I was interested to read a news report in the May 21 issue of Mortgage Strategy which revealed that when the Financial Services Authority cast its critical eye over repossession figures it discovered a high proportion of disguised buy-to-let properties.
The report suggested that almost 80% of repossession lots at auction were in postcodes dominated by buy-to-let properties and 25% were former buy-to-let houses. Purpose-built flats featured heavily too, de-spite only representing a small proportion of the UK’s housing stock. The inference is that a high proportion of mortgage losses come from disguised buy-to-let properties and that the problem is getting worse.
This spurred the regulator to focus on the brokers who advised clients to take out these mortgages and it found evidence that brokers had advised borrowers to take mainstream mortgages on buy-to-let properties.
The suspicion is that brokers advised clients to enter the buy-to-let market as first-time buyers to benefit from lower interest rates and higher LTV ratios. Then, when the going got tough with either rental voids or higher interest rates, the keys were handed back.
If correct, these figures should be no surprise. Lenders have known for some time that the buy-to-let market – and in particular the new-build sector – is high risk both in terms of realistic valuations and the ability for investors to make any kind of returns given the relationship between the price of the property and expected rental return.
So what is the FSA going to do about it? Its initial re-sponse has been to confirm that it is examining the impact on residential mortgages but the buy-to-let sector is not regulated and the FSA has said it does not want to extend its powers into this area.
Another question is how widespread the problem of brokers disguising buy-to-let mortgages as mainstream deals is. This is a difficult problem for the regulator to police and one it will understandably be reluctant to take on.
Now is the time for the buy-to-let market to be regulated and for the FSA to take action in this area. There is also a need for lenders to review their buy-to-let criteria, particularly in relation to new-build flats.
Consumers believe that property is a one-way bet and are therefore prepared to go to any lengths to get on the ladder to benefit from see-mingly endless price rises.
As a regulated industry, we have a duty of care to protect consumers and a responsibility to protect the industry if there is a correction in property prices. The industry has enjoyed an extended period of growth and prosperity and to ensure this continues it is important to weed out dubious practices before they undermine confidence in the intermediary sector.