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Letter Sent To Council Ref: Local Authority Mortgage Schemes


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Overview:

The local Authority Mortgage Scheme enables borrowers to buy their first home with a deposit of less than the 25 per cent - required by most mortgage lenders. Peterborough City Council is one of the first local authorities to make the Local Lend a Hand scheme available. Subject to Lloyds TSB's usual lending criteria, borrowers are able to select any property within the local area, up to a maximum loan size of £123,500.

First time buyers will put down five per cent of the property price, and Peterborough Council will provide a cash backed indemnity of up to 20 per cent as additional security. The local authority then earns interest on this amount.

http://www.housepric...pic=173078&st=0

Letter Sent to Complaints Office Peterborough Council.

To Whom it May concern,

With Regards to your plans to launch a Local Authority Mortgage Scheme in order to help first-time buyers get on the housing ladder.

By acting as a guarantor for First Time Buyers, the Council is actually encouraging young people to take on increasing amounts of debt, as a pose to allowing the preferable, and equitable solution, of the average house price to return to its long term measure of affordability against income.

Your scheme is not designed to help First time buyers.

Did the council take into consideration the recent comments made by the president of the Law Society and the IPPR?

The president of the Law Society John Wotton sent out a strong warning to first-time buyers to be wary about affordable housing schemes such as Peterborough councils:

September 2011

"A significant number of repossessions take place against first-time buyers who often do not fully anticipate the nature and significance of the responsibilities they are taking on. As a group they are at the greatest risk of negative equity."

The Insititute for Public Policy Research also stated just this month [December 2011] that the biggest beneficiaries of the governments, Homebuyers Direct Scheme, are not First Time buyers, but are in fact, large housebuilders, and that the main effect of the government scheme is to 'prop up' weaker housebuilders.

[under the scheme, the government and a housing developer jointly fund a loan of 30% of the cost of a property.]

Please can you inform me:

How many of the councillors who voted to approve this scheme, actually own property?

And do any of those councillors who voted in favour of the scheme own Buy To Let property, or hold other investments in property?

Surely It's highly immoral for councillors to vote in favour of a scheme, where they stand to benefit personally? And whom therefore have a strong 'vested interest'

Rather than allow the cost of an average house to return to its long term affordability as a proportion of income, this scheme, if rolled out across the country, is an blatant attempt to keep the 'housing bubble' inflated.

In other words Rather than let your own house prices drop, this is a convenient way in which to 'transfer that debt' onto a younger generation.

Disgusting behaviour and highly immoral.

What business does the local council have meddling in markets and acting as a lender? Which will clearly have massive benefit for one section of the community over another?

Were there any councillors who voted, on the board who do not stand to benefit personally? [i.E. Those Who do not own property?]

Are you also able to guarantee that Interest Rates will not rise again, over the next 29 years, and that the beneficiaries of your scheme will not be left facing negative equity and repossession?

You are underwriting slavery, and spinning it, in a cynical attempt, to suggest that you are 'helping' First Time Buyers.

I look forward to your response. And answers to my questions.

Sincerely.

P.S.

If this is such a good idea why arent Lloyds taking the risk themselves, instead of pushing it onto councils?

Because if [or when] the first time buyer defaults - the local authority will lose their money - Lloyds of course, will win whatever happens.

Did it not appear strange to the council board, that a government majority-owned bank is negotiating with councils to guarantee their lending?

The losers are people who pay council tax and who are guaranteeing these high risk mortgages. [On top of the hundreds of billions of their money, pledged without anyone's consent, for debt which is not theirs, which was used to prop up the banks in 2008.]

The Council has agreed that people not yet on the housing ladder, should continue to pay to keep the banks assets, [other peoples houses] at their massively overinflated levels!

So Banks do not have to write down losses, and can continue to pay themselves vast bonuses based upon fake mark to market valuations.

Im sure the class action legal firms will be having a field day suing councils, for mis-selling a product like this in 3-4 years time when they are all facing negative equity………………

Response from PeterBorough Council:

Dear Mr *******

Thank you for your recent comments regarding the Local Authority Mortgage Scheme in Peterborough.

