BLOG: The MIG picture

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Many years ago, high loan-to-value (LTV) lending was supported by the Mortgage Indemnity Guarantee (MIG).

This was an insurance policy designed to protect the lender (the mortgagee) against loss in the event of homeowners defaulting and ceasing to repay their mortgages.

The policy was insisted upon by the lender at the start of the loan, and the borrower (the mortgagor) paid the premium.

The premium was calculated by the level of perceived risk to the lender of borrowers defaulting on their loan. In such circumstances, the lender would repossess and sell the property.

But MIG fell out of favour for very understandable reasons. In the past, mortgage lenders did not explain MIG clearly enough (often calling it a High Lending Fee) or they neglected to explain at all that the policy was for their benefit, not that of the borrower.

Also, when claims were made, if the insurer didn’t pay up, the lender might go after the homeowner for recompense prompting the question: what was the point of it at all?

Those who opposed MIG pointed out how homebuyers paid through the nose for it with lenders making as much as 30% commission on each policy they sold - although borrowers never knew this because lenders were not obliged to disclose it.

What’s more, the astronomical premium was as often as not added to the loan, so it might accrue interest that would compound over the life of the loan. Nice.

It’s clear that the MIG of yesterday was far from perfect in execution but that does not mean it was entirely wrong in concept. A way forward for introducing higher loan to value lending in the mortgage market would be to ensure the insurance is in place but to break the lenders' monopoly over the sale of the policy. That way the consumer would insure themselves.

Inject transparency and choice into the process and there is no good reason why this idea could not be made to work. After all, it apparently works in other countries.

The new Governor of the Bank of England, Mark Carney, comes from a central bank in a country whose housing market operates with compulsory MIG insurance. If we are to see a growth in higher loan to value lending this year, the return of MIG might be imminent.

 

Matt Smith is director of WPB

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