Mortgage arrears: follow up - Treasury Contents

Written evidence submitted by the Residential Landlords Association


  The RLA is one of the two major national landlords associations operating in England and Wales. We are a national members organisation which represent landlords (and some agents) who own/let out residential accommodation in the private rented sector. Our members rent out their properties to families, working people, young professionals, students, the elderly, benefit claimants etc. We have over 7,500 subscribers with approaching 13,000 members. Our members own/control over 100,000 units of accommodation. Although Northern based, we have members throughout the country.


  The PRS is capital intensive. Many landlords are dependent, to a greater or lesser extent, on mortgage finance. Much new capital was brought into the private sector through buy to let mortgages rather than institutional investment. This has allowed the PRS to expand so that it now comprises nearly 15% the overall housing market. The Government has supported an expanding PRS. Whilst for some renting is a matter of necessity because they cannot afford to buy, it is increasingly becoming a tenure of choice. It is the easiest way for people to get onto the housing ladder. It is the one tenure where there is ease of access. Importantly, increasingly, the PRS is an intermediate sector providing affordable housing for those who cannot access the social sector and are unable to afford/choose not to live in the owner/occupier sector. Local Authorities are increasingly looking to the PRS to assist them in housing the less well off. Huge progress has been made lately with reducing the number of people housed in temporary accommodation and the PRS has played a significant role providing the necessary housing for this purpose. All of this, however, requires support for landlords who need to be able to access capital to acquire properties, to improve properties and to refurbish them.

  Unfortunately, at the moment, many providers of finance have withdrawn from providing finance for the PRS due to the credit crunch. By and large the specialist providers are no longer there. The major clearing banks are continuing to provide some finance but it can be difficult to obtain. Even if it can be obtained, mortgage lenders are increasing the spreads on rates of interest, as well as imposing higher charges, such as administration fees, which results in funding becoming more expensive, notwithstanding low official interest rates. We are finding that lenders are taking every opportunity that they can within the terms of current facilities, or when facilities are due for renewal, to increase the interest rate in their favour. In some cases, where the borrower is perceived as being a poor risk, lenders are not wanting to renew the facilities at all. In such cases overdraft levels are being reduced thus restricting working capital for landlords. For new loans, providers have been wanting increased equity injection with loan to value ratios reduced. Currently, the number of products available to the "buy to let" mortgage market is vastly less than at the height of the boom.


  A recent survey by BDRC showed that 25% of landlords are operating at no profit. This is at a time when historically interest rates have been at their lowest, even though that trend is now changing so that there is upward pressure on interest rates. If landlords face higher mortgage repayments due to increased interest rates then their return will diminish even further.

  At the moment likely returns on rental properties are somewhere between 5% and 8%. From this landlords not only have to service borrowings but also carry out repairs and generally manage their businesses. They may also face voids. When looking at individual landlords accounts it is not at all unusual these days to see that the rental business is running at a loss.

  Research work by the Grainger Trust showed that prior to the credit crunch relying on rental yield alone was not viable. The only way in which the PRS was essentially profitable was a mix of rental yield and capital yields from selling properties. This was, of course, feasible in a rising market but is no longer possible in the current climate.

  We therefore face restrictions on yields as interest rates are about to start rising again and lenders who are increasing their interest spreads.


  In their invitation to give evidence to the Committee, the Committee asked for comments on the impact on householders in the private rented sector of the current state of the mortgage market. In our view, this encompasses two aspects. Firstly, those cases where the landlord is in default and secondly the impact on the tenant who is the home owner.

  We have to accept that at the moment due to low interest rates there is fortunately less likelihood of landlords being in arrears because their repayments have been reduced but this is set to change. This is an abnormal situation and we have to recognise that as time goes on there will be a return to more normal conditions with higher interest rates. By and large, throughout the recession, landlords have been able to find tenants. There have been significant problems for particular types of property, especially newly built city centre flats. Whilst some voids have been experienced, generally speaking, the vast majority of landlords have been able to find tenants to occupy their properties.