The scheme was discussed extensively by Members at both Cabinet meetings and at Full Council (twice) before it was introduced. You may find these reports useful in outlining the issues that were considered by the Council before agreeing to proceed.

Links to these reports can be seen below:

June 2011 Cabinet Report

July 2011 Council Report

October 2011 Council Report

We take our duty to protect taxpayers money extremely seriously, and considerations regarding potential financial risks to the Council were reviewed extensively. The following extract from the Cabinet report outlines the circumstances under which the Council would face costs:

'The indemnity would only be called upon, leading to a cost for the Council, if a loss is crystallised by the lender. This would require a default by the buyer, a repossession by the bank and then the property to be sold for less than the value of the mortgage. By way of example:

· Property valued at £100k, mortgaged at £95k (funded Local Authority indemnity £20k, Bank Mortgage £75k), was subsequently sold for £70k, the bank would request the full £20k indemnity from the Local Authority. In this case the value of the property would need to have fallen by 30% from the original valuation;

· If the property was sold for £90k the bank would request £5k from the Council. In this case the value of the property would need to have fallen by 10% from the original valuation.

The Council will only face costs if both these situations arise – that there is default, and the subsequent resale value is less than the value of the mortgage. Such costs would be funded from the interest gained in depositing the indemnity funds with Lloyds. Information from the Council of Mortgage lenders indicates that the number of repossessions by first charge mortgage lenders in 2010 was 0.3% of all mortgages. Over the five year period, the following would need to happen for the costs to the council to exceed the interest income:

· Defaults to be ten times higher than the 2010 level indicated by CML; AND

· Property prices to drop 10% from the level at the time the mortgage is approved

The scheme aims to support first time buyers who cannot meet the substantial deposit requirements. Many banks and building societies do not lend to those home buyers who cannot provide up a deposit of 20 to 25 per cent. The typical entry level price for two-bedroom property in Peterborough costs around £94k which would mean a deposit of around £24k is needed. With other costs on top of this, including stamp duty and other costs, this is effectively preventing most first time buyers from entering the property market.

Potential applicants will still be subject to the full range of assessment from Lloyds to check they can afford the mortgage payments on an on-going basis. For many first time buyers, affording the regular mortgage payments on a mortgage of this size is perfectly managed, but finding a lump sum of nearly £30k to cover the deposit and other costs is impossible.

Please also note the scheme we have launched with Lloyds does not cover new build properties – only existing properties.

With regards to some of the further queries you raise, please see below:

How many of the councillors who voted to approve this scheme, actually own property?

Information about which councilors own property is shown on our website on their register of interests. Unless there is a recorded vote, (which on this occasion there was not) then we have no record of which councillors voted for or against the scheme. Owning a property did not give councilors either a personal or prejudicial interest (as defined under the code of conduct) in the decision and it was not necessary for them to declare an interest

And do any of those councillors who voted in favour of the scheme own Buy To Let property, or hold other investments in property?

See above

Surely It's highly immoral for councillors to vote in favour of a scheme, where they stand to benefit personally? And whom therefore have a strong 'vested interest'

No-one stood to benefit personally in this scheme and no-one had an interest in accordance with the code of conduct definition

Were there any councillors who voted, on the board who do not stand to benefit personally? [i.E. Those Who do not own property?]

See answer to first point

I hope that helps answer some of your concerns regarding the scheme.

Regards

I have not had a chance to fully consider the response yet. Will be reading it in full later.

Meanwhile, any comments about the Council's response would be welcome.

At a glance it seems I've been given the Brush off..........His response just seems to be confirming my accusations in the letter!

Edited by Milton
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[quote

]Over the five year period, the following would need to happen for the costs to the council to exceed the interest income:

· Defaults to be ten times higher than the 2010 level indicated by CML; AND

· Property prices to drop 10% from the level at the time the mortgage is approved

This is essentially the same logic that was used by the creators of tranches of CMBS / RMBS which went from a price of 100 to a price of 0 pretty quickly.

