Cleaning up

22 February 2010 | By Robert Thickett, Natalie Thomas

Repossession is an emotive subject, as housing minister John Healey discovered recently after his comments about it sometimes being the best option for cash-strapped borrowers.

And one area that has really got the industry hot under the collar over the last year has been a product designed for borrowers facing their property being taken away from them - sale-and-rent-back.

In 2008, with the credit crunch in full swing, rent-back was thrown into the regulatory spotlight after previously being under the radar.

In May of that year it was announced that the sector would be subject to a major investigation by the Office of Fair Trading. The aim was to put the industry under the microscope to analyse the characteristics of the product and the circumstances in which it is sold. It also wanted to look at whether home owners knew what they were doing when they entered into a rent-back agreement and whether legislation at the time provided enough protection for consumers.

In October 2008 the OFT published its report on the sector and some of its findings were damning, to say the least. It found evidence of consumers being misled about the value of their property and any protection afforded to them as tenants.

Examples of huge rent increases being imposed on consumers and evidence of tenants being evicted after just months was also dis-covered.
This was chiefly the result of firms telling clients they’d be able to stay in their home for years and then booting them out after only six to 12 months.

The OFT also warned that there was a risk tenants could potentially lose their homes if their landlord defaulted on the mortgage.

And finally, evidence of tenants subsequently defaulting on the rental payment after they had entered into a rent-back agreement led the OFT to conclude that staying in their property may not have been sustainable in the first place.

The net result of all this was that the OFT recommended the Financial Services Authority regulate the sector. Recognising the importance of the OFT’s recommendation, the FSA announced on February 6 2009 that it had fast-tracked the process of bringing the rent-back market under its regulatory umbrella with a two-stage approach. This brought in interim regulation by summer of 2009, with full regulation set to begin on June 30 this year.

“This two-stage approach is a departure for us,” Dan Waters, director of retail policy at the FSA, said at the time. “But we believe it provides the right balance between implementing regula-tion quickly to address more serious cases of detri-ment, while giving us time to develop and implement a full regulatory regime that is suitable for the rent-back market.”

Another key element of the FSA’s reasoning behind regulation was that a consumer survey found many people thought the sector was regulated already.

Of the 2,006 adults aged over 18 that the FSA interviewed, only 42% knew rent-back was unregulated. And the majority of those interviewed thought they would be entitled to stay in their homes for five years, when the typical contract was six to 12 months.

Measures the government is considering for full regulation include:

• Banning cold calling
• Banning companies from putting promotional leaflets through letter boxes
• Banning companies from using misleading phrases like ’fast sale’, ’mortgage rescue’ and ’cash quickly’ in promotional materials
• A cooling-off period of 14 days, giving people who are thinking of signing up for a rent-back scheme time to change their mind
• Ensuring that people who do decide to sell through these schemes have stronger tenancy rights

Judging by industry estimates, even the process of interim regulation has had a swift and dramatic impact on the number of rent-back providers in the market, with their number falling from around 1,000 to just 70 after attaining interim regulation.

So with the FSA having set out a code of conduct, is it time for the industry to consider recommending that customers facing repossession should think about rent-back?

And has the FSA’s regulatory washing machine turned the industry whiter than white or are certain stains still in need of attention?

Daniel Lowerson, partner at DFB Housing Solutions, one of the newly regulated rent-back firms, argues that with the FSA coming down on the industry like a ton of bricks, the only way to survive as a rent-back provider is to prove that you can take the pressure.

“FSA regulation is stringent,” he says. “There were supposedly 1,000 operatives in the market before regulation. Many of them would have been private investors, who would have bought one or two properties, and some of them would have bought a lot more.

“But we’ve seen that number drop to 70 companies that have interim regulation. All of them have different types of business models.

“Some of them are individuals as well, but in terms of national companies with national coverage, there’s only a handful,” he adds.

So if a broker or consumer went to a private investor now, would they be above board? Lowerson says the answer is yes.

“The FSA is scrutinising all firms that are regulated so we’ve all got to be whiter than white,” he says.

“When mortgage regulation came into effect in 2004, if you think back to how many thousands of regulated mortgage brokers and appointed representatives there were, one or two rogues could easily have been hidden. But with the regulation of the rent-back sector, every single firm is going to get an audit where the FSA comes to their individual offices. You can’t afford to be anything other than above board.”

Rent-back providers view the product they offer as a beneficial service to those who face losing their homes.

“It’s easy for the likes of Shelter and Citizens Advice Bureau to tell clients they shouldn’t do rent-back but they don’t offer any other alternative,” Lowerson says. “By the time they get to the point of repossession they will have spoken to their lender hundreds of times and would have tried every other avenue.