  There are also some indications that some lenders have not actively taken steps to repossess and sell properties into what has been a falling market. As an Association we are concerned, however, that this picture may well change as interest rates climb again and repayments rise. We are also concerned that where they can, some lenders are looking for capital repayments under loans which have previously been interest only loans. We will come back to this issue later. We believe that it is imperative that lenders work with landlords and only take enforcement action as a last resort. When it comes to enforcement action, we want to draw the Committee's attention to a number of issues relating to "out of court" enforcement which are not normally applicable to owner occupier borrowers. The RLA believes that a significant problem could built up as interest rates increase and therefore repayments rise as time goes on. In turn, this could adversely impact on tenants occupying rented properties.

  So far as protection for occupying tenants is concerned, the RLA has strongly supported Dr Brian Iddon's Mortgage Repossessions (Protection of Tenants etc) Bill which is currently going through Parliament. Our support was noted by Dr Iddon in his speech on the second reading of the Bill and by others. In fact, the RLA has argued that protection for tenants should go further. In our submission to the Government Consultation on this topic, we argue that normally for all tenants, including unauthorised tenants, the objective should be to protect their contractual position for up to 12 months unless there were exceptional circumstances. In other words, if a tenant had, say, nine months left on his tenancy agreement then that tenant would be entitled to remain in the property for the remainder of the tenancy agreement, assuming he paid his rent and otherwise complied with the tenancy terms. This would apply even if the tenant was unauthorised. The rent would then be paid to the lender. We believe that this would assist tenants who find themselves in a situation which is no fault of theirs. Our experience has shown that the position of the tenants is often ignored when it comes to repossession and the implementation of Dr Iddon's Bill will go a long way to address this balance in favour of tenants.


  Unlike mortgage arrears in the case of owner/occupiers lenders have two routes which they can pursue, one in Court and the other out of Court.

  As regards Court possession proceedings, these are now covered by the relevant Civil Justice Protocol which does include unregulated residential mortgages. As this only came into force relatively recently it is still too early to say whether or not it has been successful but, at the moment, we have no reason to believe that it will not assist in ensuring that possession proceedings are a last resort.

  In the case of buy to let mortgages lenders have the alternative remedy of appointing a receiver. Normally this is done out of Court relying on the powers contained in the Law of Property Act 1925 and the terms of the mortgage deed itself. Such a receiver is agent for the borrower (not the lender) but will collect the rents/manage the property on behalf of the lender. Possession proceedings will not then be taken because the whole object is for the lender to be able to secure the rent to reduce the mortgage debt.

  The RLA is receiving a number of complaints from members regarding these procedures. Receivers do not have to be licensed insolvency practitioners. They are usually surveyors but sometimes solicitors. These complaints focus on the costs involved in this process. One particular member complained that he was now excluded altogether from managing the property. He had the necessary skills to carry out minor repairs himself. Now, however, the receiver was using expensive contractors and the cost of doing this was, of course, deducted from the rent thus reducing the amount available to pay off the mortgage debt.

  Experience shows that various middle men become involved in this whole process. The receiver will be appointed who in turn may employ a specialist mortgage arrears management firm. In turn this firm may subcontract the actual management to a local managing agent. Various contractors will then be involved to carry out repairs etc. At the end of the day all of this falls on the borrower who may even be faced with negative equity. There is no control over the level of charges of such receivers, in practice. In theory they can be challenged in court but the costs involved are likely to outweigh any advantage obtained. Mortgage deeds contain clauses which give lenders/receivers unfettered discretion in reality. This is an area of growing concern which we would like to draw to the Committee's attention.