In my view, trying to assess this type of risk is beyond the remit of a council. Taking this kind of risk on behalf of taxpayers is bordering on insanity.

Some of us have memories of the Hammersmith and Fulham interest rate swaps affair. The term ultra vires should send shivers down some people's spines.

Hopefully this council and Lloyds have a few legal opinions which are unanimous in their agreement that this is something that a council can do.

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Over the five year period, the following would need to happen for the costs to the council to exceed the interest income:

· Defaults to be ten times higher than the 2010 level indicated by CML; AND

· Property prices to drop 10% from the level at the time the mortgage is approved

Isnt it blatantly obviousd that Property Prices will have dropped by 10% over the five year period?!!!

Isnt that in itself an unnaceptable risk for a council to take with taxpayers money?!

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This is essentially the same logic that was used by the creators of tranches of CMBS / RMBS which went from a price of 100 to a price of 0 pretty quickly.

In my view, trying to assess this type of risk is beyond the remit of a council. Taking this kind of risk on behalf of taxpayers is bordering on insanity.

Some of us have memories of the Hammersmith and Fulham interest rate swaps affair. The term ultra vires should send shivers down some people's spines.

Hopefully this council and Lloyds have a few legal opinions which are unanimous in their agreement that this is something that a council can do.

Why so, the banks did it for 15 years. Oh, I forget this is the fabled public 'sector' that shouldn't be engaging in such activity!

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They don't have a licence so they cannot lend, but they can guarantee.

Are they able to assess the risk? No. Do they have systems to support this? No. Do they have any experience in this area? No. Have they been advised by the banks on this? You bet.

Shouldn't a council be focused on delivering key services to people in the area, not underwriting financial risk? Is that what we would expect to be a good function of a council?

One question is, does this represent a good use of Council Tax payers' money?

Another question is, does this exist in their charter as a Council - i.e. does this represent a service you could expect them to provide?

Third question is, do they fully appreciate and accept the risk that they are transferring upon themselves, and are they happy to stand by this risk? What happens if the risk materialises... will they resign as they have squandered money that could have been more usefully spent on schools, roads, refuse and other services?

The other options is to threaten to sue them for any materialised losses. That might focus their minds as to whether they are able to assess the risks. I am sure there will be precedent for this - look into the US and how the councils "invested" in pension funds - a similar financial instrument, but at least one with more chance of a material gain than an underwritten promise.

T.I.M.

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Why so, the banks did it for 15 years. Oh, I forget this is the fabled public 'sector' that shouldn't be engaging in such activity!

The banks did take this sort of risk for 15 years and they got it wrong and were insolvent.

In my opinion, the government of the day should have forced bondholders (especially the sub debt holders) to take a hit rather than bailing them out at par.

A large part of taxpayers' money injected as capital was a direct transfer of wealth to bondholders. This makes no economic sense.

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Isnt it blatantly obviousd that Property Prices will have dropped by 10% over the five year period?!!!

Isnt that in itself an unnaceptable risk for a council to take with taxpayers money?!

Indeed. I'm concerned about the two caveats they mention. They state 'defaults' in their response about the ten times higher comment, but the CML states 'repossession' rate at 0.3% for 2010(36,000 homes, ~broadly similar for 2011 although figures are not out yet). If McKinsey's report yesterday is accurate in saying that 14% of mortgages are in default/delinquency(12% default/2% deliquency, not sure how they are defined though), then it seems things have moved on since the CML's figures. We know lenders are exercising forebearance so the 0.3% figure is a bit of a red herring in any event. For the council to state that repos have to rise by a factor of ten misses the point a bit since they could rise substantially tomorrow on nothing more than a change of policy by a lender.

The council-assisted buyers will start with a clean slate, but if the general environment is indeed one where the council would be in a far worse financial position than the original figures suggest, then the council has to ask itself why their buyers are expected to better this market average. Do they do enhanced checks etc? If anything, if these people are carrying more debt than others, you might expect their prospects to be worse.

I'd love to see their costs etc for a 15% drop, their leverage means things will go sour very quickly. 15% is hardly out of the question either. Might mean that repos need to rise by a factor of five to 1.5% of all mortgages, since the council will lose twice as much on the resale.

