UK Post Office Resurrecting Freddie and Fannie Debacle

Just keep piling it on until the entire edifice falls down.

The UK is working on creating its own version of a Freddie and Fannie debacle of low rate mortgages to increase home ownership. The interesting part is that in the UK the method of delivery is not a (GSE) government-sponsored enterprise, but the Post Office.

The Post Office plans to shake up the mortgage market in the UK

Despite the Bank of England base rate remaining unchanged at 0.5pc, Britain’s biggest high street financial services provider – with more branches than all the banks combined – has just cut its mortgage rates for the fourth month in a row. Better still, the new deals are fixed rates for up to five years and some are market-beaters.

This isn’t just good news for hard-pressed homebuyers but for many others too, particularly people in rural communities, because the company in question is the Post Office.

What? You didn’t know the place where you buy stamps also provides homeloans? Well, you do now.

So I looked at the UK Post Office web site to see for myself. Loans, very similar to the ones the US is still struggling with, are being touted as “Rate Designed For You” by the UK post office. At least the banks/Post Office are requiring 20 percent down, so it’s not as bad as some of the sub-prime mortgages were in the US.

2 year fixed rate

3.15% which is a fixed rate until 30/06/2012, then

3.49% variable, which is the Bank of England Base Rate plus 2.99% for the rest of the mortgage period

Government backed loans, low fixed rate to attract buyers, followed by variable interest rates–what could go wrong?

Back to the original article about the Post Office loans.

The new deals are part of the Post Office’s bid to reverse decades of decline – and its success could help revive commercial life in many villages, which might otherwise fade into dormitory suburbs.

It plans to follow up with a new current account and first-time buyer mortgages as part of its strategy to provide a viable alternative to the high street banks, whose reputations have been tarnished by charging borrowers too much and paying savers too little.

I had thought the lessons of government backed mortgages were clear by now. When governments back loans, it encourages risky behavior. The artificial demand for loans creates a bubble, the bubble eventually pops, and people are left upside-down in mortgages. I thought it would be at least a decade or two until this idea reared its ugly head again.

Thanks to The Modern Mystic for pointing this out.

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