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"According to the Treasury, the British government, unlike [US organisations] Fannie and Freddie, won’t primarily guarantee high-quality home loans with high down payments, which are readily available.
Instead, it will concentrate its efforts on riskier mortgages with small down payments: as little as five per cent of the principal. For a small fee, banks that issue these loans will be able to shift almost all of the risk of default onto the government.
"The Financial Times [reports that] the banks would stand to take just five per cent of the losses above an eighty per cent threshold. If that’s right, it looks like a recipe for saddling the taxpayer with countless bad loans come the next housing bust.
Compared to how Fannie and Freddie work, the Osborne venture goes even further in socializing risks. Until they made the disastrous decision, between 2003 and 2007, to venture into the world of sub-prime mortgages, the two U.S. housing giants had largely stayed away from the riskier end of the housing market. But that’s where the British government will start issuing loans and guarantees.
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