“But there is another option - rent-back, which can reduce their outgoings. It takes the outgoing cost from a variable cost - because there’s no maintenance cost, building insurance or variable rate mortgage - to a fixed rental payment. A lot of these clients also need help with budgeting and that’s what we do for them.”

Housing charity Shelter has had major concerns about the rent-back sector for a long time. Its main criticism was that because the market had not been scrutinised by the authorities, some companies had taken advantage of home owners’ desperate circumstances by buying properties at much less than their market value, putting up rents to unreasonable levels or even evicting tenants from their own home for no reason.

The charity says the requirement for firms to conduct affordability tests is a vital component in ensuring greater protection for consumers. It adds that the proposal to provide rent-back customers with greater security if rent-back landlords default is also an important step forward as customers will now be guaranteed an assured shorthold tenancy with a fixed term of five years.

“Previously, rent-back tenants could be evicted with short notice after just six months of an AST - a scandal given the huge losses some sellers made and the repeated assurances from providers that their homes were safe,” says a Shelter spokeswoman.

Unsurprisingly, the charity strongly welcomes full regulation, which it says should stop bad practice in the sector.

Rent-back is still not advised in many circumstances. Lowerson says clients are frequently passed to his firm only two to three days before they are evicted from their homes. Most of the time he says his firm can speak to the lender and get the eviction order stopped, but occasionally when this isn’t possible the case has to go to court.

In one recent court case his firm was dealing with, the judge recommended that the individual should not do rent-back as it was not a good option and gave them a further 14 days breathing space before being evicted. He says this is a common situation for clients with either legal advisers or debt counsellors advising them against rent-back.

Lowerson contends that in reality this is detrimental for clients.

“At best it means that without doing rent-back the process is going to drag on for months, with additional charges and fees and court costs added to the balance before they go down the rent-back route,” he says. “Or they don’t do anything and lose the house.”

So with the rent-back market now regulated, is it something brokers should advise their clients’ who are struggling to pay their bills to investigate?

With a growing number of home owners facing repossession, mortgage brokers see clients on a weekly basis that could be prime candidates for a rent-back scheme, but many have still not tapped into the market.

“The majority of brokers can only ever act as introducers to rent-back firms,” says Pete Thomson, sales director of rent-back provider Residential Property Solutions. “Whether brokers are appointed representatives or directly authorised, they will only be allowed to manage rent-back cases if they get a variation of permission from the FSA.”

A number of networks and mortgage clubs have already em-braced rent-back and formed ties with firms that can offer a referral service for their members.

Every day brokers face home owners who are too indebted to remortgage to pay off their debts, which leaves the door open for rent-back.

“Home owners have been on the remortgage merry-go-round for the last few years and as the value of their home increased, they were using this to their advantage and remortgaging against the equity to pay off debts,” says Thomson.

The drop in house prices over the last year and the evaporation of cheap mortgage deals has meant that the merry-go-round has come to a stop for many.

“A lot of people see rent-back as the last chance saloon for those facing repossession, but for many it is a way to pay off debts, especially if they find themselves unemployed,” he says.

The Association of Mortgage Intermediaries advises caution for brokers looking at introducing clients to specialist firms.

“AMI views rent-back as a specialist sector, like equity release, which should be addressed by those with the appropriate skills and competence,” says Robert Sinclair, director of AMI.

“We would recommend any firm looking to operate in this sector to research the market carefully, assess their expertise and work with reputable partners after doing significant due diligence.”

He also adds that while AMI supported the case for regulating the rent-back industry, it was not its assumption that this would lead to significant fee increases for companies that do not operate in this sector.

As the Financial Services Authority revealed last week, the regulation of the rent-back sector, along with the Mortgage Market Review and fraud, were the three main drivers behind it upping fees for mortgage brokers, who will now have to pay a minimum of £1,000.

But the sector clearly had issues the FSA felt compelled to add-ress. Both Lowerson and Thomson concede that the sector’s reputation has been poor, with the OFT report in particular finding firms that were looking to take advantage of people and profiting from them.

But Lowerson says he looked at the OFT report and of the people who reported such experiences, he found three had been forced out of their house after six months.

“You can’t legally throw people out of their house even before regulation came into place,” he says. “If as a landlord you threw someone out before going through the court process it was an illegal action anyway. Sadly, the few such cases that occurred gave the industry a bad reputation, so that’s why we embraced the fact that regulation came in because we knew it would give us a com-petitive advantage.”

But Thomson and Lowerson warn that unauthorised rent-back firms are still operating. All it takes is a search on the internet to find more rent-back firms than are present on the FSA’s register. Prior to interim regulation in January last year, the OFT asked 16 rent-back firms to substantiate claims made in their adverts over what customers could expect from the products they offered.

Both say they hope that the FSA clamps down on unregulated firms that are still advertising and getting business.

