Buy to let Lee Jones reports on fears that FSA regulation could damage the BTL sector
Last week, both the Council of Mortgage Lenders and the Building Societies Association claimed that FSA proposals to regulate buy-to-let lending make “no sense at all” and that such measures would stifle the market.
In October 2009, the FSA set out plans to bring the sector under the full jurisdiction of the regulator as part of the mortgage market review. It argued that the BTL boom of the last decade inflated the house-price bubble and was propelled by investors seeking a quick return on their capital.
The report said: “We conclude that the BTL sector has a significant proportion of borrowers with small portfolios and potentially limited knowledge of the complexities of a BTL mortgage.”
But the CML argues that imposing stricter regulation on BTL mortgages will simply inhibit lenders and do nothing to protect the investor.
Director general Michael Coogan says: “As far as BTL is concerned, the regulatory proposals are barking up the wrong tree. For amateur property investors, poor investment advice is the issue, not the mortgage.
“Regulation has dampened incentives to invest in the private rental sector. These proposals would simply repeat this mistake.”
This sentiment is echoed by the BSA, which agrees that problems are not on the lending side but instead lie with the decisions of the investor. It fears that regulation will scare lenders away from an already lean market to the detriment of good landlords.
Stricter regulation on buy-to-let mortgages will simply inhibit lenders and do nothing to protect the investor
BSA head of mortgage policy Paul Broadhead says: “Entering into the BTL market is an investment decision made by the borrower. Subjecting investors to affordability and suitability assessments in the same way as owner-occupiers is not appropriate.”
Mortgages for Business managing director David Whittaker adds: “The problem is that investors choose the wrong property in the wrong place at the wrong time. The sale of a mortgage has only a small impact on a BTL property.”
National Association of Commercial Finance Brokers chief executive Adam Tyler says it is impossible to regulate people from choosing a bad investment: “The call for regulation is to protect novice investors who have been sucked into investing in BTL by tales of millionaire property landlords and endless television programmes on the subject, and who now find themselves with an investment falling in value and struggling to find tenants.
“How would regulating the mortgage used to buy this property prevent this in any way?
“The investment vehicle for BTL is a property, not itself a financial product, so the FSA will be unable to protect consumers here.”
Along with the NACFB, Whittaker recently visited the regulator and argued that to corral BTL alongside residential mortgages would adversely affect core BTL investors who are generally businesspeople rather than speculators.
Tyler says: “The problem is the refusal to acknowledge that BTL is primarily a commercial transaction. BTL is not, as it has often been painted, either a simple investment decision, or a get-rich-quick scheme.
“A BTL loan is to purchase a property to be rented out as a commercial investment and, as such, it is not an investment for the average consumer unless they have really done their homework.”
The core argument with regard to BTL regulation has always been that there are two types of investor. There are those the FSA mentions in the MMR - the smaller investor with a limited knowledge of the sector - and then there is the professional landlord who may have many properties.
To try to regulate both would be difficult, especially as the lines of personal and commercial investment blur when it comes to BTL.
As a result, Whittaker does not think the FSA will go ahead with full, Mortgage Conduct of Business-style regulation and will instead create regulatory “levers” that could lightly control the advice and lending associated with BTL so as to avoid a housing bubble and risky lending practices. He says this would at the same time keep the advice and lending process as a business transaction.
“This is a business decision for profit,” he says. “The FSA just has to decide at what point is someone a complete amateur and needs to be hand-held through the process. But where do you draw the line? I don’t think they know the answer yet.”