Macquarie Bank is providing the £200 million warehouse facility. The Group’s intention will be to use the facility to warehouse loans prior to arranging term funding in the mortgage-backed securitisation markets, where the Group has considerable experience stretching back over 20 years. There has been increasing evidence of a recovery in the asset-backed market with numerous securitisations being launched by a number of major UK and European banks.

Paragon has held bond investor roadshows during 2010 and there is strong investor demand for Paragon residential mortgage-backed securities given the excellent performance of its historical mortgage assets. The number of accounts more than three months in arrears across Paragon’s portfolio of buy-to-let loan assets has continued to fall and is currently 0.86% of the book. This is significantly below buy-to-let market peers and also the wider mortgage market.

Lending strategy
It is Paragon’s aim to return to its market-leading position in the buy-to-let sector, specifically targeting professional landlords. This is an area of the market currently under served by buy-to-let lenders and one in which Paragon is well positioned given its expertise and experience in buy-to-let lending.

Paragon will offer a range of buy-to-let products through the Paragon Mortgages brand.
Paragon will continue to maintain a prudent and risk-averse approach to new lending, placing greater value on long-term customer relationships, credit quality and profitable products rather than simply market share.

This strategy has proved successful for Paragon and is a driving factor in the excellent credit performance of the Group’s assets.
During the eleven months to 31 August 2010, only £231.1 million of Paragon’s buy-to-let loan book has redeemed and the size of the warehouse facility, and its revolving nature, will provide the basis to support the expansion of the lending business.

Buy-to-let market
Competition in the buy-to-let mortgage market has reduced dramatically since the start of the credit crunch and the new lending sector has been dominated by just two lenders, accounting for up to 80% of new business written.

The number of available buy-to-let products has fallen from over 3,600 in July 2007 to under 280 in September 2010. Many of these products are focused towards the novice or small scale landlord, failing to cater for professional landlords’ more complex financial needs.

Strategy
The acquisition of loan portfolios and loan servicing of third party clients will remain a core part of the strategy going forward.

Trading
In addition to announcing its return to new lending, Paragon also today gave a trading update for the eleven months to 31 August 2010. The Board expects operating profits (before exceptional and fair value items) for the year to 30 September 2010 to be above the current market consensus forecast (£58.2 million) and around the upper end of analysts’ current expectations, which range from £40.5 million to £65.0 million. In addition, as previously disclosed, pre-tax profits will include an exceptional profit of £5.7 million on the purchase of Group securitised bonds.

Commenting on today’s announcement, Nigel Terrington, Paragon Group’s Chief Executive says:
“Despite the difficult environment over the past three years, Paragon has remained steadfast in its commitment to return the business to new
lending when conditions permitted.

“We are delighted to have secured funding on acceptable and sustainable terms to enable us to return to new lending and to work with Macquarie on this significant transaction. They are an ambitious and innovative institution and this transaction demonstrates clear evidence of their intentions to develop a leading role in the UK debt and equity markets.

“This is not only a significant development for Paragon; it is also significant for the wholesale funding and specialist lending markets. Paragon is the first independent non-deposit taking mortgage lender to secure funding to enable it to return to new lending. This shows that investor confidence is returning and the wholesale funding markets are recovering.

“Competition in the mortgage market has been sorely lacking, particularly as specialist lenders have largely been unable to secure funding or Government support to enable them to compete against high street lenders. Nowhere is this more evident than in the private rented sector where tenant demand is strong and expected to grow.

This is an increasingly important part of the UK housing market and competition is vital for a healthy and vibrant buy-to-let market and we aim to provide that competition.”
ENDS

For further information contact:
Paragon: Nigel Terrington
Chief Executive
0121 712 2024
Fishburn Hedges Andy Berry 020 7544 3044 / 07767 374421
Jane Padgham 020 7544 3061
Michelle James 020 7544 3056

* seasonally adjusted

Commenting on the figures Martin Gahbauer, Nationwide’s Chief Economist, said:

“The price of a typical UK property rose by a seasonally adjusted 0.5% month-on-month (m/m) in May, following a 1.1% increase in April. The smoother 3 month on 3 month rate of increase rose from 1.1% in April to 1.7%, as February’s fall in house prices dropped out of the most recent three month average. The annual rate of house price inflation dropped from 10.5% to 9.8%, which reflects the weaker pace of increase in May 2010 relative to May 2009. Since reaching a trough in February 2009 – following a drop of 19.3% from their October 2007 peak – house prices have risen by 12.2% and are now just 9.5% below the October 2007 peak.

“Housing market conditions remain characterised by thin transaction volumes and a relative scarcity of properties for sale, despite a slow return of more sellers in recent months. The current supply-demand balance on the market is still consistent with relatively stable to modestly upward trending prices.”

Impact of capital gains tax changes on house prices depends on timing of implementation

“The coalition agreement between the Conservatives and Liberal Democrats contains plans to increase the rate of capital gains tax (CGT) charged on the disposal of non-business assets, potentially including second homes and buy-to-let investment properties. Currently the CGT rate on such assets is 18%, and the coalition plans are to raise the rate to a level “similar or close to those applied to income.” Precise details, however, will not be known until the Emergency Budget announcement on 22 June.

“With regard to what the short-term impact will be on the housing market and house prices, the key question is around the timing and implementation of any CGT increase. If there is a significant time lag between the announcement of the increase and its actual implementation, then some second home owners and buy-to-let landlords may decide to sell in advance of the higher rate being introduced. Such a development could lead the supply-demand balance to shift more in favour of buyers and relieve the current upward pressure on house prices. However, it is difficult to know with any precision how many people would bring forward a decision to sell.