  Another area of increasing concern are the complaints which we are receiving from members about how lenders are operating certain covenants. At the moment these centre on loan to value covenants. What is happening in some cases is that lenders are requiring mortgage properties to be revalued. This is done at their insistence by their own surveyor/valuer. This can apply even though the borrower is fully up to date with his/her repayments. If the loan to value covenant is breached, which will be due in essence to the falling market, the borrower then either has to provide security or pay down part of the loan. In practice, at the moment, it is then virtually impossible for the borrower to find a substitute lender to refinance the loan. We would stress that this is in a situation where the borrower is still able to make the repayments in full. Obviously, if the borrower is not keeping up the payments it can be a different matter. Mortgage lenders are not prepared to take a view and wait for the market to recover.

  One of the particular problems experienced is the attitude of lenders valuers in this situation. They cover their backs and are very conscious of potential claims for negligence in carrying out such a valuation. It is very difficult to value in this situation in a falling market or a market where there are few transactions, as is the case at the moment.

  One example where we have encountered this problem is that the lender insisted on its own valuer. The borrower himself had the same valuation carried out by another valuer, who was an approved valuer for the very same lender! There was a difference in valuation of a quarter of a million pounds approximately, some 25%! The borrower's own valuer valued the property as being worth £250,000 more that the valuation ascribed to it by the lender's valuer. In reality there is very little a borrower can do about this in this situation.

  It is interesting to hear the lender's justification for taking this action. Lenders maintain that in this situation they have to make returns to the Financial Services Authority who treat these kind of situations as more risky. This increases the amount of Tier 1 capital which the lender then has to provide to meet FSA requirements. Incidentally, in this case the bank insisted on substantially increasing the margin charged by way of interest to the borrower because the borrower was in default.


  As alluded to in the previous paragraph, lenders are under obligations to increase their Tier 1 capital. This in turn is reducing the amount available for borrowing. Lenders themselves are facing the double whammy of the inability to access the wholesale markets for funding, as well as likely increasing costs of borrowing both because of the demand to finance the public deficit and the need to refinance borrowings that the lenders themselves have taken out which fall due for renewal over the next year or so. Lenders are increasing interest rates because of the increased cost of borrowing which they encounter. All of this is perpetuating the credit crunch. In turn this is adversely affecting the PRS because of the inability of landlords to access funding or to do so on reasonable terms.


  We have two main concerns about the potential impact should FSA regulation be applied to buy to let mortgages. The first is how the concept of affordability would be applied to the buy to let sector, especially to experienced landlords. Secondly we would be concerned if certain practices were to be outlawed. In particular we would be concerned if there was any attempt to end interest only mortgages. This has been talked about in certain quarters. However, the interest only model is a vital part of the business model for many landlords. It is not necessary in our view to factor in capital repayments either by making them mandatory or including them in any assessment affordability. It is perfectly normal to roll over funding in a commercial world. We have already pointed out the adverse impact of low returns and this will be threatened even further if there were any obligation to repay capital.


  The RLA recommends that the Committee should make the following proposals:

    1. Whilst welcoming the measures which would result from the enactment of Dr. Iddon's Bill, more extensive protection should be conferred on households in the private rented sector in the event of possession proceedings being taken. Normally, the expectation should be that the existing contract tenancy should be honoured (up to a maximum of 12 months) so long as the tenant pays the rent to the lender.

    2. The Council of Mortgage Lenders should issue a Code of Practice to its members dealing with out of Court enforcement, particularly in relation to the use of receivers. Restrictions should be recommended to limit the amount of charges which can be levied.

    3. The Council of Mortgage Lenders should also issue practice guidance regarding the valuation of properties in relation to loan to value ratios. In particular borrowers should be entitled to select the valuer (so long as the valuer is on an approved panel for the lender in question) and that such guidance stresses the need for an independent judgment to be exercised as to the value of the property in question. A procedure should be set out to deal with valuation disputes in this situation.

    4. If the FSA regulates buy to let mortgages careful consideration needs to be given as to how regulation would apply at the micro level particularly in relation to issues such as affordability and interest only mortgages.

March 2010

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