The latest news and developments in retail mortgage lending and regulation.
The latest news and developments in retail mortgage lending and regulation.
This month in summary:
Focus on Northern Ireland
Focus on Scotland
Since February 2016 landlords in England have had to conduct immigration checks before letting. A campaign group has conducted a mystery shopper exercise for tenancy applications. The applicants differed only in relation to citizenship, immigration status and the documentation they were able to produce.
It was concluded that applicants who were not British, but had indefinite leave to remain in the UK, were likely to receive a negative response. Based on this a legal challenge was made by Joint Council for the Welfare of Immigrants to the legislation. It was argued that immigration checks place a heavy administration burden on landlords meaning landlords were incentivised and more likely to let to people who could evidence a British passport.
In support of the challenge the Residential Landlords Association (RSA) also highlighted that buy-to-let mortgages commonly include a duty to comply with all legislation. The RSA argued that lenders who wish to reduce their exposure to the buy-to-let sector may use a breach of immigration checks to call in the mortgage debt.
The court agreed that immigration checks were discriminatory and incompatible with prospective tenants' human rights. It is now for the Government to consider whether to amend the legislation.
In related news, Housing Minister Heather Wheeler has announced that the Government plans to end blanket bans by landlords on letting to tenants in receipt of housing benefits. It was stated that two thirds of the largest lenders prevented borrowers letting to these types of tenants. The Government wishes to work with stakeholders to end the blanket bans. Natwest has already declared it is working with Shelter and the RSA in this area and is lifting restrictions on letting to tenants in receipt of benefits.
Tech start-up, Bunk, is planning to revolutionise the private rental sector. Bunk describes itself as a complete rental ecosystem.
The system works via a mobile app or a website platform with each user being given a rental identity to enable them to be rated as a tenant or landlord. The users then form a market place of verified and rated tenants, landlords and third party suppliers to work together, cutting out the need for letting agents.
The platform will allow tenants to search for properties and to enter into tenancy agreements digitally with the landlord. Once a tenancy has been created the platform will allow rent to be paid directly to the landlord and will facilitate a gateway for the landlord and tenant to discuss any maintenance issues and enable third party maintenance contractors to be instructed from an approved supplier list. The platform will also allow the tenant to arrange utilities and search for co-tenants or shared accommodation.
Bunk says that no tenancy deposits will be required and instead a small monthly fee will be paid by tenants. Bunk then provides a guarantee to the landlord for a normal deposit amount.
Bunk is unlikely to displace traditional letting agents for some years. Nevertheless, it is an innovative solution and one that buy-to-let lenders and receivers may wish to keep an eye on.
On 20 March 2019, the Housing, Communities and Local Government Committee publicised a report on leasehold reform in England and Wales.
The Committee's recommendation is for the Government to ensure that commonhold becomes the primary model of ownership of flats in England and Wales.
The report also notes that it would be possible for the Government to introduce legislation to remove onerous ground rent in existing leases. The Committee's view is that existing ground rents should be limited to 0.1% of the present value of a property, up to a maximum of £250 per year. They should not increase above £250 over time, by RPI or any other mechanism.
The report also recommends that the Government introduces legislation to restrict onerous permission fees in existing leases and implements a new consultation process for leaseholders affected by major works in privately-owned buildings.
The Government has two months to respond to the report.
The recommended reforms should be welcome news for lenders. At present, leasehold properties that are affected by onerous ground rents and permission fees are often unsellable and do not offer attractive security for lenders. If these reforms are implemented, homeowners who are presently unable to sell or remortgage their properties will be put in a position to avail themselves of products on offer by lenders, resulting in an increase in business.
Thistle Finance, which packages complex residential mortgages and in particular second charge loans, has reported that in Q4 2018 25% of its loans were partly or fully used to cover self-assessment tax bills, which was a 12% rise in the previous same period. Mark Dyason, managing director at Thistle Finance, commented: “What stood out in the fourth quarter is how a far larger number of people than usual were using second charges to pay off their tax bills". The second charge market continues to boom in a period of low mortgage rates.
