Mortgage arrears: follow up - Treasury Contents


Written evidence submitted by the Paragon Group of Companies

EXECUTIVE SUMMARY

  1.  The Paragon Group of Companies welcomes the opportunity to submit evidence to the Treasury Select Committee's follow-up inquiry into mortgage arrears and access to mortgage finance. We responded to the Committee's original inquiry on this subject last year; this submission reiterates our approach to mortgage arrears, and the importance of the Receiver of Rent process to private rented sector (PRS) tenants and lenders in the event that a borrower landlord experiences financial difficulties.

  2.  Paragon is the UK's leading specialist provider of buy-to-let mortgages to professional and investor landlords. Paragon launched its first specifically targeted buy-to-let mortgage in 1995 and over the last fifteen years has increasingly specialised in this market. The Group has approximately £9.3 billion of assets under management, 40,000 landlord customers and 110,000 individual accounts.

  3.  The key points of our submission are:

    — Policy-makers and opinion-formers need to be absolutely clear about the different kinds of mortgage arrangements that apply to properties housing private tenants, and they should focus their attention on the very limited number of cases in which tenants are not already protected from the possibility of short-notice eviction. Tenants living in properties financed by buy-to-let mortgages are already protected from this eventuality, contrary to the suggestions of some highly inaccurate political and media commentary on the matter.

    — The Mortgage Repossessions (Protection of Tenants Etc) Bill will provide greater protections to tenants in properties where the landlord has not sought permission from their lender to let their property. It is important to stress that this legislation is not aimed at situations where a buy-to-let mortgage has been used to finance a privately rented property.

    — Lender repossession of privately rented residential property is a key issue in the current economic environment. The situation of tenants should not be neglected when landlords experience financial difficulties.

    — Paragon is a strong advocate of taking a sympathetic approach to both landlords and tenants in distress on account of economic hardship. We have developed a market-leading approach to arrears management and the use of the Receiver of Rent process.

    — Receiver of Rent aligns the interests of the lender and the tenant. It allows tenants that comply with the terms of their tenancy agreement to remain in the property and ensures that the lender receives the rent payments.

    — It is nonetheless important that the public policy debate on repossession in the PRS is informed by an accurate understanding of the legal procedures and protections already in place for private tenants in the event of repossession of their homes.

    — In the case of buy-to-let mortgages, a tenant's existing Assured Shorthold Tenancy (AST) agreement is binding on the lender if enforcement action is pursued against the borrower landlord. The tenant is entitled to the remainder of their initial tenancy period and to a minimum of two months' notice.

MORTGAGE ARREARS IN THE PRS

  4.  Due to Paragon's conservative lending policies, the credit performance of our borrowers is robust and compares favourably with industry competitors. Arrears on Paragon's buy-to-let assets stood at 1.5% at the end of December 2009, compared to 3.05% for the buy-to-let industry. These figures include Receiver of Rent—without Receiver of Rent Paragon's arrears rate stood at 0.2%, compared to 2.0% for the wider buy-to-let market.

  5.  The buy-to-let sector as a whole has proven more robust during the financial crisis than some commentators predicted, and market data suggests that the position of buy-to-let mortgage borrowers is showing signs of improvement. Data on the sector issued by the Council of Mortgage Lenders on 11 February 2010 showed that the number of buy-to-let properties taken into possession in Q4 2009 (1,200 properties) was 25% less that in Q3 2009.

  6.  We understand the ongoing concern about how the financial crisis is affecting individual landlords' arrears levels in the PRS and, ultimately, what this means for private tenants. The buy-to-let sector has—completely unfairly—been the focus of negative and ill-informed attention in this regard. The situation of tenants should not be neglected and remains at the heart of our approach to arrears management.

  7.  We completely agree it is vital that lenders take prompt action to protect tenants' interests when their borrower landlord experiences financial difficulty.

  8.  Policy-makers and opinion-formers need to be absolutely clear about the different kinds of mortgage arrangements that apply to properties housing private tenants, and they should focus their attention on the very limited number of cases in which tenants are not already protected from the possibility of short-notice eviction. Tenants living in properties financed by buy-to-let mortgages are already protected from this eventuality, contrary to the suggestions of some highly inaccurate political and media commentary on the matter.

  9.  In particular, in considering the implications of a private landlord falling into arrears it is crucial that a clear distinction is drawn between three different situations that can exist:

    — tenants of rented properties subject to buy-to-let mortgages;

    — tenants of rented properties subject to owner-occupier mortgages where the lender has given permission for the property to be let; and

    — tenants of rented properties subject to owner-occupier mortgages where the lender has not granted permission for the property to be let and is typically not even aware that the property is being let out.

