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Busy lender's monthly round-up - September 2015

Welcome to TLT's busy lender's monthly round-up. Each month we summarise the latest news and developments in mortgage litigation and regulation.

This month in summary

Mortgages

  • The uncertain future of the buy-to-let sector
  • Fraudulent broker given suspended sentence
  • The end of the mortgage rate war?
  • Interest-only mortgages

Economic outlook

  • House prices reach new national record

Other news

  • Civil Justice Council publishes recommendations on damages-based assessments
  • Safe Harbor ruled invalid by European Court of Justice
  • Belfast: Future City
  • Skills shortage and planning system in Scotland 'preventing solution to housing crisis'

Mortgages

The uncertain future of the buy-to-let sector

The UK's buy-to-let (BTL) mortgage debt has reached £200 billion. It has grown by £44 billion in the past five years.

The BTL sector accounts for 14% of all mortgage lending, up from 9% in 2010. There are now more buy-to-let mortgage products on the market than at any time since April 2008.

The long term future of the BTL sector is uncertain though in light of the implementation of the Mortgage Credit Directive, anticipated interest rate increases and tax changes.  

The Treasury is also due to consider soon whether it should grant the Bank of England's Financial Policy Committee (FPC) the power to control levels of BTL lending, potentially through limiting loan-to-value or debt-to-income ratios. The FPC already has similar powers in relation to owner occupier mortgages.

The Council of Mortgage Lenders, which attributes BTL growth to increased demand for rented homes fuelled by a lack of social housing, increased net migration and higher numbers of university students, has urged the government to reconsider its fiscal plans. It says that whilst its members accept that regulators must have the right tools to manage macro-economic risk, increased regulation of the BTL sector needs to be weighed against the potential impact of anticipated rate and tax changes, none of which are likely to make life easier for BTL borrowers over the next 12 to 24 months.

With uncertain times ahead, the Council of Mortgage Lenders has warned that lenders (especially SMEs) may be reluctant to continue to accept current levels of BTL risk. This could lead to a reduction in the choice of BTL products in the market and a slowdown in growth.

Fraudulent broker given suspended sentence

Mortgage broker Marcus Copeland was spared a custodial sentence after pleading guilty to five counts of obtaining money by deception and two charges of fraud arising from mortgage applications submitted in and around 2007.

Copeland, who operated Copeland Mortgage Services in Prestatyn, North Wales, falsified financial documents to obtain mortgages for himself and some of his clients.

The Court imposed an 18 month prison sentence which was suspended for two years. This was despite Copeland's argument that losses suffered were minimal and repayments under the mortgages had been made in full to date.

The end of the mortgage rate war?

A panel debate at a recent Financial Services Expo (a trade show for financial intermediaries) has predicted that the ongoing mortgage price war between mainstream lenders is unlikely to last beyond the end of the year.

Lenders believe that pricing cuts, which led to advantageous deals for borrowers, are unsustainable.
Participants in the debate unanimously predicted that a base rate increase in 2016 would have a significant impact on mortgage pricing.

However, lenders generally expected the rate change to be modest with low interest rates predicted for a number of years to come.

There is likely to be a window of opportunity for lenders to increase market share as borrowers race to secure favourable deals before the long anticipated rate increase occurs.

Interest-only mortgages

In 2014 lenders undertook a major exercise to contact some 720,000 borrowers whose interest-only mortgages will mature on or before 2020, to encourage a discussion about repayment plans. The FCA called it "a prime example of a model demonstrating good conduct outcomes and putting customers first."

What is clear however from recently released figures is the importance of lenders undertaking further follow-up communications and building on this initial exercise.   
Industry experts suggest that close to 1 million of the estimated 3.3 million homeowners with interest-only mortgages have made no arrangements as to how they will pay off the capital due at the end of their mortgage term. Citizens Advice Bureau believes that these borrowers are at risk of repossession if the situation is not addressed.

Homeowners without a mortgage capital payment plan could switch their mortgage onto a repayment basis but this is likely to result in much higher monthly payments which for some borrowers may be unaffordable. Some borrowers seek an extended repayment period but this may not be available for older homeowners as lenders are often reluctant to extend mortgages terms for those heading towards retirement. For homeowners who fall into this category, an alternative option may be an equity release scheme such as a lifetime mortgage. 

Although the level of interest-only mortgages has declined significantly from its peak before the credit crunch, lenders will be dealing with interest-only borrowers for many years to come.  

Economic outlook

House prices reach new national record

The average house price in England and Wales reached a new national record of £294,834 in September 2015 according to Rightmove's House Price Index. This is an increase of 0.9% from August 2015, with an average increase of £2,550 over the month.

The increase in property prices is again being primarily put down to a lack of suitable supply (the number of properties coming on to the market dropped by 6% from the same period in 2014). Although prices are high, low mortgage rates and the delay in the rise of the base interest rate mean continued increased lending demands.

Miles Shipside of Rightmove has commented that this "is the biggest monthly price rise seen at this time of year for 13 years" and the situation is also "leading to some extremes in market forces in different sectors and parts of the country".

He explained that previous price rises in the first-time buyer market have priced some would-be owners out of the market, leaving owners of properties that appeal to this particular market having to reduce their prices. Conversely, "those who own property that is in most demand, either by type or location, are seeing their values continue to rise", Mr Shipside said. 

Other news

Civil Justice Council publishes recommendations on damages-based assessments

Damages-based assessments (DBAs), also known as contingency fee arrangements, are a funding litigation option. They supplement funding options such as Conditional Fee Arrangements and allow lawyers, if successful, to recover an additional fee calculated as a percentage of the client's financial award, and if the case is lost no fee is payable to the lawyer.

