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Buy-to-Let Regulation

What will be the impact on landlords of further Buy-to-let mortgage regulation?

Landlords who have a buy-to-let mortgage will be watching with interest the latest prevarications of the FSA (Financial Services Authority) as they decide whether to regulate buy-to-let mortgages. The outcome of this is likely to emerge from Lord Turner’s eagerly awaited report on the regulation of the mortgage market. In his recently released Turner Report on ‘A Regulatory Response to the Global Banking Crisis‘ the FSA chairman promised that his ‘paper will also consider whether more effective regulation of the mortgage market, through either tighter conduct rules or direct product regulation, would require the extension of the FSA’s remit to cover second charge mortgages and buy-to-let mortgages.’

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Property Hawks view

Our initial response is that the use of regulation in itself is not bad. Our concern is that all too frequently authorities regulate the wrong thing. The potential is for the FSA to release a whole raft of rules with negative consequences for landlords.

Firstly, let’s not forget it was the FSA that were supposedly regulating the banks. It was under their watch that the excessive lending that has now been identified as one of the prime causes of the credit crunch and global economic slump took place. It turns out that the FSA’s soft touch regulation of the banks gave them pretty much ‘carte blanche’ to do what they wanted. At the same time they imposed a whole range of box ticking bureaucracy on the little guy i.e. the mortgage brokers and intermediaries.

LTV – the reality

The talk in the buy-to-let sector is all about restricting loan to values on buy-to-let mortgages to prevent landlords over leveraging themselves. The theory is that this will prevent another housing boom based on excessive debt.

The reality is that buy-to-let lending institutions, stung by big potential losses on lending on property and against a backdrop of falling property values, have, and will continue to impose their own very strict and restrictive control on buy-to-let lending.

Any landlord who is currently trying to get a buy-to-let mortgage over 75% will know all too well that lenders are not keen to lend on a high LTV basis. This is not going to change for many years. We would point out that LTVs of 75% are still well below the rates available to owner occupiers. Here rates of up to 90% are accessible. This has always struck me as an anomaly.

The argument has always been that higher rates are available to owner occupiers because they are less likely to default on mortgage payments on their own home. However, up until the last few months the figures didn’t bear this out with arrears amongst owner occupiers being higher than those within the buy-to-let sector. In many ways landlords are more likely to be able to service their debt if they hit hard times because they are also in receipt of rent. The rent should therefore generally cover any mortgage payments. An uninsured owner occupier will have potentially very little or no income to pay for their mortgage payments.

Regulators misunderstand the problem

There is no doubt that property repossessions in the buy to let sector recently has shown a sharp deterioration. This has added weight to the calls for the tighter controls on lending. However, this misunderstands the problem.

Repossessions have been on the rise not predominantly because of the high LTV available for buy-to-let mortgages but because novice investors were duped into buying overpriced city centre apartments. These investments were misold as unscrupulous middle men and developers promised landlords unrealistic rents and at capital values far in excess of their real worth. It’s not surprising that many new landlords are handing back the keys after facing the prospect of decades of subsidising the rent whilst they wait for capital values to recover.

Proper regulation for Buy-to-Let Property

The rise in repossessions results from the fact that many ‘newbie landlords’ were enticed into becoming a landlord by promises of instant property fortunes. In previous generations and property booms landlords were pretty much left to their own devices to source property, ‘do them up’ and then let them as a business. This time ‘buy-to-let’ was packaged as the investment opportunity of a lifetime. It was promoted remorselessly by a property obsessed media in an ‘investor’ friendly way that promised instant and ever increasing returns with no risk and no effort to hoards of naive property investors.
The Financial Services Authority ( FSA ) protects retail investors, investing in a whole gamete of investments, from retail deposits to bonds, unit trusts and shares. It forces intermediaries to warn and re-warn and then warn the investor again that they are taking a risk, and reassure the investor of the financial advisors competency.

Buy-to-let on the other hand has none of these checks and balances. Any old ‘Tom, Dick or Harry’, or half creditable sales person could set themselves up to sell a whole raft of over priced property, armed with their fancy marketing and swish presentations it was not surprising that many inexperienced property investors fell hook, line and sinker for it.

Let’s hope that the FSA get it right this time. Otherwise restricting mortgage finance for landlords will have the effect of depressing house prices even further. This will only serve to trap those landlords who were caught out the first time round in negative equity. Where’s the justice in that?

Chris Horne

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