LAMS generates £100m in mortgage lending

Thirty-three councils have now helped to generate nearly £100m in mortgage lending under the Local Authority Mortgage Scheme (LAMS).

The scheme was set up in March 2011 as a partnership between consultants Sector, local authorities and commercial mortgage lenders. Participant councils set aside a sum of money to provide indemnities for partner mortgage lenders. Applicants in the councils’ areas are then able to apply for a mortgage with just a 5% deposit instead of the usual 20-25%.

While the council’s money is at risk in the case of default, with no defaults on the 1000 mortgages so far, the scheme is well below the national average default rate of 1 in 300. The average mortgage to date is £108,000.

Blackpool was the first authority to launch with LAMS in 2011. The council earmarked £5m from investable cash and borrowed against the amount. “We have £2m deposited with Lloyds TSB,” explained treasurer Steve Thompson. “For that we receive a rate of interest plus a premium to reflect the risk. That element is meant to compensate for any state aid support because under European regulations you can’t be seen to be supporting any particular organisation at the expense of others. That interest rate premium compensates for any default and so far we haven’t had any default.”

At Warrington Borough Council, which was the second authority to launch LAMS, corporate finance manager Danny Mather said that a second £5m tranche had just been approved for the scheme. “We think the risk is miniscule,” said Mather. “It’s not the councils’ credit criteria being used, it is the very stringent criteria of the bank, and the scheme is aimed at people who can afford to pay a mortgage but just can’t afford a deposit.” Warrington sets aside any interest it receives on its LAMS money to be first call in case of default. If at the end of the five year duration of the indemnity any profit is made it is incorporated into the General Fund.

Sector Treasury Services created the scheme. “It is designed to be cost neutral,” explained director Cecilie Booth. “The authorities earn interest and a premium to compensate for the risk.” While profit is not the objective, Blackpool has made a notional surplus on the £1.25m it has so far used for underwriting the deposits.

The scheme is not risk free, Booth adds. Each council must look at whether there are any specific local default risks such as a high dependency on one local employer. She also observes that different areas see different rates of uptake. The scheme has seen particular success in Wales, and Leicestershire County Council has helped 50 of its residents to get mortgages after just one month.

“In terms of financial risk, through our treasury management strategy we invest surplus cash but it is becoming increasingly more difficult to invest with the principles of security, liquidity and yield in mind,” said Blackpool’s Thompson. “Yield is less important but this is providing an opportunity to invest existing cash and provide some security to residents and prospective residents to Blackpool.

“After a year and a half we had helped with over 50 mortgages, it might not seem a huge number but that is a life-changing experience for all of those people. In a typical housing chain you may have two, three, four houses so that 50 could impact 1500 or more house owners.”

Nearly all councils in the UK are now looking at the LAMS. Eight lenders are already on board and Santander and the Co-op may be joining the scheme in 2013.

The amount of money that each council commits to the scheme is up to them, but as a rule of thumb Booth says that districts tend to apportion £1-5m; unitaries £5-10m and county councils upwards of £10m.

The extra mortgages made through LAMS also help alleviate stress on council housing according to Mather: Warrington has a waiting list of 13,000 for council properties. “We want to expand the scheme to a new audience and so are looking to invest into joint-ownership mortgages,” Mather said. “We will hopefully go live with that in the new year to bring the scheme to the next level down of mortgagee.”