I am delighted to introduce this guest post from housing consultant and former TRO, Ben Reeve-Lewis.
Mortgage advice for Buy to Let Landlords
The recession has not appeared to have greatly dented the buy to let market but where does the novice landlord stand if the tenant doesn’t pay their rent and as a consequence, they can’t pay their mortgage?
The so called ‘Sub Prime’ lenders can be very quick off the mark to recover their money when there are mortgage arrears and have been widely criticised and in some cases penalised for being too keen to use possession instead of working with their borrowers to find a solution.
Back in October 2009 the Financial Services Authority imposed a penalty of £2.8 million on major mortgage lenders G Mac and ordered them to pay a sum of £7.7 million in redress to complainant borrowers in relation to their conduct with their customers. The decision has heavily influenced proposed changes being brought in by the FSA to protect borrowers from unreasonable practices of mortgage lenders. (you can see the final G Mac notice at www.fsa.gov.uk/pubs/final/gmac_rfc.pdf).
In the Financial Services Authority’s ‘Mortgage Market Review, published in January 2010 it states
“The findings from our thematic reviews demonstrated that firms were often too quick to take repossession action, focussing too strongly on recovering arrears without reference to the borrower’s individual circumstances. In addition, some firms explored very few forbearance options before taking legal action against borrowers. We observed these poor practices across the mortgage market, though it was more prevalent among the specialist lenders and third party administrators”. (4.6)
What should they be doing?
The Mortgage conduct of Business rules / Mortgage Pre Action Protocol
The 2 main tools that should help a borrower in mortgage arrears are the Mortgage Conduct Of Business rules (MCOBs) and the Mortgage Pre Action Protocol (MPAP).
The over arching aim of both instruments is that possession should only be used as a last resort, after all other avenues have failed. There are a range of what are known as Lender Hardship Tools, that should be explored before a lender applies for a possession order.
The MPAP was brought in back in November 2008 but by October 2009 it was evident that adherence to the protocol was patchy and inconsistent so for all mortgage possession claims initiated after 1st October 2009 lenders must produce for the court a new form called an N123, which details their actions before possession.
It has to be said that some lenders are very good at negotiating and exercising sensitivity and a generally helpful attitude to borrowers in difficulties but in my experience the majority fall well short of that standard, sometimes behaving in an obstructive and evasive manner.
This behaviour has not escaped the attention of the FSA and their Mortgage Market Review proposes changes to the MCOBs to tighten up things like excess and unfair charges being levied on borrowers in arrears.
Lender hardship tools amount to what is termed ‘Forbearance’ on the behalf of the lender. At present the MCOBs relating to forbearance are guidelines only, which means that even if a borrower in trouble offers a certain deal or arrangement to the lender, they are not obliged to accept it, however the Mortgage Market Review recommends changing these guidelines into rules.
Protecting yourself from possession
In response to the recession the government has introduced high profile measures such as the over hyped but in reality, under effective Mortgage Rescue Scheme and the Home-owners Mortgage Support package but these are not available for buy to let mortgagors.
As we saw above, at the moment negotiating forbearance is a bit of a lottery. The worst lenders don’t give anything away and will ask you to make an offer without hinting at what they will accept.
Making an offer to your lender
Remember you have to offer something that amounts to a reasonable plan of action, you will be wasting your time if you just ask them to allow you time in the hope that your situation might improve. Similarly asking them to allow you not to pay while you chase your tenant for their arrears is not a strong argument.
- They can extend the life of the mortgage, which will reduce the monthly payments you make.
- They can grant you a payment break of a short period and tack the missing payments onto the end of the mortgage.
- They can reduce monthly payments for a short time
- They have the power to freeze charges and fees while you get yourself back on your feet.
- Where there are arrears but you have made regular monthly payments of say 3 or 6 months you can ask them to Capitalise the Arrears, which means to swallow them up into the mortgage as a whole.
Some lenders have strict lending covenants which may prohibit them from capitalising the arrears but if so you can ask them to exercise their discretion in accordance with a case law of Cheltenham and Gloucester Building Society v. Norgan 1995 which is a case where the judge allowed a borrower’s appeal against possession on the basis that if the arrears could be paid off during the life of the mortgage then that measure of forbearance should be allowed.
Always bear in mind that your contract with your lender is a 2 way street, you are their customer and it is strictly business. They can modify their deal with you in pretty much any way they choose as long as you have a sensible financial arrangement to propose.
If your lender takes you to court for possession it is wise to check both MCOBs, particularly rule 13, and the MPAP to see if they have covered all recommended pre actions before applying for possession.
If you try to negotiate with your lender but hit a brick wall each time or if they keep rejecting reasonable proposals and keep pushing for outright possession then you could file a complaint to the FSA itself for unfair treatment – remember the FSA ordered G Mac to pay some £7.7 million in redress to disgruntled borrowers and the FSA’s enforcement division are currently investigating 6 other firms on similar grounds and while you are lodging your complaint with the FSA let your lender know what you are doing, it might just be the leverage you need.