“The incentive to try to beat the higher tax rate is most pressing for those who have owned their properties for a relatively long period of time and therefore have relatively large unrealised gains. Conversely, those who bought their second homes or investment property within the last five years have little incentive to sell early in order to beat the tax change. House prices have only risen back to their mid-2006 level and the first £10,100 of capital gains is currently tax free.

“If the new rate comes into effect immediately on 22 June, then supply conditions are unlikely to be affected materially as any potential sellers would not have time to react.

“There are some examples of where tax changes have had a significant short-term impact on the housing market. Most prominent was the March 1988 announcement to end double Mortgage Interest Relief At Source (MIRAS) for cohabiting couples. The implementation of the tax change was postponed until August of that year, which prompted a rush of buyers to try to beat the deadline. The result was a temporary surge in property values, with house prices increasing by 18% between Q1 1988 and Q3 1988 alone.

“However, the most recent change in CGT rates announced in the 2007 Pre-Budget Report did not have any discernable impact on the supply of property on the market. At the time, the existing CGT rates of 24-40% – depending on taper relief and income status – were cut to a flat rate of 18%. New instructions to sell property remained very low even after the tax changes were introduced, although this may also have been due to the very weak market conditions prevailing at the time.”

Monthly UK House Price Statistics

Nov 09
Gross lending in the buy-to-let mortgage market grew in the third quarter for the first time in two years, according to data published today by the CML. At £2.1 billion, lending was 10% higher than in the previous three months. The third quarter also saw a similar first increase in two years in the number of buy-to-let loans advanced, from 21,600 to 23,700. But the welcome recovery in buy-to-let lending was from a low base, with current lending volumes sharply lower than their peak in 2007.

The number of outstanding buy-to-let loans grew to 1,205,000, representing 11% of all mortgages by the end of the quarter (compared to 1,180,000 three months earlier). The value of outstanding buy-to-let mortgages increased by 2.5% to £144.2 billion.

Within the buy-to-let market, both lending for house purchase and remortgaging grew in the last three months. As with the mainstream mortgage market, however, house purchase lending was appreciably stronger. Remortgaging capacity was constrained by the unavailability during the quarter of any buy-to-let mortgages at over 80% loan-to-value (LTV). Landlords with existing mortgages at a higher LTV are therefore effectively obliged to stay on their existing lenders’ reversion rates. But with variable interest rates remaining low, it is relatively painless for them to do so and there is little pressure to re-finance.

Low borrowing costs are also contributing to a continued improvement in cases of buy-to-let arrears and the number of landlords facing enforcement action. For the third quarter in a row, there was a decline in the number of buy-to-let mortgages with arrears of more than 1.5% of the balance. In the last three months, the number has fallen from 22,900 to 20,500, representing 1.7% of outstanding buy-to-let mortgages.

The number of properties taken into possession rose in the third quarter, from 1,400 to 1,600, equivalent to 0.14% of all buy-to-let mortgages. Over the same period, however, there was a sharp decline – from 2,500 to 1,700 – in the number of arrears cases in which a receiver of rent was appointed, often as an alternative to seeking possession of the property.

Commenting on the newly-published data, the CML’s director general Michael Coogan said:

“At this stage, the recovery is modest - but the figures show that buy-to-let is here to stay. Buy-to-let lenders are among those facing some of the biggest challenges in raising mortgage funding, so the improved figures are all the more welcome.

“Future demand for housing in all tenures supported by lenders will remain strong, despite mortgage funding constraints and low construction rates. With funding for social housing under pressure, the private rented sector has a strong future. Mortgage lenders will have an important role to play in it, and will continue to help improve choice and standards for private tenants.”

Notes to editors

1. The Council of Mortgage Lenders’ members are banks, building societies and other lenders who together undertake around 98% of all residential mortgage lending in the UK. There are 11 million mortgages in the UK, with loans worth over £1.2 trillion.

2. The CML buy-to-let press release for the final quarter of 2009 will be published on 11 February 2010.

Contact details

Name: Bernard Clarke

Tel: 020 7438 8923

Email: bernard.clarke@cml.org.uk

Name: Sue Anderson

Tel: 020 7438 8924

Email: sue.anderson@cml.org.uk

Name: Sarah Robson

Tel: 020 7438 8922

Email: sarah.robson@cml.org.uk

FSA Director - Lesley Titcomb

Speech by Lesley Titcomb, Director of Small Firms and Contact Centre, FSA
Mortgage Business Expo
11 November 2009

Good morning, it is a pleasure to be back at Mortgage Business Expo.  I would like to thank the Association of Mortgage Intermediaries (AMI) for inviting me to speak and for hosting this session and I’d also like to thank them for their help so far on our Mortgage Market Review.  We want this review to have a positive impact on the future of the UK mortgage market, so AMI’s help, and your engagement, are important and gratefully received.

You will be pleased to hear that I’m not going to stand here and summarise all 118 pages of the Discussion Paper – instead I would like to speak about the proposals that will have the most impact on intermediaries.  I don’t get to speak to mortgage intermediary audiences as often as I’d like to, so I will also cover some other topical subjects away from the review if I have time.

This is also a good opportunity for me to dispel some of the myths that are out there about our proposals.  Does anyone really think that we really want to stop self-employed people – over three million people – from ever getting a mortgage again?   And do we really want to make all lenders ask their customers how much they spend on cigarettes and alcohol?  The answer to both of course is No, but you could be fooled into believing otherwise by some of the comments we’ve seen so far.

