Background

Over the past decade, the mortgage sector has been entering into dangerous ground. Financial institutions have been lending recklessly to the sub-prime mortgage market and this has been a time bomb waiting to go off. That time bomb has now exploded and this government has been left to pick up the pieces of a crumbling economy.

Although there has been an abundance of wealth available over the past few years hardly any of the money has gone into rectifying the mistakes of a system which sold on its overvalued assets simply by repackaging them.

Is Your Home In Safe Hands?

With credit already drying up this leads to a reduction in asset values, reducing financial institutions balance sheets and the knock on effect is an increased reluctance to lend further. Already this has resulted in many companies going out of business and mortgage holders are unable to renew their mortgages and first time buyers cannot get on the mortgage ladder. The values of properties has dropped 15% so far with another 20% drop expected, it will be impossible for the majority of the public to get a mortgage based on the loan to valuation model on which all banks base their lending criteria on now. The days of 75%+ mortgages have gone.

Why do people feel insecure and unhappy at this time? The fear of losing their job, a high possibility of their home being repossessed and the detrimental effects of bankruptcy on the family unit.

Builders are unable to sell any properties as potential buyers cannot sell their houses or get mortgages anymore. Costing the government unemployment payments, and the knock on effect to the other areas of the economy e.g. suppliers.

Both large and small companies are unable to renew their business overdraft, thereby they cannot produce more goods or competitively compete in the marketplace, leaving no option but to make their employees redundant.

The overall effect on the individual is depression which does not encourage the spend mentality required to kick start the economy.

Solutions So Far
VAT: The government have reduced VAT by 2.5% which equates to a saving of £2.50 on an item previously priced at £117.50. While a welcoming saving this alone will not encourage people to spend their way out of a recession. At a time of crisis financial security comes first, money to pay the mortgage and buy food (both VAT exempt) are more important than material luxury goods like a new TV etc.

Mortgage to Rent: Homeowners are at real risk of losing their home due to their mortgage lender repossessing their house. The current solution is to buy the property from the homeowner and rent it back to them. This does not encourage people to value their asset (home) anymore as they no longer own it and subsequently cannot work their way out of debt by building up any equity they might have gained over the coming years.

The Feel Good Factor
How to create the feel good factor and kick start the economy within existing budgets;

1. Provide a stable financial foundation upon which to build the feel good factor
2. Money alone cannot fix the crisis it must be targeted at areas which generate positive feel good
3. Fix the mortgage problem by introducing a new government mortgage shortfall cover solution
4. Government already a strategic partner in the financial services sector.
5. Money has been given to the banks in anticipation of lending to customers.
6. Existing infrastructure already in place.
7. Market readiness for restructure in lending
8. Government gains maintained property portfolios.
9. Economy is re-started and recession ends.

The Security Cycle

Mortgage Shortfall Cover
My proposal is to keep people in their own homes by becoming a strategic partner in their mortgage ownership. This can be achieved in many ways and a few examples are given below, however the main objective of my solution is to help a beleaguered economy get back on its feet by giving the population, who have been caught out by the risk taking banks, their security back, which in turn will allow them to enjoy the lifestyle they had before.

Where the mortgage to rent scheme fails is that it takes the homes away from the people, thereby denying them any profit they would have eventually made when the housing situation improve i.e. values increase.
This would leave only the landlords profiteering from any increase in value. It also means that any maintenance or home improvements would cease as because they don’t own their own home anymore it is not in their interest to improve it.

My solution means the government is the silent partner in the mortgage as they would help make up the shortfall through monthly repayments or equity share in the value of the house. They would be repaid when the homeowners move on and release the equity or they get back into employment and can afford the monthly repayments again.

Homeowners would still be in charge of their houses allowing them to extend, improve or maintain it in their own way. They would reap any profits (less any payments to the government) when they eventually sell the property.

As the government is already part ownership in many financial institutions it is in an ideal position to offer and police these schemes.

