The government's FirstBuy scheme is a mis-selling scandal waiting to happen

Mar 29, 2011, 02:37

Merryn Somerset Webb

Posted byMerryn Somerset Webb

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The Observer ran an article at the weekend about the mis-selling of mortgages. Turns out, in the words of the Citizen's Advice Bureau (CAB), that, pre-2008, "we were seeing lots of evidence of irresponsible lending – people being lent mortgages they could never properly afford and unsuitable lending with people being given products that weren't necessarily right for them – and a lot of the problems were driven by intermediaries".

That means – regardless of whether you think moral responsibility for this kind of thing rests with the lender or the borrower – that "it was only a matter of time before the claims management industry started moving in".

And move in they have. Claims management firm Brunel Franklin has just launched a "consumer mis-selling scheme" for example: brief it to make a case against the man who sold you your mortgage, and it'll take a 30% cut of your compensation if they do so successfully.

Clearly, most of those who think they have been mis-sold a debt are better off making their own claims via the Financial Omsbudsman Service (0800 0 234 567), but the fact that claims management firms are getting into this business (BF is far from alone in giving it a go) should act as a warning to any outfits planning to mis-sell mortgages this year. Outfits such as the coalition government.

George Osborne's budget made much of a £250m scheme to help first time buyers to get their own homes. If they can stump up 5% of a deposit, the government, along with a housebuilder, will come up with the rest at very favourable interest rates. This is supposed to be good for first-time buyers.

But will it really be any good at all for those who take the bait? I can't see that it will be. All the signs are that house prices are going to keep falling from here – you can see that in our house price indicators and there was further evidence in the Land Registry numbers out yesterday. Note that transaction levels are particularly pathetic.

So the most likely outcome of the FirstBuy scheme will be that – just as with Labour's similar effort a few years ago – the miserable few who take the bait will end up in negative equity (remember that while the interest rate might look good, they've still taken out a 95% loan) and hence stuck for years in houses they thought they bought as stepping stones. Fast forward five years and if I was one of the 10,000 who are supposed to be buying via the scheme, I'd be looking for BF's phone number and then for a way to bring a mis-selling case against Osborne.

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  • 1. burstingbubble

    (30 March 2011, 10:32AM)  Complain about this comment

    'You can't buck the market' to paraphrase Margaret Thatcher, but it seems that since 2008 an awful lot of people, both those in Government & ordinary people think you can: just think of the housing market as you mention, plus the banking system, the monetary system, etc., etc..

  • 2. Roberto Birquet

    (30 March 2011, 03:19PM)  Complain about this comment

    Unfortunately, Mrs T was wrong. The market can buck the market. The eficient market theory holds that people are rational, and act on perfect information to make rational economic decisions. Price signals still show low yields on houses, and therefore, a sell signal.

    Truth is people are emotional more often than rational. And fear and greed trump rationalism almost every time. Governments getting involved to artificially inflate the market just adds to the mess. Unfortunately, most commentators - not Ms Somerset Webb - do not act in the public interest, but the self -interest of there own assets. As I suspected, Tories are no better than Labour, and are more than willing to waste the tax money of FTBers in order that prices remain above the levels that the same FTBers could afford. Mis-spending more than misselling, and it is a tiring disgrace.

  • 3. UnaPlanner

    (30 March 2011, 04:42PM)  Complain about this comment

    Purchasers of FirstBuy would only be in negative equity if prices fell by more than 20%. Can anyone really see that on the horizon.

    The mortgage lenders will have a first charge over 95% of the property, with the government and housebuilders taking an equal hit on their 20% stake if a purchaser had to sell up and could not realise the original purchase price.

    That is not to say that housebuilders will not be engaged in their age old practice of inflating the headline price to minimise the real cost of their investment, but from a purchasers point of view it does represent a rationale response in the short term.

  • 4. Alex

    (31 March 2011, 09:13AM)  Complain about this comment

    @3.

    For the still over priced, badly constructed, tightly packed in, starter flats/homes that FTBs can afford, you're dam right I can see a 20% plus fall.

    It's a gimmick, 10,000 homes is a drop in the ocean, although it's an annoying gimmick because the coalition do things like close down a world leading forensic lab in the UK to save £24m a year, then throw £250m of our money down the toilet on an utterly futile/ stupid jesture like this.

    I'm beginning to think that there is now no party in UK politics that is fit to govern.


  • 5. Roberto Birquet

    (02 April 2011, 04:03PM)  Complain about this comment

    3. Purchasers of FirstBuy would only be in negative equity if prices fell by more than 20%. Can anyone really see that on the horizon.
    ---------------
    wrong, they'd be in negative equity if thre price of the flat fell a mere 6%. They are being offered 95%, but just 75 from the bank, 20% from government and developers. For the developer, it is win/win. They give 10%, and get the 10% right back with the purchase.

    Who loses, the buyer and the tax-payer. As FTBers are tax-payers, they are being conned again. Govt and developers, don't you just love them?

  • 6. Tom

    (04 April 2011, 01:48PM)  Complain about this comment

    It might be a modest somewhat restricting offer, but I think it is a step in the right direction.

    The issue here is deposit, not the mortgage payment. If client can not afford the regular payment, then they should not have a mortgage. That is the suitability factor.

    Whether or not there is deposit available is less of a concern concerning affordability. Negative equity is not a good place to be, but no one can know for certain what the future will bring. Personally I think the future house price will stay level in medium term, including current dips.

    My concern is that his scheme is too narrow. If it only include new build it will limit what the buyer can look for. Most new build I see is higher priced and not realistically meant for a first time buyer. Flats might be an exception.

    What I really want to see is extra charges on landlords for small and affordable properties, as these are the ones who have been crowding out the first time buyers.

  • 7. Critic Al Rick

    (05 April 2011, 11:56PM)  Complain about this comment

    @ 4. Alex

    QUOTE (I coined possibly 30 years ago):

    'By the time you are mature enough to vote, if ever, you have realised there is no person or Party worth voting for; against, maybe.'
    You, by the sound of it, are nearly mature enough to vote!

    You are mature enough to know that the HP:Wage ratio is way out of kilter. If we're being steered for hyperinflation to rationalise the HP:Wage ratio, we're all stuffed. Are you mature enough to see that?

    I remain unconvinced that there is not a master (conspiratorial)Plan; I cannot believe that such people could be so utterly incompetent; politicians, yes!

    They are 'selling us down the river'; betraying our trust in exchange for utmost selfish gratification.

    We allow it to happen; we deserve the Govt we get. Don't you think we deserve a lot better?

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