Some have also questioned whether a review is even necessary.  I’m tempted to suggest they should take their heads out of the sand.  We know that the mortgage market has worked well for many over the years, but the financial crisis has brought it near the top of the pile of big issues the FSA has to deal with.  Our existing rules did not do enough to prevent irresponsible lending and borrowing or to secure the fair treatment of borrowers, so we’ve had to look at why that is and in our paper we’ve set out proposals to make improvements.  We have taken a holistic approach – this is not just about reforms to the Mortgage Conduct of Business Source Book – we have looked at the prudential framework and how we can use the gateway to regulation, as well as how we ourselves monitor and enforce.

Others wonder whether the FSA really understands the mortgage market.  I would say that we do and that our proposals are evidence-based and built upon thorough analysis of what went wrong and why.  It would have been easier for the FSA – given the support in the press and in Parliament for tough action – to make wholesale changes that could have left the market unrecognisable.  We could have done that, but the evidence and analysis showed us that we didn’t need to.  We believe that the proposals that we have put forward offer us a good opportunity to build a more sustainable market and one that works better for consumers without having to do things like cap LTV and LTI limits.

Others suggest that the market has already corrected itself.  Well, it’s true – the market may be more cautious now, but we know that once the economy picks up, once funding and confidence return, current cautiousness will be forgotten.  We must not forget the lessons of the past. The reforms we are putting in place will ensure that when confidence returns the market will operate better, to the benefit of all participants.

Before I cover some of our proposals in detail I should put our review in context. We must accept that regulation alone is unable to resolve the problems in the UK mortgage market.  Regulation cannot reverse the impact of the downturn, regulation cannot provide funding for banks, and regulation can only go so far in ensuring that the unsustainable and destabilising boom in the property market is not repeated in the next upswing.

But what regulation can do is put in place the right incentives and framework to ensure more responsible lending and borrowing and the fair treatment of customers. Our focus is therefore on proposing regulation that works for the future, not on addressing all the current issues in the market. But there are some current practices, notably in the area of arrears and repossessions, which we do need to address and we propose to do so urgently, of which more later.

LTV/LTI caps

The Turner Review raised the prospect of product regulation, and it’s worth considering what this encompasses.  It’s perhaps most helpful to think of it as a spectrum – at one end a full-blown ban or pre-approval of every product prior to launch – at the other, more generic restrictions placed on product design.  In the Mortgage Market Review, we haven’t gone as far as some thought we might.  For example, and as I just mentioned, we have not – for now at least – included any proposals to cap LTV or LTI ratios.  Our analysis suggests that the case for imposing such ratios on consumer protection grounds is not clearly proven and that this would not necessarily be an effective tool for reducing default rates.

But we are assessing whether we should ban the sale of products which exhibit certain toxic risk combinations. These characteristics include high LTV and LTI; low income levels; high levels of debt; being credit impaired; or borrowing for the purpose of debt consolidation. The case for a focused use of this form of product regulation is, in our view, clearer.

Income verification

In the paper we say there is a clear and non-controversial case for product regulation in the shape of requiring income verification. It has certainly proved one of our most controversial proposals so far – but I think that controversy (which, I might add, is largely among industry members) is because of a lack of understanding of what we’re actually saying.

Firstly, I should explain why we’re looking at this.  At the height of the market in 2007, 45% of all mortgages were advanced on a non-income verified basis, either as self-certified or what became known as ‘fast-track’ mortgages.  Expanding beyond its original market, self-certification in particular has allowed many borrowers to inflate their incomes and subsequently take out unaffordable loans.  Arrears rates for these loans tend to be higher than those for standard mortgages.

In our view, the best way to deter lenders from accepting, and individuals from applying for, a mortgage based on an inflated income figure or on a non-existent source of income is to require income verification in every case.

Some have suggested that this means a self-employed person or a contract worker would not be able to get a mortgage and that we’re blocking access to the market.  This is way off the mark.  We can think of no reason why the self-employed or a contract worker would not be able to verify their income.  As we say in the paper, an income flow that is ‘non-regular’ is not equivalent to, nor does it imply, one that is ‘non-verifiable’.

People counter this by saying that lenders require self-employed workers to show three years’ worth of accounts.  Well, this is something that we have never mandated anywhere – it is a market practice among some lenders. We plan to work with the industry to agree what good practice looks like and therefore what are the appropriate forms of income verification.

We do not want to introduce anything that is unworkable or that prevents people who can genuinely afford one and who can demonstrate that their stated income is genuine from getting a mortgage.  But what I should be clear on is that the days of accepting a business card or some headed paper as proof of self employment and therefore income will be over.

Affordability

In our view, a key problem in the industry has been either the lack of proper affordability assessments or poor practice in this area. We are therefore proposing to tighten our responsible lending standards and spread the existing good practice on affordability.

We propose making the lender ultimately responsible in every sale for verifying affordability. This means a proper assessment of whether the customer can afford the mortgage, verifying statements around income and considering the plausibility of other information provided.

Many who are not familiar with how the UK mortgage market has evolved over recent years would expect this to be done anyway – because why would you lend money to someone without checking whether they could afford to repay it?  They would be amazed at the evidence we have – in some cases showing that the customer’s mortgage repayments actually exceeded their monthly household income.  These types of loan were sold in the market boom – they won’t be able to be sold in the future.

There is naturally a question about whether we will need intermediaries to also do an assessment of affordability.  Well, we believe that as the intermediary needs to properly ascertain the suitability of a mortgage, and as you obviously cannot do this without first assessing a borrower’s affordability, you will need to continue to do a preliminary assessment of affordability as part of this, with the lender making a final assessment.

We need to work out exactly what this will look like in practice and we are in the process of setting up an industry working group to discuss and help decide what an affordability assessment should look like for both intermediaries and lenders.