On 8 March 2019, the FCA and FOS published a joint policy statement (PS 19/8) confirming an increase to FOS's award limit from 1 April 2019. This follows an FCA consultation on the proposed changes issued in October 2018. The aim is to ensure more FOS complaints receive a fair compensation and to strengthen firms' incentive to improve their conduct.
Complaints referred to the FOS from 1 April 2019:
From 1 April 2020 onwards, both award limits will be automatically adjusted on 1 April to ensure they keep pace with inflation, as measured by the Consumer Prices Index.
Firms will need to have a number of changes in place on 1 April 2019. These include:
The Government has introduced new regulations to strengthen the protections relating to client funds which are held by letting agents.
Only 60% of letting agents are currently members of a client money protection scheme. However, under the new regulations, all agents in the private rented sector will be required to sign up to a government-backed client money protection scheme (CMP Scheme) by 1 April 2019. Failure by letting agents to comply with this deadline will result in fines of up to £30,000.
According to the Government, an estimated £2.7 billion of client money, including tenants’ deposits, landlords’ rental payments and monies held for repairs and maintenance to the property, will be protected as a result the CMP Scheme.
The CMP Scheme will prevent tenants and landlords from losing their ability to recover their money if their agent is unable to repay the fund. Heather Wheeler, Housing and Homelessness minister, considers that this new law will "give tenants and landlords confidence and peace of mind that their money is in safe hands whilst with their agent".
A year ago, the FCA introduced new rules requiring lenders to assist customers who are in persistent debt by waiving fees and interest on credit cards. Since then, the FCA has carried out a year-long review of 100 lenders' treatment of credit card customers. In the review it was found that some lenders failed to monitor when a customer might be in financial difficulty, and many made the situation worse for customers by applying compounded charges and fees in a single billing cycle.
In early March 2019, the FCA's executive director of retail supervision, Jonathan Davidson, wrote to those lenders involved in the review, forcing them to change their practices, and putting senior managers on notice that they are responsible for ensuring the FCA's message is passed down the chain of command. The letter sets out the FCA's findings that a large proportion of customers' outstanding debts, particularly those with lower credit limits, is made up of fees and charges and that firms are required to do more to ensure that customers who are struggling financially are identified and treated fairly.
A statement from a UK Finance spokesman has made it clear that firms are making renewed efforts to help support customers in financial difficulty, including implementing "renewed communications strategies to help prevent fees being triggered in the first place."
In our previous article we reported that the FCA had written to the Treasury Select Committee on the issue of "mortgage prisoners" and that the FCA was planning to consult on changes to its responsible lending rules in order to assist mortgage prisoners to break free.
Whilst Ms Jackie Bennett, Director of Mortgages at UK Finance, is hopeful that many customers of closed books will benefit from the new proposed rules - particularly those customers who do not wish to increase their borrowing - she has also suggested that it will be a commercial decision for lenders as to whether they wish to make an offer to individual customers. Speaking at an event on 8 March 2019, Ms Bennett clarified that not all customers would benefit and that this was likely to be due to their individual circumstances taking them outside the commercial risk appetite of lenders. She suggested that lenders are likely to consider customers' payment histories and whether the costs of the any new mortgage are equally as affordable as customers' current mortgages.
John Glen MP, the Economic Secretary to HM Treasury, has also confirmed in a letter to the Select Committee that he does not feel it is feasible to require lenders to facilitate new lending to such customers, suggesting it will require co-operation from the residential mortgage industry once the FCA proposals come into effect. Mr Glen has acknowledged that the decision is a commercial one for lenders. He has indicated that circumstances which may put customers outside of the risk appetite of lenders would include existing arrears, other significant debts, and mortgages in negative equity or with a very high loan-to-value.
Unfortunately, the data on mortgage prisoners is not detailed enough for the regulator to identify which customers may or may not benefit from the new proposed rules. And without the rules being finalised, the regulator does not wish to speculate.
Kensington Mortgages warns that those in mortgage arrears could rise substantially by up to 30% over the next three years if we exit the EU with no deal. Repossessions could also increase by 10%.
The specialist lender's risk-modelled tool, Vector, predicts that up to 70,296 homeowners could be more than three months in arrears by 2022, assuming there is no market intervention from the Bank of England.