The tone of the response suggests the council are not quite aware of the risks they are taking.

Edited by cheeznbreed
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Owning a property did not give councilors either a personal or prejudicial interest (as defined under the code of conduct) in the decision and it was not necessary for them to declare an interest

It would be interesting to see what the code of conduct actually says on councilors voting for policies that help to support their own porftolio values (even if it's just their own home) - even if supporting in a general way. Are they trying to suggest something like councilors live in types of housing or areas of housing etc that are unaffected by the FTBers housing? Or if they do live in the same type/area etc it just doesn't matter?

Does the code of conduct imply that owning property does not indicate a direct VI in the general market?

Another possibility is that the code is just so vague that it can be taken to mean whatever they want it to mean.

Maybe the code of conduct needs redrafting.

Edited by billybong
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Shocking. The council do not understand how resources are allocated by the market. If they enable someone to get a mortgage and buy a property, someone else has been outbid. The number of people unable to buy does not change therefore, only the price has moved higher, and the risk of default has risen.

Edited by leicestersq
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The scheme aims to support first time buyers who cannot meet the substantial deposit requirements. Many banks and building societies do not lend to those home buyers who cannot provide up a deposit of 20 to 25 per cent. The typical entry level price for two-bedroom property in Peterborough costs around £94k which would mean a deposit of around £24k is needed. With other costs on top of this, including stamp duty and other costs, this is effectively preventing most first time buyers from entering the property market.

Potential applicants will still be subject to the full range of assessment from Lloyds to check they can afford the mortgage payments on an on-going basis. For many first time buyers, affording the regular mortgage payments on a mortgage of this size is perfectly managed, but finding a lump sum of nearly £30k to cover the deposit and other costs is impossible.

They are failing to ask the crucial question of why the banks and building societies will not lend to those home buyers who cannot provide a deposit of 20 to 25 per cent. For example, people with 5% deposits are much more likely than average to both fall into negative equity and default. They quoted an average default figure in their response, but the default percentage will vary markedly with the level of deposit/equity. They also quoted an average price fall, but price falls vary with location and property type. Is the type in the scheme more likely than average to fall in value? Probably. I don't have the figures to hand on defaults, but I am sure there are threads on this somewhere.

Q

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You could mention that the subsidy allows developers to effectively sell houses at 25k over market value. The properties drop in to negative equity immediately after sale.

Ok, this is a bit of a stretch, but you get my drift...

The council response did say:

Please also note the scheme we have launched with Lloyds does not cover new build properties – only existing properties.
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They don't have a licence so they cannot lend, but they can guarantee.

Are they able to assess the risk? No. Do they have systems to support this? No. Do they have any experience in this area? No. Have they been advised by the banks on this? You bet.

Shouldn't a council be focused on delivering key services to people in the area, not underwriting financial risk? Is that what we would expect to be a good function of a council?

One question is, does this represent a good use of Council Tax payers' money?

Another question is, does this exist in their charter as a Council - i.e. does this represent a service you could expect them to provide?

Sounds to me that it could be ultra vires - any lawyers here?

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Please also note the scheme we have launched with Lloyds does not cover new build properties – only existing properties.

"Only existing properties":

1. That's at the moment. How likely is it that it might include new build properties in the future?

2. Private sales of existing properties, developer sales of existing properties (say after refurb), council sales of existing properties etc or just any existing property ownership?

Edited by billybong
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Someone at the council has clearly spent a bit of time preparing this response and clearly knows a bit about housing and legislation (i.e. not the housing department tea maker). Perhaps they're concerned about how this 'help' is portrayed?

They should be of course. Though Milton's letter comes across a bit ranty in places he is spot on.

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I thought Lloyds were fine until they were rushed/pushed into buying HBOS.

I think that was the final straw that got the headlines for their failure. A pretty incompetent purchase financially etc.

I don't think their loan book was that healthy to start with.

Are councils being similarly rushed/pushed by banks etc into carrying out these FTBer policies.

Edited by billybong
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