We have already heard some lenders say they believe their fast-track processes can help us achieve the outcomes we want.  We are not convinced that current processes – where income verification is sought but only sample of cases actually scrutinised – can provide a proper assessment of income and affordability – as it will always leave the vast majority with no income verification and no proper affordability check.  We believe the onus is on the industry here to prove that exceptions to our proposals could work, and remain firm in our belief about the importance of proper assessments of income and affordability.

Intermediaries are obviously a key part of any change and will continue to be important players in the UK market.  We are one of the few countries in the world where intermediaries play such a strong role in providing mortgages, something that is driven by the value that intermediaries can add for consumers in a market like ours which has had so much product diversity – and we see that strong role continuing.

Approved persons

We have found widespread support for the idea of extending the approved persons regime to those individuals in customer facing functions in mortgage intermediation.  We are proposing to extend the regime so that individual mortgage advisers – in intermediary and other firms – will need to be assessed as honest and competent by us and be individually registered with us, and we intend to move forward on this proposal quickly.

There will be costs to this but we believe they will be outweighed by the many benefits.  And I am pleased to see the consensus on this shows that many agree with us that this is the right thing to do and important way for us to drive up standards and create a better and more sustainable industry in the long term.

The enforcement actions we’ve taken against mortgage intermediaries (70 banned over the last three years) demonstrate that there is a small percentage of people out there that can tarnish the good reputation of your industry.  In the future the approved persons changes will help us prevent such individuals becoming advisers in the first place; it will help us keep track of them and  prevent them moving through the industry, and will enable us to take tougher action against them and hold them to account for their actions.

Charging

And we are determined – as we have shown in our recent fine of GMAC-RFC – that we will crack down on unfair charges in the mortgage market.  One of GMAC’s failings was on the charges it placed on borrowers in arrears.  We will be looking further at charging practices in the industry to get a better understanding of charging and pricing structures to enable us to indentify and challenge unfair and excessive practices.  Initially this will be on arrears charges before looking at wider levels of lender product charges and lender charging models.
We also propose to collect data that will allow us to identify firms earning large commissions in addition to charging customers large fees.

We are assessing the case for banning certain specific charges.   And this is one area that many people have missed so far, and that I would like to draw your attention to.  We are looking at whether we should ban the practice of lender charges (such as set up fees) and intermediary fees being rolled up into the loan and then paid off by the customer as part of their regular mortgage payments.  Doing this could help to focus the customer’s attention on what they are actually paying – because they are unlikely to focus on it currently as these charges almost disappear into the overall cost of the loan.  This marks a substantial change in our approach to date, as we have so far been reluctant to be a price regulator, but we think it is something that is worth looking at further.

In the meantime, we intend to press ahead with specifically outlawing some of the worst practices in arrears charging, such as making an administration charge when a borrower is adhering to a repayment plan.

Non-advised sales

Our Mortgage Market Review analysis shows that consumers do not understand the distinction between advised and non-advised sales.  This has caused us to look closely at the differing standards we set for each.

Non-advised sales offer less protection as there are no checks to ensure the consumer can afford the product choice and no checks to ensure the products presented to the consumer are appropriate.

So this is something we believe we have to address in some way.  We could move to a fully advised market – but where would that leave the knowledgeable consumer happy to buy with information only, and would the costs to the industry justify this move?

Instead we propose to retain non-advised sales but introduce a standardised affordability and appropriateness check across all sales. Firms will no longer be able to provide the consumer with information on a range of mortgages without first assessing whether a mortgage is actually appropriate or affordable for that consumer.

We are also looking at ways to ensure sales standards for advised sales meet the needs of the market and appropriately protect consumers.  Should we toughen up the suitability standards?  No decisions have been made on this and we welcome the industry’s feedback.

Retail Distribution Review

Finally, we assessed whether there is a case for applying to the mortgage market some of the recommendations of the RDR applying to the investment market.

Intermediaries will be relieved to know that we will continue to let them choose how they charge for their services and are not proposing to introduce ‘adviser charging’.   We haven’t seen the same issues in the mortgage market that we did in the investment market, and which warranted change there.

Yet we do see merit in aligning with the RDR on ‘scope-of-service’ labels. We have a diagram of the different services in our paper and it clearly shows the complexity of the current labels for intermediaries.  We propose to replace the existing ‘whole of market’, ‘independent’, and ‘single’ labels, with the much simpler and readily understandable ‘independent’ (whole of market) and ‘restricted’ (limited panel) advice only.  For similar reasons we propose to replace non-advised with ‘information-only’.  For firms and consumers this will mean the labelling of services for both mortgages and investments will be better aligned.

In the investment market, the RDR is also proposing to introduce higher qualification requirements for investment advisers.  We have seen no evidence that a lack of training and competence is a significant issue in the mortgage market so we do not propose to make the same changes for mortgage intermediaries.  Of course this is partly because mortgage products are inherently less complex than those in the investment market.  We are however looking at the possibility of reviewing the existing mortgage syllabus to ensure that the exams remain ‘fit for purpose’.

Disclosure

We also propose changes to disclosure.

To put our changes into context here we need to look at the behaviour of consumers – and it is clear that irresponsible borrowing has been just as much a part of the problem in the mortgage market as irresponsible lending.  A significant minority of consumers have made decisions which were imprudent.

Our policy approach to date has been underpinned by a view that consumers will act rationally to protect their own interests. And disclosure has been the cornerstone of that approach, in the belief that it enables consumers to shop around and compare the risks and costs associated with products and helps them make informed choices.