Mark Arnold, CEO of Kensington Mortgages, stated that he would expect the Bank of England to step in to stabilise the market, which would benefit homeowners but be costly for the general tax payer. Any such intervention would not assist first time buyers, who already struggle to get on the housing ladder.
The longer term five-year forecast following a no-deal Brexit included a 17% drop in mortgage lending and 1 million homeowners still paying off a mortgage they would have cleared or re-financed otherwise.
There are likely to be more mortgage litigation and repossessions, which have been at very low levels due to low interest rates since 2008. Kensington's base case analysis assumed an 18% rise in house prices over the following five years, along with a flat rate of unemployment.
Lenders will no doubt be modelling multiple scenarios to ensure they have the correct capital requirements.
The Government has announced plans to launch an Affordable Homes Guarantee Scheme which it hopes will assist in the development of a further 30,000 affordable homes.
Instead of providing funding itself, the Government is expected to guarantee up to £3bn of private lending to Housing Associations to allow them to reduce the cost of borrowing.
This scheme forms part of the £8bn programme announced in 2017 to address the affordable homes crisis.
The Government is investing heavily in this area – and lenders are taking note. Newbury Building Society has released two new Shared Ownership Mortgage offerings, including 85% and 95% LTV options.
Shared Ownership is a common affordable housing option that sees the customer "buy" a nominal percentage of a property and "rent" the remainder from the Housing Association.
However they have come under criticism in recent years because if the customer breaches the terms of his or her lease and the Housing Association takes action the lender's security is at risk.
TLT advise a number of clients both liaising with Housing Associations when customers face financial difficulties and assisting lenders with the complex recovery and sale position when account do not perform.
If you are experiencing difficulties with your shared ownership portfolio, or would like to become more active in this area, please do let us know.
Two years ago in Northern Ireland, the Courts and Tribunal Service made the decision to increase its fees on a phased basis over a 3 year period. Two years ago the fees increased by 10%, last year the fees increased by 7.5%, and this year, on 1 April 2019, the Court fees increased by a further 5%. This will impact on both secured and unsecured recovery proceedings.
This is something that we wish to highlight to all of our lender and financial service clients, as it will be a factor which will affect the cost of all litigation proceedings in the jurisdiction. An example would be an increase from £177.00 to £186.00 to issue an originating summons, i.e. to commence repossession proceedings.
If you require any further information on this, visit the Court Service website.
Alternatively, please contact our Fergal Maguire or our Ciaran McCorry in our Financial Services Disputes and Investigations team in Northern Ireland, who would be happy to discuss this in further detail.
The Royal Institution of Chartered Surveyors (RICS) released its latest residential market survey for the UK earlier this month. The results of the survey were released as MPs voted against the Prime Ministers Brexit deal on a second occasion. It has been widely acknowledged that Brexit uncertainty is likely to have widespread consequences for the UK's economy and markets.
The Scottish Markets have seen buyer demand remaining flat for several months now. The RICS survey points to the uncertainty of Brexit being one of the main causes of this. The uncertainty in the market is causing both buyers and sellers to hold fire in the Scottish housing market. In an additional question added to the survey this month, 47% of respondents confirmed that buyers and sellers are refraining from participating in the current market due to their concerns over Brexit. Other issues do also play a part, such as a lack of supply, an uncertain SDLT framework; and a faltering private rental system.
With Brexit delayed and Parliament at a standstill on any deal, the likelihood of a no deal Brexit is increasing which could potentially cause further problems in Scotland's Housing Market.
Simon Rubinsohn, RICS chief economist, said: “Although activity in the housing market continues to be weighed down by the lack of available stock, changes in the tax regime affecting property, and affordability; feedback to the latest RICS survey makes it pretty clear that the ongoing uncertainty around how Brexit will play out is the critical factor influencing both buyers and sellers. And with little sign that the issue will be resolved anytime soon, it could prove to be a challenging spring for the housing market and the wider economy.”
Chessie Da Parma
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at April 2019. Specific advice should be sought for specific cases. For more information see our terms & conditions.