“I spoke to a client recently who has visited three rent-back companies, one of which was not authorised but still trading,” says Thomson.

This is something that Shelter is also concerned about. It says that with such a relatively small number of rent-back firms gaining interim authorisation, it is likely that some firms are continuing to operate under the radar. A Shelter investigation in October 2009 found that four out of 18 rent-back firms advertising in the press did not appear on the FSA register.

“If those that are advertising are not all signed up, it is likely many of those that do not advertise are not signed up either,” says its spokeswoman. “Some of these firms may be instead approaching customers through informal methods such as doorstep selling.”

Most providers offer to rent the house out for a period of between two or three years, after which it is up to the discretion of the individual firm to decide tenants’ fate.

“FSA regulation will introduce a minimum term of five years and after this we will assess each case individually to decide if the tenant can remain in the property for another year and we then review their case annually,” says Thomson.

One of the most important aspects of any rent-back deal is making sure clients are aware that there is no guarantee they can stay in the property indefinitely.

Out of the 2,006 adults aged over 18 that the regulator interviewed only 42%knew that rent-back was unregulated

“Every property will be treated differently and every provider will have differing terms and conditions so clients must be told what these are at the start of any sale,” says Thomson.

But the biggest surprise is that for both DFB Housing Solutions and RPS, the distressed sale scenario represents just one aspect of the total business they do.

For RPS, only 25% of its business could be termed as distressed sales, with the rest coming from landlords looking to offload some of their portfolio or perhaps where a client has inherited a property and they want to offload it quickly.

For DFB Housing Solutions, there is an equal split between using their products for a distressed sale and those looking to use it for other purposes, such as an equity release-style product where it helps supplement their income.

Rent-back can also play a part for newly separated couples or for those who want to stay in their home for family reasons.

“Even if they can’t afford to pay their mortgage they may want to stay in the house so the children remain in their school’s catchment area,” says Thomson. “A lot of couples who get divorced or separated also find that one of the two wants to stay in the property but cannot manage the mortgage payments on their own.”

In the meantime, the market is swiftly moving towards full regulation at the end of June this year. While predictions of 75,000 repossessions in 2009 have been thankfully wide of the mark, there were still 46,000 repossessions last year.

A low base rate environment and various government measures have obviously helped many home owners keep the wolf from the door. But as the economic landscape changes there will un-fortunately be many individuals for whom rent-back plan will be their last option before losing their home.

As the mainstream mortgage market knows only too well, regulation is no barrier against rogue individuals. But interim regulation has at least been a step in the right direction in ensuring desperate consumers don’t get taken for a ride.

Regulation Timeline

OCTOBER 15 2008
The Office of Fair Trading publishes its market study of the sale-and-rent-back sector looking at the characteristics of the product, the circumstances in which it is sold and whether consumer protection legislation is sufficient.

It concludes that statutory regulation of the rent-back sector was necessary with better protection for consumers. Specifically it found that:

- Some consumers enter into rent-back transactions when this is not the best option for them.

- Some rent-back firms may mislead customers on the value of their property or the security they have as tenants. This includes telling people they will be able to stay in their home for years, when in reality the tenancy may only be guaranteed for six to 12 months.

- Some firms impose substantial rent increases or even evict tenants after a short tenancy period. It is also possible that tenants may lose their homes if the landlord defaults on the mortgage.

Some consumers are evicted because they cannot afford the agreed rent, which suggests staying in their property was not sustainable in the first place.

The OFT says that although the details of regulation were up to the regulator to decide, the OFT believes regulation should include:

- An obligation on rent-back firms to be more transparent about the initial valuation and sale price, the terms of the tenancy and the amount of rent to be paid. In particular, firms must offer forms of tenancy that match the assurances they give to customers.

- A requirement on firms to tell consumers about the free, independent advice available to them before they decide to sell.

FEBRUARY 3 2009
The government accepts the OFT’s recommendations and publishes a consultation on regulating the rent-back market. The consultation lasts 12 weeks and closes on May 1 2009. The FSA also publishes a separate consultation on a potential interim regulatory regime that closes on April 30 2009.

JUNE 3 2009
The FSA decides to take a two-stage approach - an interim regime to brought in on July 1 to address immediate problems for consumers, followed by a more comprehensive regime starting on June 30 2010. As part of the interim regulation firms have to apply for permission from the FSA. Firms have to evidence where their funding is coming from and prove it will continue.

JANUARY 29 2010
The FSA introduces rules to protect vulnerable rent-back consumers, including:

- A ban on exploitative advertising and high-pressure sales techniques.

- A 14 day cooling-off period to give consumers more time to make decisions on rent-back.

JUNE 30 2010
The FSA to implement its full regulatory rent-back regime.