We now believe that this assumption is wrong.  The evidence shows that many consumers do not use disclosure as intended. We therefore need to change our approach, recognise the behavioural biases of consumers, and be more interventionist to help protect consumers from themselves.  And these changes are a combination of some of the product and sales regulation changes I have already mentioned, together with proposals to update our disclosure regime.

We propose to remove the requirement for the initial disclosure document (IDD) and whilst we will remain prescriptive about the key messages consumers must be made aware of, we will allow firms to set out them out in their own format, perhaps in their terms of business letter.  We think we should keep the key features illustration (KFI) but also have firms explain key points to customers orally.

We have also recognised that suitability letters may have a role to play in improving outcomes – intermediaries will have better records of the advice given on file which may help improve the quality of the advice given.

Prudential reform

So there is clearly a lot in our paper that will impact intermediaries – but the focus of our proposals for constraining irresponsible lending is on lenders. It is lenders that design, develop and sell the products that can cause risk and harm to consumers and the market. The proposals in our paper will combine with measures already going on to improve lenders’ capital and liquidity – and to improve the overall stability and sustainability of the lending market. They will address the general problem of the rapid expansion and sudden withdrawal of credit and will give banks and other lenders a stronger financial backing, make them assess risk more realistically and smooth out the peaks and troughs of the lending market.

High-risk lenders

We are looking at some specific proposals to temper the level of risk being taken by high-risk lenders.  Although some banks and building societies did engage in high risk lending, greater risks were taken by the subsidiaries of the banks and building societies and the group of lenders that came to represent a significant part of the market, who we call the ‘non-banks’, as they didn’t have branches or depositors.

Our extensive research showed that non-banks advanced a significant share of their mortgages at a high LTV; on a non-income verified basis (generally self certified); to credit impaired borrowers; and for the purpose of debt consolidation.   And the significantly higher arrears rates for these lenders (between 30% and 60% of all of their borrowers are in arrears) shows that these combined risk characteristics to have proven to be ‘toxic’.

We are therefore assessing, in the overall context of our proposals for prudential reform, the case for further regulation of non-banks, including changes to capital requirements; the vetting or banning of business models; and looking at lessons we can learn from other countries’ approaches to regulating these types of firms.

What we eventually do will be proportionate here.  We have no problem with new lenders, like these firms, entering the UK market.  But what we will ensure is that they have sustainable business models and they add value to our market in the longer term and do not expose customers to unacceptable levels of risk.

I mentioned arrears just now – as I’ve said, the review also looks at firming up our rules on arrears charges and banning some of the charges we think are unfair.  We plan to issue a Consultation Paper in January setting out our proposals for change.

In the paper we also set out the case for extending FSA regulation to consumers taking out second and subsequent charge mortgages as well as mortgages for buy-to-let purposes, but it is for government to decide whether to make these changes.

One area where we still have some thinking to do is on whether we need to limit the amount of equity borrowers can withdraw from their homes – one startling statistic is that by 2007, remortgaging to withdraw equity had replaced home purchase as the main reason to take out a mortgage.

So that is a quick canter through some of our proposals.  I will be interested to hear what you think, and take any questions afterwards.  And I should also give a plug to our consultation roadshows – these begin later this month and we still have space at some of the venues.  You can find out about them by looking at the events section on our website.

And now briefly on to some other points.

The ‘new’ FSA and small firms

The review has coincided with the emergence over the past year of a different FSA to the one that existed before the financial crisis. It is undoubtedly a more intrusive and interventionist FSA than before.

Larger firms are finding the approach of the FSA quite different – we’re taking a closer look at their businesses, checking their staff holding senior positions and stress testing their business models to make sure they still maintain the standards we expect.

But we are getting more focused with smaller firms too. We’re well on track with our assessment programme for small firms, which is now becoming part of our normal approach to supervision. And we are making sure that once firms are assessed we keep in contact with them through our new regional education programme so that we can be certain our smaller firms are continuing to treat their customers fairly.

And we’re getting smarter in the way we regulate small firms. Our new risk-profiling tool enables us target the highest risk of the smaller firms – allowing us to focus our resources on those firms that pose the biggest danger to consumers or which impact significantly on the FSA’s other objectives. In the past our choices of which firms we reviewed, for example through our thematic projects, were based upon the business they were in or the product they were selling. Now we can take a more holistic approach and we can look at firms’ riskiness based upon a wider range of factors.

For example, looking at financial risks we have so many data sources now that we are much better at spotting actual or potential financial stress. If you send us something and we spot a problem we can be on the phone to you very quickly.

So the FSA is now more intrusive, more focused, and more proactive. Many firms we speak to about this are pleased – because we will be tackling the bad guys.

Good firms have nothing to fear from the new more interventionist FSA, but if there are firms that clearly do not have the interest of their customers at heart we will find them and we will take tough action. You may have seen that we have already concluded two enforcement cases so far as a result of our small-firm assessment work and there will be more to come.

We are prepared to take action against firms, whatever their size.  If firms do not treat their customers fairly, then we do not think they should be operating in the market.

But I want to emphasise that what this does not mean is that we are out to get small firms. We are taking a tougher approach with larger firms too – and I can point to a number of examples to support this.  But I would note in passing that I have been working in regulation for the past 18 years.  During that time, there has been a constant cry that the regulator is out to kill off small firms – and yet small firms are very much still with us.   I don’t want to belittle the challenges that small firms face, whether it is from the current recession, or from the overall burden of regulation imposed by the combination of the FSA, the taxman, employment law, health and safety and so on.  I marvel at the resilience shown by these small firms and I applaud it.  I want to emphasise to you today, the FSA wants to see a thriving small firm community, but we also want to see one where standards are high, and I’m sure you do too

An example of where there continues to be clear need for action is on mortgage fraud and tackling this remains firmly on our agenda here.  We continue to both ban and fine brokers – and continue to work with lenders to identify and act against fraudulent brokers and to help lenders enhance their systems and controls to prevent fraud.  So the depressing routine of fraud enforcement cases will continue while we crack down on these rogue individuals.

