Jardine Lloyd Thompson Group PLC, a London-based insurance brokerage, has been named by the Home Builders Federation, a U.K. trade group, to manage and develop a mortgage indemnification program designed to allow buyers in that nation to purchase a home with as little as 5% down.
The program is being set up with the Council of Mortgage Lenders and will be underwritten by the homebuilders and the U.K. government. It will remove the risk of default losses from the mortgage lenders.
When HBF announced the creation of the program last November, it said lenders were requiring downpayments of between 20% and 25% for the average first time buyer. Many of these buyers did not have this kind of savings and as result, the first-time buyer market collapsed, HBF said. This program is not just for first-time buyers; current homeowners who are unable to move because of limited equity in their current property, can use the program to make a 5% downpayment on a new, larger home.
In the announcement of the creation of this program, Stewart Baseley, executive chairman of HBF said it “will allow people to buy their new home on realistic terms and help in particular hard pressed first time buyers.
“It will also be a huge boost to house building. Since 2007, the biggest constraint on homes being built has been mortgage availability. This scheme will see more desperately needed homes being built, create jobs and give the economy the boost it needs.”
Under the plan, the developer will deposit cash, up to 3.5% of the property's value, in order to indemnify the lender. The lender will hold these funds for seven years and pay interest on them. After seven years, the money will be returned to the developer, less a portion of any credit losses.
The government will provide an additional guaranty of 5.5% of the value of each property included in the program that can be used in the event the losses exceed the value of the funds held on deposit.
There will be “silos” that allow the program to cross-subsidize properties built by the homebuilder and mortgaged with the same lender.
Steven Rance, a partner with JLT, said the program is expected to launch in March. JLT's role prior to launch will be to develop the legal framework, structure, bank accounts and systems. This initial program is expected to run for three years.
“The U.K.'s major lenders and house builders are all supporting the scheme which is being backed by the government and is expected to launch in March. This is an extremely timely and exciting development for lenders, builders and the U.K. housing sector,” Rance said.
A request sent to JLT for more details about how this program would operate was not returned by press time.