  10.  In the first two cases, including properties financed by buy-to-let mortgages, the existing AST agreement is binding on the lender if enforcement is pursued against the borrower landlord. In such cases, the tenant is entitled to the remainder of their initial tenancy period—typically six months—and to a minimum of two months' notice.

  11.  The situation is different when an owner-occupier borrower has not sought the permission of the lender. The borrower in these cases is in breach of the terms of the mortgage by letting the property out, and while the tenancy agreement is binding between the tenant and landlord, it is not binding on the lender. Furthermore, in these situations the FSA's Mortgage Conduct of Business (MCOB) rules are clear that the responsibility of the lender is to the borrower—it is their legal duty to minimise arrears and obtain the best price for the property. It is clearly still desirable for repossession to be very much a last resort, and the court in these situations will only allow possession during the term of the tenancy if it is just and equitable to do so.

  12.  The Mortgage Repossessions (Protection of Tenants Etc) Bill, sponsored by Dr Brian Iddon MP, will help to extend the protections currently available to tenants in properties with buy-to-let landlords to those "unauthorised tenants" that reside in homes where the lender has not given consent for the property to be let. We note that the Government supports this Private Member's Bill and welcome the more complete protection it will bring to tenants in the PRS.

THE RECEIVER OF RENT PROCESS: PARAGON'S APPROACH TO BORROWER ARREARS

  13.  Buy-to-let lenders are able to adopt a different approach to arrears management than providers of residential mortgages. The primary reason for this is that properties financed by buy-to-let mortgages—unlike (in most cases) those financed by owner-occupied mortgages—house tenants that are typically maintaining prompt rental payments under their Assured Shorthold Tenancy (AST) agreements.

  14.  If an owner-occupier falls into serious arrears, it is clearly desirable for repossession to be a last resort and for every effort to be made to keep the person or family in their own home. Lenders in this sector are, in any case, bound to follow MCOB rules and the pre-action protocol for owner-occupiers. However, in cases where there is a tenant in the property, the lender needs to move quickly to ensure the safety and welfare of the tenant and also to protect the value of the property and the rental stream.

  15.  Paragon operates a market-leading approach in the event that one of our borrowers experiences repayment difficulties. We look at a range of options when arrears emerge, but the welfare of tenants is always our highest priority. Where we have to take control, we will leave a tenant that is complying with the terms of their tenancy agreement in the property, honour their rights under the terms of their contract, and ensure that the property is professionally managed and maintained. This is achieved through the appointment of a Receiver of Rent—an approach most commonly used by buy-to-let lenders.

  16.  A Receiver of Rent is appointed by the lender, effectively to take over the responsibilities of the landlord, collecting rental payments direct from the tenant and applying them to the borrower's account, and maintaining the condition of the property. A mortgage lender can only instruct a Receiver of Rent when the landlord is not making payments under their mortgage agreement. The Receiver of Rent process aligns the lender's and tenant's interests as it allows the tenant to remain in the property they are renting, ensures that the property is maintained and safe, and also means that the lender continues to receive rent payments.

  17.  Paragon is an exemplar of best practice in this area—a point which was recognised by the Communities and Local Government Committee in its February 2009 report, Housing and the Credit Crunch (HC 101, 24 February 2010). We work closely with officials in the CLG on this issue, as well as a range of other matters impacting on the PRS. We would urge the Treasury Committee to support the CLG Committee's call for our approach to be disseminated throughout the PRS.

CONCLUSION

  18.  Although mortgage arrears and repossession levels in the PRS are showing signs of improvement, they will remain an important issue as the effects of the economic downturn continue to be felt. It is important that lenders operating in the sector continue to adopt a sympathetic, tenant-focused approach to arrears management and work through all of the options available with borrower landlords experiencing financial difficulties before pursuing repossession.

  19.  In the exceptional cases where repossession is unavoidable, it is important that sitting private tenants are given adequate notice before having to leave a property. Where a buy-to-let mortgage has been used to finance the property being rented, the tenant is already entitled to the remainder of their initial tenancy period and to a minimum of two months' notice. It is important that this is clearly understood by policymakers and commentators so that completely unjustified criticism and reputational harm is avoided.

  20.  The Government should look to build on industry best practice and disseminate the lessons that can be learnt from leading lenders operating in the PRS. In particular, the importance of the Receiver of Rent process in providing stability and continuity for tenants and lenders alike should be encouraged as much as possible as an alternative to repossession.

March 2010





 
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