You may have noticed that in September a mortgage intermediary was convicted in court for failing to notify us that he had taken a controlling interest in a firm, but also for making false statements to us.  We specifically require regulated firms and individuals to meet our principle of being open and honest with us.  We’ll be taking action against firms that lie to us or try to hide things that we need to know about to supervise effectively and protect consumers.

Last year at Mortgage Business Expo I warned firms against trying to become ‘phoenix firms’ – firms that cancel and then try and re-appear with the same people behind them, and often the same premises and customers, but without the liabilities they have left behind for others to pick up.  Our recent consultation paper on payment protection insurance brought the prospect of firms having to reassess past payment protection insurance (PPI) complaints they have rejected and some think this could mean more firms try and become phoenix firms to leave these behind.

I should warn them that we are alive to that threat.  We are watching certain firms very closely and we are determined to remain one step ahead of potential phoenix firms and take strong action against firms and individuals that try this.

I spoke earlier about the limitations on the FSA, in terms of our ability to put everything right in the mortgage market.  I know that at the top of most intermediaries’ list at the moment are issues with lenders, such as the lack of choice available with only six lenders of scale left, products being withdrawn at short notice and, most importantly, dual pricing.

These are all a symptom of the current market conditions.  We cannot intervene to turn these market conditions around – as I said earlier, we cannot return funding to the market, create more lenders, or ask them to favour one form of distribution over another.

Dual pricing is clearly a problem for intermediaries at the moment, but as Robert pointed out recently in his Mortgage Strategy blog, we can understand why lenders are favouring their own branches in such difficult market conditions, just as we can understand that this makes your job even tougher.  They are not obliged to lend through intermediaries.  And how they choose to price and distribute their products is up to them.

I realise this makes life difficult for you, especially when combined with lower levels of activity anyway.  But these commercial decisions are not something that the FSA can intervene to stop.  However, we do expect lenders to be sensible and act with integrity.  Where an intermediary product is of such poor value compared to direct product from the same lender, we question why lenders would continue to market that product.

And there are some signs that conditions could be improving for intermediaries with a few lenders recently launching exclusive products for intermediaries.

Before I finish I’d like to mention one other thing.  One area where we have seen anecdotal evidence of business growth and poor practice is where FSA-authorised firms are introducing their customers to claims management companies.

I would just like to say that if a claims management company approaches your firm, be careful.  We have seen firms failing to consider their data protection obligations when referring customers without the appropriate consent, others failing to perform any due diligence on the claims manager they refer to, asking no questions about success rates, the average length of time to complete on a claim and refund policies where fees are taken up front.

In one case we have seen an intermediary referring customer for claims where evidence was held on file indicating the claim was unlikely to be successful from outset.  While we recognise there are good claims managers out there, as with any sector there are poor firms and we expect you to act with integrity and to make the fair treatment of your customers central to what you do.

I hope that you have found my pointers on current issues and current FSA thinking useful and you have a better insight into our mortgage market review and the other work we have on with small firms.  I realise that the financial crisis has already had a big impact on your businesses, and that further change led by the FSA is probably not going to be at the top of your wish list.  But we believe that our proposals, combined with our new approach to supervision, will help bring about a better mortgage market for all, intermediaries included.

Costs of buy-to-let regulation must not be passed on to landords

19 Oct 2009

The National Landlords Association (NLA), the UK’s leading representative body for private-residential landlords, has expressed concern that the regulation of buy-to-let will mean increases in the costs of borrowing for landlords.

Although increased protection for smaller, less experienced landlords may be welcome, professional landlords who treat their lettings as a business do not require the same level of protection.

In proposals outlined today by the Financial Services Authority (FSA), buy-to-let would be brought within the FSA’s regulatory regime thereby, they claim, strengthening oversight arrangements and potentially ‘protecting consumers making investment decisions on property.’

David Salusbury, Chairman, NLA, commenting on the Discussion Paper, said:

“As with all proposals, the devil will be in the detail but the FSA may come across problems of definition. When does a so-called ‘amateur landlord’ become a professional landlord? How large does a property portfolio need to become? The answers to these questions may well indicate exactly which investors are in need of further protection and which are capable of protecting their own interests quite adequately.

“While the paper presents a logical approach to the regulation of buy-to-let, some of the rhetoric about reckless lending is playing to the gallery. The focus should be about getting lenders lending once more. The lack of mortgage finance is hampering the housing recovery and, therefore, reducing the available housing stock on offer to those who choose to rent.

“The majority of landlords are financially sound and approach their lettings business in a professional and business-like way. We must ensure this fact is at the heart of all discussions relating to regulation which will affect landlords.”

To download the FSA Mortgage Market Review Discussion Paper go to: http://tinyurl.com/yj3kq9a

For journalists who require more information or case studies, please contact:

Steven Hilton
Media Relations Manager, NLA
Email: steven.hilton@landlords.org.uk
Tel: 020 7840 8906
Mob: 07508 031 084

Notes to Editors:
The National Landlords Association (NLA) exists to protect and promote the interests of private residential landlords. With over 18,000 individual landlords from around the United Kingdom and over 90 local authority associates, it provides a comprehensive range of benefits and services to its members and strives to raise standards in rented accommodation. The NLA seeks to safeguard landlords’ legitimate interests by making their collective voice heard by local and central government and the media. The NLA seeks a fair legislative and regulatory environment for the private-rented sector while aiming to ensure that landlords are aware of their statutory rights and responsibilities towards their tenants.

