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Buy to Let Lending – Why it Needs Regulating

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By - Wednesday 19 October 2011

Buy to Let Lending – Why it Needs Regulating

I have written many times about the UK Buy to Let market – some positive, but most erring on the negative side. The positives of the whole thing really are when there is a mechanism of some sort in place that enable Buy to Let buyers to invest in property whilst having some level of peace of mind that the bank or lender is not just handing out cash willy-nilly to rake in fees.

In the USA the system works: the Section 8 program in most US states can be very rewarding with low level effort and relatively low level risk. It also works in France – French Leaseback is a very elaborate, long-term version of Buy to Let that is heavily regulated and governed.

In the UK it is a very different story. Buy to Let has been around for about 15 years now, drawing very mixed opinion from the masses – some love it, some loathe it – with little in the way of middle ground.

Like it or not, there is one thing Buy to Let always gets blamed for – rising house prices and rents.

Billed as the “get rich quick” of the late 90’s, the press harped on about it incessantly, tv shows rolled out, ever eager to get on a new bandwagon, creating numerous celebrities in the process. Subsequently companies sprang up left and right extolling the virtues of this “new found pot of gold”.

Of course, the banks were not to be outdone – the housing market was hitching a ride on the financial rocket, prices rising almost daily – what better a time to create new mortgages by just tweaking a few terms and conditions on a standard mortgage and calling it a different name? Talk about money for old rope.

Of late, there have been calls for regulation on Buy to Let lending – as high up as the European Mortgage Directive (whether you like Europe or not, occasionally they have some good ideas).

Banks and lenders are rarely approving of additional regulation at the best of times, primarily because it means more paperwork for less money, and fewer people are able to buy whatever fancy new-fangled financial product is being promoted.

The response from one high profile Buy to Let “specialist lender” is that

“Those angling for regulation lack understanding about buy-to-let as a commercial product. Believing regulation can boost consumer protection is delusional.”

I would seriously question quite whether the lobbying for regulation is to boost consumer protection at all, In fact, far from it. I will address exactly why in a moment.

“There are many reasons why buy-to-let has not been regulated and they continue to hold sway - the main one being that regulation will have no bearing on the risk investors take.”

This rather depends on the regulation being proposed, and in what form it can or could take.

“Investor risk lies in the property they buy, the area they buy in, its ability to attract tenants and deliver returns. The mortgage product does not affect these decisions.”

Well spotted, however this again is something I will cover in more depth in a moment

“The battle has not been lost so we can continue to fight the cause. The media might prefer to build buy-to-let up as a runaway business train but this is not the case. The sector is fragile and regulation would not help its rehabilitation.”

Whilst I think most of us would agree the media are fond of talking up the odd story here and there,  lately the only reason the media have talked it up is largely due to paid press releases and pseudo-statistics from banks and mortgage companies.

The fact of the matter here is this particular specialist lender (along with most other lenders in this field I shouldn’t wonder) has, I feel, rather missed the point of the calls to regulate Buy to Let lending.

I don’t doubt that many will argue that the huge rise in rents and property prices was largely caused by Buy to Let in the first place. Pre mid 90’s landlords still existed, but that was a different time. No specialist mortgages were available – if you wanted to run your property empire as a business, you used a business loan and complied with the terms that were held within that process.

Buy to Let lending was invented to take advantage of the new “investment tool” that was Buy to Let, and all of a sudden a huge new revenue stream existed for lenders. Almost anyone could apply for one and the banks were falling over themselves to throw money at these new one-man “entrepreneurs”.

It all got tarted up further by being marketed as doing the rental market a favour, helping out people by providing property to those that had an income and didn’t qualify for council housing – at the time – all was great in mortgage world.

The problem was though that because the whole thing was rushed together and no regulation was implemented at the time with respect to the loan to value levels, and little research had been done on the stability or prospects for the rental market, the mortgages themselves caused several things to happen that would change the housing market in the UK forever.

Promoters of Buy to Let at the time could hardly believe their luck – lending was easy to come by, all you needed to do was make the rental numbers stack up, buy the property below market value if you could, throw down a small deposit and wahey! Instant gold-mine!

Where the banks failed is they believed that house prices would continue to rise – yet appeared to have missed the point as to why they were rising at such a rate. The reason being is the flood of easy lending based on very little at all.

Subsequently, mortgage lending requirements in other areas became more lax – mortgages began to appear that were beyond the value of the properties themselves. The public of course welcomed this because first time buyers found it easier to get onto the housing ladder or move to a larger house or nicer area.

The result of all of this is one almighty kick in the pants for the housing market in the UK. House prices that are now largely unaffordable, banks are overexposed with more toxicity than a nuclear dawn, a Government resorting to wheeling out poorly thought through ideas with no idea of how to implement them  - all in all a financial apocalypse with no real end in site.

My conclusion to all of this is simple. The point in regulating Buy to Let lending is not primarily about consumer protection. It is about the fact that the banks and lenders obviously don’t know what they are doing, and if history over the past few years tells us anything, they still don’t.

Buy to Let lending NEEDS regulation because, as the bankers and lenders have proved, they have no idea what they are doing when it comes to the effects their lending has on the housing market as a whole. If you lend money into a market you blatantly don’t understand, the end result is that someone will get burnt.

The banks are ok because they get bailed out by the Government who resort to printing more money to prop the country up through quantitative easing.

The problem is compounded further as Buy to Let property that doesn’t perform gets handed back to the banks – the end result being the everyday home owner gets left with the nightmare of negative equity, tougher borrowing requirements and a stagnant property market.

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