The use of DBAs has been minimal to date and the Civil Justice Council (CJC), which is the public body responsible for the modernisation of the civil justice system, has now published its recommendations to government for reform. 

To increase uptake, the CJC wants the regulations governing DBAs to be made clearer and less burdensome.

Its key recommendations include:

  • Counsel's fee - this should be an expense payable outside the cap on damages a lawyer can receive;
  • Allowing DBAs to be used by defendants;
  • Raising the caps on the amount of damages a lawyer can receive;
  • Lawyers being able to retain a DBA fee on top of recoverable costs; and
  • A further review of hybrid DBAs - it appears that whilst the government objects to concurrent hybrid DBAs (where DBAs run alongside other pricing structures such as traditional hourly rates) sequential DBAs (where different types of retainer apply to different litigation stages) are allowed.

The recommendations have been welcomed by the Master of the Rolls, who is keen to "promote confidence" in DBAs as a viable funding arrangement.

Safe Harbor ruled invalid by European Court of Justice

On 6 October 2015 the European Court of Justice (ECJ) ruled that Safe Harbor is invalid.

What is Safe Harbor?

The European Data Protection Directive (Directive) prohibits organisations processing personal data in Europe from transferring personal data outside the EEA, without additional safeguards.  Self-regulated Safe Harbor principles (Safe Harbor) enabled US organisations to comply with the Directive.     

Maximillian Schrems v Data Protection Commissioner

Austrian citizen, Maximillian Schrems, complained to the Irish Data Protection Commissioner (the Commissioner) about Facebook’s processing of EU citizens’ personal data, through its Irish subsidiary. Data obtained was transferred to Facebook in the US under Safe Harbor. Following Edward Snowdon’s revelations regarding US intelligence services’ monitoring and surveillance activities, Mr Schrems did not consider that Safe Harbor provided “adequate” protection. 

The ECJ was asked whether the Commissioner (a data protection authority):

  • was bound by Safe Harbor (established in 2000); or
  • should conduct its own investigations in light of new (Snowden) developments.

The ECJ held that:

  • Safe Harbor should have ceased after Snowden’s revelations. Personal data transferred under it was not secure. 
  • Safe Harbor is invalid.
  • US national security and law enforcement requirements override Safe Harbor, the US could interfere with the fundamental rights of persons under The Charter of Fundamental Rights of the EU and The Directive.
  • Data Protection authorities can investigate/audit organisations transferring personal data to the US, even if done under Safe Harbor.

Implications

  • Data transferred under Safe Harbor is at risk.
  • Transfer of personal data outside the EEA is still potentially lawful if adequately protected.
  • A new process is likely.

What should you do?

Undertake an audit and identify: 

  • what personal data is transferred;
  • the reason for the transfer;
  • the legal basis for the transfer ie Safe Harbor/other contractual clauses/rules/consent;
  • the highest risk transfers ie large volumes/sensitive data; 
  • steps to rectify breaches.

Belfast: Future City

The ‘Belfast: Future City’ initiative was launched in 2013 to maximise collaborative working to deliver mutual benefits across the city. Belfast City Council has recently revealed there will be an estimated £1 billion of capital investment taking place in the city within the next 10 years.

The city is undergoing a major transformation and at this year's Future City conference, which was attended by business and community representatives from across Northern Ireland, a City Centre Regeneration and Investment Strategy was launched. 

The strategy aims to develop Belfast into a world class city of the future. It envisages the BBC moving its headquarters across the city centre to Royal Avenue, the construction of another major department store and a new transport hub at Great Victoria Street. The strategy is based on core principles aiming to increase residential population within the city centre, encourage retail activity, create jobs, maximise tourism opportunities and create more green spaces.

A £18.7 million development fund has been established to support the strategy in partnership with the private sector.

Retail activity is already on the increase in the city as new retailers rush into Belfast city centre. They have been lured by a recent reduction in rates and a general upturn in consumer confidence. Commentators are encouraged by a variety of retailers of who entered the market keen to capitalise on attractive trading conditions in the run up to Christmas.

This new activity has taken place across Belfast's prime retail units and rate reductions of up to 65% have attracted leading high street retailers.

Recent CBRE (a firm of international property consultants) statistics indicate that the vacancy rate in Belfast's prime retail area is just 8.8% and commentators are optimistic that additional rates incentives will be introduced to lure new businesses to the city centre. 

In other clear signs that Belfast in the midst of resurgence, it has been estimated that office sales alone in 2015 have topped the £55 million mark and house prices in the city continue to increase. The latest RICS (Royal Institution of Chartered Surveyors) and Ulster Bank Residential Market Survey has forecast that Northern Ireland is set to achieve the highest price growth in the UK this year - an 11% increase in house prices. 

Skills shortage and planning system in Scotland 'preventing solution to housing crisis'

A severe shortage of skilled workers and a slow planning system are hindering efforts to tackle the housing crisis in Scotland, according to new research. 

Housebuilders said the skills shortage is most acute among electricians and site managers with architects following closely behind, reflecting the supply chain-wide nature of the problem.

Housebuilders appear to be taking steps to redress the balance by prioritising investment in recruiting apprentices in an effort to increase the pipeline of talent coming into the industry.

When asked what one change they would advocate for the alleviation of the housing shortage, housebuilders suggested greater local authority support to promote and fund building projects.  

Existing government schemes, Stamp Duty reform and the Help to Buy equity scheme were flagged as having a positive impact on the housing crisis.

Despite the challenges cited, housebuilders seem to be optimistic about the future as most plan to create new jobs during the next 12 months. If replicated across the industry this could mean the creation of a significant number of new positions.


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