Investors hit by the downturn who choose not to complete property deals can still be forced to buy after court orders, lawyers have warned.

By Kevin Peachey
Personal finance reporter, BBC News

Many buyers who agreed to purchase city apartments being built in the boom now find values have plunged or have difficulty in finding a mortgage deal.

Some wrongly believe they risk only their deposit by pulling out after exchanging contracts.

But lawyers said the legal obligation to complete the transaction was clear.

Average flat prices fell by 19.5% in England and Wales from peak to trough.

The average price had risen to £175,776 by January 2008, according to the Land Registry, but then plunged by £34,211 to £141,565 by May 2009.

Quick profit

Many buy-to-let investors – including so-called amateur landlords – jumped on the property bandwagon as prices continued to rise.

If the completion dates were six months earlier…it would have been a completely different story Administrator Chris Stirland Financial shadow cast by city apartments

Some who exchanged contracts, often agreeing after seeing plans of construction work, have since been hit by the squeeze on mortgage finance, or simply realise that a fast profit is no longer available.

This, in turn, has affected developers and they have put pressure on buyers not to pull out of contracts.

A developer can apply to a court to seek an order of “specific performance” – an injunction that makes the buyer perform his or her part of the contract and complete the purchase agreement.

“Such actions were rare in the boom times when finance was readily available and the value of property was ever-increasing,” said Paul Lewis, a partner in commercial litigation at Gordons law firm in Leeds.

“But with the economic downturn, builders and developers are now seeking legal advice on ways to enforce the contract or at least seek advice on how to recover their losses.”

However, he pointed out that judges would only make such an order if an award of damages was not adequate. Generally, they would be cautious when asked to force somebody to buy. Other options for the seller included:

• Rescind the contract – this is when the seller cancels the contract, keeps the deposit and retains the property in an attempt to resell it
• Rescind the contact and sue – the seller goes to court to claim any unpaid deposit and then tries to resell
• Sue for damages – if successful, the buyer who pulls out must pay the seller the difference between the contract price and the value at the date when completion should have taken place.

Suing for damages is often the better option if the buyer does not have the funds to buy the property. City-centre apartment investors might have equity in other properties and so an award could be enforced.

However, many investors remain ignorant of the rules, lawyers warned.

“There is a worryingly widespread and entrenched belief among buy-to-let investors that if they decide to withdraw from a purchase for which they have exchanged contracts, that only their deposit is at risk,” said Jeremy Raj, of City law firm Wedlake Bell.

“The legal position is quite clear. They are legally obliged to complete on the transaction.”

Administrators are currently considering legal action after the collapse of a development company which renovated a block of 112 apartments called Thames Tower in Leicester city centre.

Brampton Asset Management (Leicester) Ltd called in the administrators after contracts were exchanged on 111 apartments, but only 14 completed.

“If the completion dates were six months earlier, all those people would have paid. Mortgage products were still in hand then. The bank and creditors would have been paid and it would have been a completely different story,” said administrator Chris Stirland, of Vantis Business Recovery Services.

Defence?

Generally, buyers have a defence against these actions by developers if the development was “not substantially completed”, if the property was not adequately described or misrepresented, or if the value of the property overtakes the contract sale price or is sold for a higher value (in which case the buyer might be able to reclaim their forfeited deposit).

When a developer becomes insolvent some buyers also find that their deposits have been swallowed up by the developer instead of kept by their solicitors in a separate account.

A reputable builder will usually offer insurance to a buyer of a newly built property to cover defects and some of these policies provide for repayment of deposits in cases such as this.

Original article link

They fear thousands of people who sought to cash in on the buy-to-let dream during the boom years of 2004 to 2007 may turn out to have been victims of organised fraud.

The Sunday Times – David Leppard

The Serious Fraud Office (SFO) is investigating alleged scams that have cost government-owned banks such as Northern Rock, Royal Bank of Scotland and Bradford & Bingley millions of pounds on loans that should never have been made.

Senior police officers said the full scale of the buy-to-let scandal was only beginning to emerge in the wake of the credit crunch and the collapse of house prices.

One chief constable said: “We can expect to see one or two of the same type of [scheme] emerging in every major city.”

The SFO said last week it was investigating two alleged buy-to-let frauds, involving properties in Leeds, Cardiff, Nottingham, Derby, Liverpool, Hull, Newcastle upon Tyne, Glasgow and London. Police in Greater Manchester, the West Midlands, and West Yorkshire are also involved in the inquiries.

At the centre of one of the biggest police investigations is Morris Properties, which specialised in student new-build flats and refurbished homes in Leeds and the northeast. It sold 1,000 properties before going bust last summer.

The firm was established by Simon Morris, a local developer who built up a £69m fortune by selling buy-to-let properties.

Morris’s firm lured investors with promises of substantial “discounts” on flats that were allegedly overpriced, and guaranteed rental income, which in many cases failed to materialise. Investors, drawn in by the mirage of ever-increasing house prices, were easy prey.

With property prices now falling in some areas by as much as 50%, many of those investors are facing ruin. The victims include doctors, nurses, teachers and builders who have seen portfolios worth hundreds of thousands of pounds vanish. Many have had their properties repossessed or been forced to sell at knockdown prices.

A whistleblower who once worked for Morris and fell into debts of £500,000 after making buy-to-let investments with the firm said he had received threats after helping the police. Morris denies any wrongdoing.