It is not the public’s fault for getting caught out in this crisis as they followed the financial advice they were given. Yet only the financial institutions that put them there in the first place are getting financial support and are still not passing the assistance on to their customers.

Current Scenario
Couple with a family, both working parents with a joint mortgage. With 2 incomes, good bonuses and regular overtime they can comfortably afford £100,000 mortgage at £500 per month.

One of the couple loses their job, with their income now halved this only leaves the couple £300 towards their mortgage payment.

Worry and depression set in and it costs the economy as they only spend on necessities now (mortgage and food, which are both VAT exempt), the debts start to mount up.

After 3-6 months of being unable to keep up with their mortgage payments the bank repossess their house and the family have to move into council paid for accommodation.

It further costs the government in unemployment costs, less tax revenue, and increased NHS bills due to prescriptive drugs for depression and counselling. Additional housing may be required through the possibility of the breakdown of the family unit.

Mortgage Shortfall Cover - Solution 1
Couple with a family, both working parents with a joint mortgage.

They can afford £100,000 mortgage @ £500 per month, however there is no overtime or bonuses due to recession.

One mortgage holder loses their job leaving only enough money for £300 towards the mortgage payment. Worry and depression set in and it costs the economy as they only spend on necessities now (mortgage and food, which are both VAT exempt), the debts start to mount up.

Using the Mortgage Shortfall Cover Solution, the government step into cover the £200 shortfall on the mortgage payment after valuing the house and taking a percentage share in ownership.

With the family home safe, the couple regain the feel good factor and are confident that they can once again afford to purchase non-essential items thereby helping the country spend its way out of the recession.

Once the recession is over and the couple are both working again, they buy back the governments share in their home returning them to 100% ownership of the property.

Mortgage Shortfall Cover - Solution 2
First time buyer/low income couple or typical sub-prime candidates i.e. those people who can afford the monthly repayments but do not earn enough to get a mortgage or do not have enough savings to meet the LTV of 75% which banks now demand.

They can get a £60,000 mortgage based on their earnings, but properties are worth £100,000, leaving them short with no way of saving £40,000 in a realistic time period.

They cannot afford to get onto the property ladder, and therefore prevents the chain starting for the rest of the property market.

Using the Mortgage Shortfall Cover Solution the government step into cover the £40,000 deficit on the mortgage after valuing the house and taking a percentage share in ownership. This solution helps house sellers/builders as it will be open to existing and new properties and help kick start the property chain.

Return of investment to the government is made when either the property is sold, or when the occupier can afford to buy back the shortfall cover.


Mortgage Shortfall Cover - Solution 3
People with existing mortgages where LTV has fallen to below 75% .

As the banks have tightened up their lending criteria these customers are now unable to renew their mortgages leaving many in financial crisis.

This will lead to people having to sell their houses, which in a poor selling market could lead to repossessions and bankruptcy. This is another vital link that will be lost in the property chain.

Using the Mortgage Shortfall Cover Solution the government step into cover the deficit on the loan to valutation mortgage after valuing the house and taking a percentage share in ownership.

This solution helps people afford to stay in their homes, providing a safe and secure environment, encouraging the return of the feel good factor allowing them to once again afford to purchase non-essential items thereby helping the country spend its way out of the recession.

Return of investment to the government is made when either the property is sold, or when the occupier can afford to buy back the shortfall cover.

Virtuous Circle
By reinforcing the fundamental elements of a stable economy will encourage favourable results.

Panic Saving
In conclusion for this recovery solution to work it is vital that the media are a fundamental part of the solution.

This can be demonstrated using the psychological theories of panic saving coupled with Anthony Gidden’s vicious cycles. These theories demonstrate exactly where the hearts and mind of the people of the UK and indeed the rest of the western world are right now. We need the media on board, as they are instrumental in spreading the feel good factor back into the social consciousness of the UK and the rest of the world.

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View The UK Government's Mortgage Rescue Proposal

Copyright © 2008 Stewart Lothian.