One of the issues that has concerned me for a while is that of ‘distressed sales’ in the buy-to-let (BTL) market and the possible negative impact these types of purchases could have on the reputation and standing of the sector.
The market has worked hard to build a considerable foundation, with the latest Council of Mortgage Lenders (CML) figures showing the strength of, what we must now call, a mainstream market.
BTL lending now accounts for 10 per cent of all total balances – over three times the level of 3 per cent five years ago. In the first half of 2007, BTL borrowers took out 171,800 mortgages worth £21.2 billion. The value of BTL loans totalled £108 billion which was an increase of 14 per cent on the second half of 2006.
While it might be difficult to talk about a solid mortgage market given the current climate, the BTL sector has done its utmost to shake off the ‘bubble’ criticism that it was once subjected to and is now a fundamental and important part of the UK’s overall lending mix.
That said, there is an area where BTL lenders could be subjected to criticism and it is in the ‘distressed sale’ market where there is potential for ongoing negative publicity.
On the brink
For those unaware of the distressed sale market, I suggest you look at some of the local and regional free newspapers that you undoubtedly receive. Here, you will see adverts from companies asking home owners, ‘are you about to be repossessed?’.
These types of companies or individuals are looking for home owners who feel they are on the brink. In turn, they are offering to buy the homes at a percentage of the valuation with the supposed carrot of the money this will give them to pay off their debts, plus the offer that the former owner will be able to stay on in the property, this time as a tenant.
So, with the owner paid 60 or 70 per cent of the property’s true value, they will then sign up to a rental assured shorthold tenancy agreement and begin renting from the company that has bought the home. The company will then take out a BTL mortgage at 80-85 per cent loan-to-value, giving them the extra money which will effectively allow them to pay the mortgage for the first year.
A risky business
The positive spin that is often placed on this arrangement by those involved is that it keeps people in their homes. But I would suggest this is merely a short-term arrangement and what the firms buying these properties are hoping for is for the tenant to miss a rental payment, allowing the landlord to turf them out of what was their home so that they are able to sell the property for its full value.
Not only is this clearly a risky business for the home owner, but for lenders knowingly giving BTL loans to these types of companies there is a reputational risk. Do we really want to be perceived as funding those companies who are potentially preying on the needy? The consumer and national press are already picking up on this issue and the dreaded words ‘mis-selling scandal’ have started to raise their ugly head.
All those involved in the financial and lending community must work hard to sustain a reputation which, if we are honest, is not always as squeaky clean as we would like. We are now seeing a large number of vulnerable people who have felt that this type of scheme is the only way they can pay off their debts and get to stay in their own home.
While some companies will pay 60-70 per cent of a property’s value, there are cases where this figure has been close to 30-40 per cent. Plus, of course, there are no guarantees on how long they will be allowed to stay in their ‘home’ and, perhaps due to the unregulated nature of these arrangements, there’s no ‘safety net’ in place.
Who has the rights?
The other issue that lenders must take into account when funding these loans is the nature of their claim to the property. If the borrower has a long list of creditors, and it is found that they have sold their property at a value less than it is worth, then the creditors have a right to that asset.
The lenders’ first-charge loan could therefore be set aside in these circumstances, which amounts to crazy lending if lenders are knowingly funding this type of activity. Of course, lenders may well have this type of business on their books without knowing.
The nature of the UK population’s indebtedness and the increase in the price of property over the last few years means that these types of schemes will certainly have an audience. While we cannot say in every circumstance that a borrower opting to sell their house in this manner is doing the wrong thing, we can certainly see that it is open to abuse and can result in an individual still very much in debt and without a home.
The industry has a duty to warn people of the potential consequences of these schemes, especially given that there may be many out there feeling desperate and looking for any way out from their financial problems.
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