Select Committee on Transport, Local Government and the Regions Minutes of Evidence

Examination of Witnesses (Questions 400-408)



Mrs Dunwoody

  400. Can you tell us what is Fannie Mae, we cannot wait to hear!
  (Mr Williams) They are mortgage intermediaries, they buy in the mortgages from the mortgage lenders. It stands for Federal—I look to your advisers on this. You have the advice and I can give it to you later. It is something like National Federal Home Loans Agency, but it is spelt out as Fannie Mae and Freddie Mac and Ginnie May and Ginnie Mac, if you would like all of them. They are vehicles in the States used to underwrite the housing market. 60 per cent of mortgages in the US are sold down to these vehicles which have a Government guarantee which sits underneath them of a no-failure clause. What they do then is buy in the risk that lenders have taken on. The lenders take on the risk according to standardised criteria which are set by those agencies. In essence, because they are pooling that risk on a massive basis—the Fannie May bonds are sold globally, they are sold in the UK markets for example and they are bonds which are backed by mortgages—you have a repayment stream which is the mortgage repayment stream. Those bonds operate on a global basis but the risk is borne by these very, very large agencies. Fannie Mae and Freddie Mac and all these other weird and wonderful organisations basically now have a debt approaching the size of the US Government's, possibly beginning to exceed it, and they have absorbed that risk, and that has basically given a vehicle underneath individual lenders to take on risks. Do not forget in the States you have got a much more racially discriminated housing market and one of the issues there was lenders being unwilling to lend in certain markets because of the characteristics of the people as well as the weaknesses of the market. That has allowed home ownership to be extended substantially into those markets and these vehicles were designed to assist that process.

  401. These are federal and they are underwritten by the federal government?
  (Mr Williams) They were initiated by federal government in the 1930s and subsequently developed. There was an implicit government guarantee and I believe there still is, but they are now fully independent organisations.

  402. Obviously it does not have any bearing on the Government's debt?
  (Mr Williams) No.

  403. So you think they could be used here?
  (Mr Williams) There is an argument that one of the problems in Britain is the level of the risk we are beginning to identify across the diversity of markets is such that you face a stark choice about whether they are lendable into them and whether therefore they can be underpinned in ways that mean that individual lenders can act in those markets in a prudent way. Do not forget a long-standing concern about lending is a prudential concern from the Financial Services Authority about whether you should take on such risks.


  404. Is the phrase "safe as houses" a bit in question?
  (Mr Williams) "Safe as houses" as a concept? As a generality, no, in specific localities, evidently yes.

  405. But how many of your members will have perhaps five per cent or ten per cent of their debt in low demand areas?
  (Mr Williams) Very unlikely. There may be some small lenders who might have concentrations in such areas, but I think the evidence is that they themselves, being aware over many years of the frailties of local markets, have themselves spread their risk and indeed their regulators would have insisted they spread their risk. So when you look at it on a local market basis, the evidence I have looked at in the past shows that in many of these areas, which are quite old, the number of mortgaged properties is quite low, many of the owners are cash buyers or outright owners because they have been there a long time so the level of mortgage risk is relatively low and the number of lenders is very substantial. There is a very diverse range of lenders who have lent there.

  406. So you are working pretty hard to make sure none of your members go bust?
  (Mr Williams) I do not think there is any prospect of that.

Ms King

  407. You also said that you wanted local public authorities to underwrite loans, so how much would that cost the public sector?
  (Mr Williams) Local authority guarantees exist where under the calculation of how much it would cost the local authority they merely have to set aside the historically calculated loss on such loan guarantees. The loan guarantee legislation is made very limited use of by local authorities. There is a substantial misunderstanding by local authorities of their loan guarantee powers. It was more substantially used in the 1970s when most local authorities came out of lending in local markets and private lenders were encouraged to go in with guarantees. Those guarantees were widespread at that time but subsequently hardly used. My concern is maybe we are going back to a situation where some underwriting by guarantee would be used.

Mr Wiggin

  408. What effect do you think the Government's proposals to increase council tax to 100 per cent on empty properties will have?
  (Mr Williams) It could make the situation worse, I suppose. We have to understand that property is empty for a variety of reasons. It might incentivise some people to do something with it. It is a very negative way of incentivising people in a sense. Alongside punitive council tax, there is the question of whether there should be incentives to make use of property. Some people will simply hold property for capital gain and, rightly, they can make money out of that. We do have concerns (alongside punitive treatment like 100 per cent council tax) over issues like licensing of the private rented sector which again might have an impact of deterring people letting their property.
  (Ms Bennett) We think better incentives are things like reducing VAT on renovating properties to bring them back into use. So incentives rather than penalties.

  Chairman: On that note, can I thank you very much for your evidence. Can we have the next set of witnesses.

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