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Special purpose loophole threatens low rate loans

Associations must scrutinise their use of special purpose vehicles in loan deals to ensure they can benefit from the low rates offered to housing associations, experts have warned.
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Associations must scrutinise their use of special purpose vehicles in loan deals to ensure they can benefit from the low rates offered to housing associations, experts have warned.

 

Affinity Group, which is planning to use a special purpose vehicle to borrow £660 million, had to seek special permission from the Financial Services Authority to proceed with the deal.

 

The regulator had ruled that the group's use of a special purpose vehicle to receive borrowed cash did not meet the criteria to qualify as a housing association.

 

A delegation from Affinity met the FSA to restructure the deal to ensure the loan would meet the requirements to qualify for lower rates of lending.

 

Keith Exford, chief executive at Affinity, said the issue threatened to have a big impact on the pricing of the deal. But a clarification of the structure had led to the FSA ruling the deal could go ahead, he said.

 

But the hitch has raised questions for other associations using SPVs, which are widely used across the housing sector.

 

Affinity formed Affinity Funding to receive cash from the lenders and distribute it to the subsidiary group members. But because it did not have any of its own security the vehicle failed to meet the FSA's requirements to qualify for special rate lending under rules for housing associations.

 

The problem centred on the amount of capital banks must have to back up a loan. Housing associations enjoy special status because they are low risk borrowers. This gives associations better pricing on deals.

 

The case has alerted the Housing Corporation to the problem and it has written to the FSA.

 

Piers Williamson, chief executive at the Housing Finance Corporation, said other associations must take notice of the near miss. 'It is a good health warning for other trust structures,' he said. The sector could lose its low pricing on loan deals if associations repeatedly fell foul of the rules, he warned. 'The consequences are that the razor sharp pricing could be lost.'

 

Associations must ensure their lending structures are transparent to enable lenders to easily see the nature of their business and the underlying security, he added.  Andrew Heywood, senior policy adviser at the Council of Mortgage Lenders, said it would be talking to the Housing Corporation to try and iron out problems with the use of SPVs.

 

The negotiations have held up completion of the Affinity deal, involving five lenders, which was originally expected to be concluded by October.

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