficiaries have to be first time buyers
- the overall value of the indemnity pot is a maximum of £1m
- the maximum mortgage per property is £147,000
- the area targeted for assistance should be the whole of the Borough
It took the figure of £147,000 from the fact that the median house price in Fylde is £155,000 - and a 95% mortgage would represent £147,250. This means that the £1m will only support in the region of 30 to 35 mortgages. However, that's going to be around 30 or
more happy couples that couldn't otherwise make a start in a first time home.
But when it was considered at Scrutiny Committee there seemed to be less than universal support for the idea.
Cllr Singleton was clearly unhappy with the idea and said "A banking facility is not our core business" and "It's ridiculous for a Council to go
this way, we'll be competing with Wonga.com next" Cllr Linda Nulty reflected concern when she said she had no problem with the scheme but "using half of what we have in this is a worry"
The Scrutiny Chairman, Cllr Mulholland, said "This is £1m in a
pot, so if the money is there now, it doesn't need more S106 money to come in. We have the money now"
Cllr Kath Harper wanted to know if it would be limited to so many a year. The answer was in effect 'we'll suck it and see, but the probability is that it will go quickly.'
Cllr Angela Jacques - who didn't seem to have read the report before the meeting said "In the old days you saved up for your deposit but we still had negative equity. This seems like a round robin if no-one defaults, what interest do we get?"
Singleton was still concerned. He said "If you are a good risk you should be able to get a loan. Is it possible for FBC to lose money yes or no?" The answer was yes but the risk is offset by the interest we gain.
With some (in this case understandable, we thought) exasperation in his voice the Chairman said "This is not about high risk" and he explained how it would help young people. he concluded "its supporting a shortfall in the deposit"
- To which Cllr
Singleton retorted "That's what the banks are there for"
In the vote, the Scrutiny Committee approved the idea by 12 votes to 1
We found the discussion on this topic interesting. It was the first time for a long time that we had seen non-party-political debate take place, with disagreement even between those in the same political party.
But we were also saddened.
Those of us with greyer hair will remember the days when councils offered full mortgages to people in their areas as a way of generating a decent return on their deposits, AND helping people into housing. And it's only a very
few years since Fylde had a housing department of its own of some considerable size. Time was when the provision of shelter and housing was one of the great public services undertaken by local authorities.
Those days are clearly gone when councillors
believe it is no longer their "core business" to help meet the housing needs of their community.
The idea had a better ride at Cabinet, but the maximum price per property was a concern to Princess Karen Buckley who seemed to want to reduce the limit per property, so they could help more people. We thought that was an interesting perspective, and
suggested she was more concerned with helping first time buyers rather than the national aim of stimulating the market. We're not saying she was wrong. Not at all. It was just interesting to note the angle she came from.
The application of the scheme to the whole of the Borough is also interesting. Again it shows a desire for equity and fairness rather than a more hard-hearted selection of geographic hot-spots within Fylde to benefit specific areas and exclude people in
So if that's the good news, what can go wrong?
Well the first worry is that bankers and building societies might relax their normal lending criteria if they have a third party indemnity like Fylde to ‘bail them out’ for 20% of the risk - and if this happened, the risk might be greater than it should for FBC.
have promised not to do this. Yes, we hear your anguished groans, but we take comfort from the fast that they will all be repayment mortgages – there will be no interest-only mortgages.
Another risk is that the mortgage payer might default. If this happens, Fylde would become liable under its indemnity. But the indemnity would only be called-on if the loss were to be crystallised by the lender. This would happen if a
couple default, and the lender repossesses the property for resale. The national average of mortgage defaults (based on the Council of Mortgage lenders published 2010 statistics), is 0.3% of all advances made, so the risk is not high. In cash terms it
works out at around £15k for every £5m of loans made.
If a statistically accurate default were to happen, FBC would lose out, but they would probably be able to recover most of it from the interest they would be getting on the deposited indemnity cash.
If all goes well, and there is no default by any of the buyers, the indemnity liability would terminate after 5yrs (or on an early repayment of the mortgage) and the money returns to FBC.
Interestingly, one little legal issue arose. One of the mortgage providers was very cautious about whether the Council had the power to use S 166 money for this purpose. FBC's legal people checked it out and believe it's all kosher. (A barrister gave
an opinion on this for the whole national scheme) but Lloyds TSB bank, also require a Local Authority Officer to provide an Opinion Letter confirming that the Authority has the power to enter into, observe and perform the terms and obligations required of
it under the Scheme. The also wanted the Council to indemnify the Officer from any personal liability he or she may incur by providing the Opinion Letter.
FBC were (probably understandably) not having this, so an agreement with Lloyds TSB bank isn't on at present - unless the conditions change.
So, to sum up,
- It will help FBC to stimulate the local economy by kick-starting the first time buyer housing market.
- It will be relatively admin-free from the FBC's perspective.
- The Interest rate on indemnity deposits compares favourably with what FBC can get elsewhere. (Albeit that rate it is fixed for five years)
- They will keep the interest set-aside to meet any potential mortgage defaults that may arise
- There are some risks but on past experience that will be low
- And, perhaps most importantly, it will help young couples get on the housing ladder.
We only have one fly in the ointment, and its the logic that says a developer should make 'normal' houses more expensive by having to include within their sale price, the cost of providing (or contributing to FBC) some 'Affordable Houses' for those
less well off.
We think that principle makes this indemnity scheme a bit like a tail-chasing exercise - because if Fylde (like many other councils) hadn't insisted the developers provide affordable houses in the first place, it's arguable that the cost of the houses the developer built would have been lower
more affordable - anyway.
We asked about this and the view from FBC was that well, housing sells for what its worth anyway, and it wasn't thought that without having to provide the affordable housing developers would sell them any cheaper.
We can see the point, but we're not inclined to agree - at least not yet.
That said, if Affordable Housing is going to be a feature of the future, we think this indemnity scheme is a far better approach to helping our young people than building the so-called "Affordable Housing". It's not so much more houses we need, as a
bit of help for prospective buyers to get on the ladder.
So overall, it's well done on this one for FBC.
Dated: 30 September 2012