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The £160m Sale of ‘Mortgage-Style’ Loans

July 22, 2014

The BIS Committee have got themselves into a bit of a tangle discussing the sale of mortgage-style loans in 2013 (§§58-65 of the report).

That sale saw the government receive £160m on an asset with a face value of £890m (what the outstanding balances say borrowers owe to the government).

So we know the price and we know the face value of the loans.

What we didn’t know was what the government thought those loans were actually worth (the fair or carrying value): how much income was going to come in and when.

Having those three distinctions in mind -price, fair value, face value – is essential for considering loan sales.

I was asked explicitly about the 2013 sale at the evidence hearing. 

 Nadhim Zahawi: A supplementary to everyone: the Government sold the old loan book for £160 million.  The Government had valued it at £81 million to £128 million.  What do you think the buyers valued or knew that the Government did not?

McGettigan: For assessing this sale, the face value of these loans is £890million, so it is quite small.  They got £160million for it.  The question was: what was the fair value?  The fair value is about how the Government are estimating what income stream they are going to get from these remaining loans.  Importantly, it is not disaggregated in the accounts.  It is wrapped up with the income‑contingent repayment loans.  You get a statement in the accounts of face value; we know what the price is; we do not know what the Government’s assessment of fair value is from reading the accounts.  Most people would say had they got more than £200 million they would have done a good deal there, because these are now ageing loans and most people have already repaid their loans from this tranche.  It is 69% or 70% of the people on this tranche of loans have already repaid; we are only talking about the last remaining bits of loans.  These are ageing; the conditions are moving against the Government; the value has to be written down every year.  On value‑for‑money terms you could argue the disposal was not too bad.  However, you might have lost £20 million to £30 million.  Was that your question?

My point here was that the BIS accounts did not record the value of the remaining mortgage style loans separate to the overall book of loans (worth over £30billion at the time).

The Committee report has misrepresented the evidence I gave. It has left out the above and used quotes that were not meant to reflect on the 2013 sale, but used the 1998/99 loan sales to reflect on the ICR sales announced in the Autumn Statement. The statement at §61 was made in with respect to the Autumn Statement and its presentation of the benefits of the proposed future sale.

The BIS annual accounts for 2013/14 show that for loans made to English and Welsh students only, £128m was received (price) and that these were valued by BIS at £116m (fair value) meaning that BIS claimed a profit of £12m on the deal.

But you could not have interrogated the sale deal in advance since that £116m value was not published. When one civil servant was quizzed about the deal by Margaret Hodge, we gained the following insight:

 Mick Laverty: This was the third tranche of the loans book—the final tranche. It was the distressed loans that were 13 years or older. They were in arrears and in deferment. We modelled the whole process and had a figure in our heads. If we achieved a sale value over that figure, it would represent value for money.

They had a figure in their heads. Robust accountability in action.

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