Brendan Burgess
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If the objective of the restrictions is to protect lenders from making bad loans, then this could be achieved by allowing higher LTV loans to borrowers with guarantors.
The Ivan Yates bankruptcy has shown that the Guarantor system does not work for the banks. He used his home place as collateral for his loans...and when the time came to call in that guarantee, the Bank could not do so while his mother remained alive and still lived in the home. So it's all in limbo still
First, I don't think that the objective of the restrictions are solely - perhaps not even primarily - to protect lenders.If the objective of the restrictions is to protect lenders from making bad loans, then this could be achieved by allowing higher LTV loans to borrowers with guarantors.
First, I don't think that the objective of the restrictions are solely - perhaps not even primarily - to protect lenders.
Borrowers should also be protected from their folly or desperation, and one way of doing that is to limit the amount that they can borrow.
There is also an issue of economic management. We know from recent experience that excessive lending/borrowin for property can cause trouble.
And to return to the issue of guarantees: if the guarantee is based on the value of the guarantor's home, then it is very difficult for a lender to call it in.Agreed. Especially in a country with an attitude towards no recourse mortgages and the refusal to give up the house that can no longer be afforded.
Treatment of mortgage insurance:
It can be argued that lenders wishing to make loans at higher LTV ratios than the cap and who have obtained an adequate form of guarantee from a highly credit-worthy guarantor for the excess of the loan over
the cap should be allowed to treat this guarantee as allowing an exemption from the LTV cap. This would likely need to be a high-quality guarantee, for example provided by a highly-rated financial intermediary and payable on first demand.
While the involvement of an independent mortgage insurance guarantor could help improve loan underwriting quality, and could protect the lender against default, permitting such an exemption would weaken the effectiveness of the macroprudential measure as a tool to dampen the pro-cyclical credit-price dynamics.