Last week Morris was accused by lawyers representing 133 of his former clients of overseeing a scheme in which flats were sold to innocent investors for as much as 100% above their real value.

Hammad Ahmad, a solicitor with Max Gold Partnership, said his clients would launch a group legal action in the new year against the Morris companies and several conveyancing solicitors and valuers involved in the sales.

Experienced property investors had been waiting for some time for the wheels to come off this organisation.

Champion of buy-to-let boom succumbs to credit crunch

· School for ‘property millionaires’ collapses
· Mortgage famine hits sales in UK, US and Spain

Inside Track, a firm specialising in property seminars, has gone into administration.

Link to original article

However, its sister company, buy-to-let broker Fuel Investments, is said to be unaffected by the development.

A taped message on the Inside Track’s phoneline states that the move has been forced by the continued sustained difficulties of the credit crunch.

Jeremy French and Glyn Mummery of Vantis plc have been appointed joint administrators.

If a new build developer or selling agent offers you a discount from so called "normal price" simply ask yourself why the skilled new build developer or agent needs to do this to sell the property.

Editor

*****************

All 49 flats in this block in Manchester are owned by amateur investors – 37 of them thanks to one property club. Now it is feared that their value has slumped by HALF – or worse – in four years.

Richard Dyson, Financial Mail -16 March 2008

Liability: Bridgewater view in Monton, Manchester

The get-rich-quick advertising of property investment club Inside Track has persuaded more than 100,000 people to attend seminars in the past few years.

But profits at the privately owned club, which are generated mainly by recommending newly built properties to fee-paying members, are sliding.

And the number of people prepared to sign up for its £2,500-a-time seminars has plunged. 

The firm, Britain’s biggest property club, last week axed 44 staff and announced it would cease offering free taster seminars held at hotels and conference centres. But it is not just Inside Track that is suffering – so are some of its clients.

Falling property values, a shortage of tenants and an oversupply of certain types of homes mean some landlords are losing money fast. Lenders are even turning away some landlords (see below), or forcing them to pay punishing rates of interest.

Inside Track boss Tony McKay admits the market is difficult. ‘There is less demand for seminars,’ he says. ‘We are focusing on existing members who are still buying properties but at a slower rate.’ There are 10,000 members, most of whom have bought membership for a fee of several thousand pounds paid on top of the £2,500 seminar bill and McKay says most are happy. Not all, however. 

Photographer Gary Hynes, 51, and dozens of others are sitting on mounting losses through investing in a block of flats called Bridgewater View in Monton, Manchester.

Before the block was built in 2004, Inside Track urged investors to buy two-bedroom flats it said were worth £140,000 and likely to attract up to £650 a month in rent. It is not known what the properties are worth today, but a two-bedroom flat in the development failed to sell at auction in December for a guide price of £70,000. The flat is now let for £425 a month.

Gary, from Oxton, The Wirral, and other Inside Track members are failing to cover their mortgages with rental income. They are having to dip into their savings to meet their mortgage bills and at least one is thought to have had his property repossessed. 

The development of 49 flats, all bought by amateur landlords, and in 37 cases on the recommendation of Inside Track, has been beset by problems. The location, build quality and security have been cited as just a few of many troubles. Inside Track denies responsibility.

Property analysis

This is Money’s expert analysis
 

On top of membership fees to join Inside Track, and the seminars they paid for, investors in this block also paid a ‘finder’s fee’ to the property club in return for the recommendation. Gary estimates he has paid Inside Track more than £9,000 in fees, including a finder’s fee of £4,540.

Big losses: Gary Hynes could be £50,000 worse off because of his property investment.

His total losses, including the estimated fall in the value of the flat, exceed £50,000, he says, and losses are mounting at £200 a month. ‘What we were offered was an armchair service where we were to trust the advice given to us by Inside Track,’ he says. 

‘It promised to do due diligence, check out these properties and recommend the best.’

More than 20 investors in the block have complained to the company. It has since paid for a security firm to make random visits to the site but denied any failure on its part.

McKay says that Inside Track relied on other experts for the recommendation and adds that just one out of ten developments meets its requirements as being suitable for investors. ‘We’re communicating with investors and we’ve helped where we can,’ he says. ‘When things go wrong, we do our utmost to put matters right.’

Inside Track will soon publish its accounts for 2007 and these are expected to show a sharp fall in profits and numbers of people at free seminars. In 2006, the number of attendees fell to 25,000 from 32,000 the year before. The number paying the £2,500 fee dropped to 3,400 from 4,400.

Squeezed lenders cut risky loans  

Inside Track’s promises are tempting: ‘How to retire completely debt-free in three to five years’ and ‘how to buy lucrative UK property with little or no deposit’. 

Whether such goals are realistic is questionable, but life has got harder for all property investors, especially those in newly built, inner-city flats. That is because of the change in mortgage lenders’ attitudes to risk.

Lee Grandin of specialist broker Landlord Mortgages says: ‘New-build is an area where experienced landlords do not invest. In a rising market, novices can make money buying anything, but that doesn’t work in a stagnant market.

‘Lenders have been stung and are taking action to protect themselves by refusing to lend or demanding bigger deposits. People who have bought in the past couple of years have been hit hard and, yes, they could struggle to remortgage.’
 

Nationwide Building Society will not lend money to landlords of new properties, while Coventry wants a 50% deposit on such properties. Other lenders to tighten terms on new flats include Kensington, GMAC, Woolwich and Abbey.

Lenders also worry about mortgage fraud. This has mostly involved newly built properties that have been overvalued.

WANT TO KNOW MORE?

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