BUY TO LET MORTGAGES SET TO BE REGULATED BY THE FSA  

WHO WILL BENEFIT AND WHO WILL PAY?

In the wake of the irresponsible and unsustainable mortgage lending upon which the credit crunch was blamed, the Financial Services Authority (FSA) has been  investigating whether increased regulation of mortgage lending would prevent similar problems happening again in the future and whether increased regulation would provide improved protection for landlord-borrowers and reduce unsustainable borrowing.  The FSA’s discussion paper (09/3) can be found on the fsa website www.fsa.gov.uk. 

The FSA already regulates residential mortgage loans which are first charges and the regulation of those loans obliges lenders (among other things) to:

• treat customers fairly

• provide clear comparable information about the mortgage including a standardised Key Facts Illustration which makes it easier for consumers to compare products and shop around

• identify a mortgage which best suits the customer’s needs

• consider the customer’s ability to repay/recommend only mortgages that are suitable

• meet standards for dealing with borrowers who are in arrears.

However, there is currently no such regulation of buy-to-let mortgages (BTLs).  The original thinking behind the exclusion for BTLs was that that they were not entered into by consumers, but by professional landlords who treat their investments as a business and do not need the same level of protection from the FSA as individual mortgage consumers.

The FSA’s report makes a case for extending the scope of its regulation to cover buy-to-let mortgages. It argues that if parts of the mortgage lending sector are left unregulated the less sustainable lenders will be forced into those unregulated parts, which parts include BTLs.  The FSA’s concern is not for larger scale commercial landlords but for landlords that they term “amateur” landlords and small business borrowers, who they see as poorly placed to protect their own interests.  According to the FSA report the purpose is not only to protect those “amateur” landlords but in doing so, to re-build a stable and sustainable mortgage market overall. But is increased regulation the way to go about it and will landlords benefit?

Statistics do show that a large proportion of buy to let landlords are “amateurs”.  In a survey by mortgage broker Exact 2 out of 5 brokers questioned estimated that 90% of their buy to let clients were amateur landlords.  There was a massive market growth in buy-to-let borrowing from 2000 to 2007 (20% per year).  (This declined sharply after 2007). A survey for the 2006 Rugg Review of the Private Rented Sector concluded that out of 2.617 million private rented properties in the UK 35% were owned by landlords with portfolios of a single property. Clearly not all properties in the private rented sector are funded by mortgages, but there is still a strong indication that the private rented sector includes a large proportion of landlords with small property portfolios.  The FSA assumption appears to be that the small landlords are more in need of protection and more vulnerable to irresponsible lending/borrowing than their  counterparts with larger portfolios.  Many may welcome clearer information when entering into BTL mortgages so they can more easily compare products.

There is also currently government concern about the lack of protection for tenants who have been finding themselves evicted from their homes at short notice because their landlord has not been able to pay the mortgage and the property is being repossessed.  This may well be another driving factor to increase regulation of BTLs. 

Not everybody supports the proposed extension to the scope of the FSA’s regulation.  The Council of Mortgage Lenders has come out against it. Their view is that it would impinge on commercial transactions which it is inappropriate to regulate in such a way, and that the regulation would not in any event do away with the systemic risk in the BTL lending sector; clearly no investment is risk-free and regulation cannot alter that. The CML would like to see the level of BTL lending increase again after its shrinkage in the last 2 years and believe that regulation would damage the prospects of an increase. 

The National Landlords Association has expressed concerns as to how the FSA will distinguish between so-called amateur and professional landlords if regulation is only aimed at amateurs. How large does a property portfolio have to become before a landlord is deemed to be “professional”?  The NLA is worried that the lack of mortgage finance is hampering the housing recovery, and increased regulation of BTL borrowing could increase the cost of that borrowing, which cost would be passed on to landlords and would thereby deter them from borrowing, reducing the available housing stock to those who wish to rent.

As yet the government has not followed up on the FSA’s proposals. The most recent figures from the Council of Mortgage Lenders demonstrate that buy-to-let borrowers might be more resilient and the lending more sustainable than the FSA fear.  In a news release on 11^th February 2010 the National Landlords Association reported the latest figures on BTL arrears that have been published by the Council of Mortgage Lenders.  Arrears are down 37 per cent and in the last quarter of 2009 the number of BTL properties repossessed had reduced by 25%.  This is no doubt partly due to the reduction in interest rates, but if this trend continues the government and FSA might be persuaded to re-think their belief that buy-to-let borrower landlords are in need of the FSA’s protection.

Sandersons can advise on Landlord and Tenant disputes and tenancy agreements, property related tax issues, BTL sales and purchases, and can also assist landlords by referring them for advice on BTL finance.  Contact the writer Sarah Coates-Madden scoatesmadden@sandersonsolicitors.co.uk

Tel:       01482 324662

Fax:      01482 860118

 Source:  Humber & District Landlords Association, February 2010

             Federation of Small Businesses, February 2010