The federal coalition's first home buyer support scheme will preference borrowers who take out loans with "smaller institutions" such as credit unions and mutual banks, according to Prime Minister Scott Morrison.It is not yet clear how the government's scheme will operate under the preference arrangements with small lenders given that Morrison also said yesterday that government support for new homebuyers would be made on a 'first come, first served' basis.The preference arrangement has the potential to send a strong signal to prospective borrowers that they might stand a better chance of receiving government support if they were to take out a loan with a small institution.Putting to one side the merits of supporting small lenders, the scheme as it has been explained so far by the coalition seems to have been conceived with a cross-purpose: to support young homebuyers get a loan and also to bolster loan activity for second tier lenders.The two objectives are not entirely compatible.Not all small lenders offer competitive home loan rates and many sell mortgages that are more expensive than offers from ABA-member banks who were not consulted about the homebuyer support scheme.There is a risk with a policy that preferences some lenders over others that borrowers could be enticed - in this case by the government - into mortgage products that might not be among the best deals available in the market.The Coalition government and the Labor opposition need to explain why the scheme is going to be operate on a preferred lender model, rather than one that is borrower-directed.Morrison's announcement in Perth last night that the government was likely to expand the $500 million support cap of the scheme has magnified its potential to distort the mortgage market.Right now, the Customer Owned Banking Association seems to be the only finance sector body with sufficient information to declare public support for the scheme.COBA chief Mike Lawrence yesterday warmly responded to Morrison's pledge that the scheme would give preference to smaller lenders."By preferencing smaller banks, the Prime Minister is acknowledging that Australians should look beyond the Big Four," said Lawrence. "We welcome the Labor Party's announcement that it will match the scheme."The Customer Owned Banking Association looks forward to working on the details of the scheme with whichever party wins government on Saturday."Lending industry providers yesterday were scrambling for more information from the major parties about the deposit support scheme, which appears to be a hastily patched policy.None of the major banks would comment on the scheme but the country's largest provider of lender's mortgage insurance, Genworth, confirmed it was in talks with the major parties about the proposal." We are currently in constructive discussions with both major political parties about the important role that Genworth can play in implementing the scheme and developing other policies that facilitate home ownership," said Genworth CEO, Georgette Nicholas."Importantly. we are committed to continuing to support the many home buyers and lenders not eligible to participate in the scheme."Nicholas said Genworth was supportive of the proposed support program because it