BREAKINGVIEWS-New UK mortgage help misses lesson of U.S. debacle

Thu Mar 21, 2013 10:48pm IST

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(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

By Agnes T. Crane

NEW YORK, March 21 (Reuters Breakingviews) - George Osborne's new mortgage subsidy program misses an important lesson of the U.S. housing debacle. The British chancellor hopes to boost housing, and by extension a still-struggling UK economy, by guaranteeing home loans. It sounds like the beginnings of an approach that saddled taxpayers across the Atlantic with huge losses at Fannie Mae (FNMA.OB) and Freddie Mac (FMCC.OB).

Help to Buy, as it's called, is part of a 5.4 billion pound package of housing support in Wednesday's budget. Osborne's Treasury will either provide a partial guarantee for a mortgage or, for new-build homes, directly lend the buyer up to 20 percent of the home's value. Under both schemes, the borrower would only need to find a 5 percent down-payment.

The United States has already tried following this road. Its quest to make the dream of home ownership a reality – even for those who couldn't, in reality, afford it – led to the creation of giant quasi-government agencies which dominated the market for standardized loans and left scope for reckless lending by private firms. The shortcomings of Fannie and Freddie were laid bare by the housing collapse, and Uncle Sam had to rescue them. They have so far needed $189 billion of taxpayers' money.

Subsidizing home ownership scores political points but the UK scheme, like the one in America, provides the wrong incentives. It encourages borrowers to stretch themselves, and lures banks into riskier lending in the knowledge that the government takes a slice of any losses. It could also achieve little except to push housing prices higher, leaving homes no more affordable. Unlike the United States, the UK long ago stopped allowing taxpayers to deduct mortgage interest. Reintroducing a version of the same kind of distorting subsidy is a backward step.

Cash-strapped Osborne knows that loan guarantees cost nothing to offer – at first. And if the program ends in 2017 as proposed, it may not go bad. The devil in the idea, though, is that successor politicians won’t find it easy to abandon. In the United States, borrowers, investors, homebuilders and real estate salespeople are arrayed against any government pullback from the market, and even the discredited Fannie Mae and Freddie Mac seem indestructible. Letting a Limey Muck take root across the pond would only build trouble.

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CONTEXT NEWS

- The budget unveiled on March 20 by UK Chancellor George Osborne includes a 5.4 billion pound package that aims to increase home ownership. The government plans to lend qualifying home buyers an amount equal to 20 percent of the home's value or provide a partial mortgage guarantee to help reduce the cost of financing. Under both schemes, a home buyer would only need to find a 5 percent down payment.

- UK Help to Buy program: link.reuters.com/kys76t

- Reuters:

Britain offers help to struggling home buyers [ID:nL6N0CCFSP]

UK's Osborne says homes package won't spur bubble [ ID:nL6N0CD2F2]

TAKE A LOOK-Britain's budget [ID:nL6N0CA74N]

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- For previous columns by the author, Reuters customers can click on [CRANE/]

(Editing by Richard Beales and Martin Langfield)

((agnes.crane@thomsonreuters.com)(Reuters messaging agnes.crane.thomsonreuters.com@reuters.net)) Keywords: BREAKINGVIEWS USA/HOUSING UK

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