Time for reform in the mortgage market

Following the disastrous state of current property repossession, the British Property Federation (BPF) has released the Responsible Regulation guide to the market. We examine what the commercial market can learn from this

The recession has been far from kind to the property market. Whether residential or commercial, owners have suffered, with some facing mortgage defaults and repossessions. In March 2009, the Turner Review suggested that there should be a debate about the future of mortgage regulation in the UK. With the release of Responsible Regulation: Reforming The Mortgage Market, the BPF have outlined their position on the debate.

The BPF, as a representative body for investors in property, focuses its interest on the private rented sector. This entails aspects of the residential market, such as buy-to-let, through to issues specifically effecting the commercial market, such as the current state of the empty rates relief. In either case, their strong reputation and informed industry expertise makes their advice worth taking note of.

Though most of the recommendations that appear in Responsible Regulation are more significant to the residential rather than commercial property market, there are certainly lessons to be learnt from the advice on offer. The recommendations for mortgage reform the BPF have made are based on the perceived flaws in the property market and its practices that have been seen to contribute to the economic downturn.

The valuation of property, and in particular new build properties, is an area the BPF sees as particularly flawed and suffering from lack of transparency right across the industry. Bad practices included basing property values upon proposed developments that did not necessarily materialise as the recession began. Other properties were simply over-valued by agents. The result in either case of these valuations has been that owners have been unnecessarily forced into negative equity as value has dropped. The BPF believe this to be unacceptable and are calling for guidelines for and regulation of valuations to properties to prevent this in future.

Another problem the BPF has perceived is the provision of mortgages for rental premises to people with no experience of being landlords. This was particularly apparent with buy-to-let residential property owners, many of whom were insufficiently able to service one or more mortgages as well as their tenants. Arguably though this has been a problem in the commercial property industry as well. Inexperienced and unrealistic property buyers purchased at the peak of prices, expecting to make instant profits through rents. The failure to fill or maintain these properties are now resulting the in mortgage defaults, insolvencies and the wealth of vacant Grade B currently effecting the market.

The BPF argue that we are now seeing the consequences of irresponsible investment and lending in the form of finance limitations that now constrain the market. Equally, past practices can be seen to have had an impact on tenants too, who are now far more wary about the contracts they sign for fear of receiving raw deals or for the danger of eviction as a result of property repossession. Thus, bad practices can be seen to have resulted in a loss of confidence in the market.

Issues and recommendations
On top of suggestions mentioned already, Responsible Regulation outlines three particular issues that Government should resolve in terms of future regulation of the mortgage market. The first, already under consideration by the Government, is the protection and rights for tenants in the case that their landlord’s property is repossessed. The BPF agree this important issue would be best facilitated by implementing new agreements, binding on the lender, where lettings are authorised by the lender and comply with the mortgage agreement. The objective is to see tenants protected with a minimum of two months’ notice prior to eviction and that good practices are pursued so that no tenants find themselves being evicted at short notice.

This would certainly help reassure commercial property tenants that they would not face a sudden eviction in the case of repossession. It would also be useful in the growing trend of underleasing, where a tenant leases out a property to another tenant, as the undertenant could enjoy these privileges on the tenants behalf.

Another of the BPFs key issues is the minimisation of bad property investment decisions. They are particularly critical of advice groups such as ‘property investment clubs’. These are characterised usually by seminar events held at local hotels at which potential investors are given information and advice about property investment. As exposés by the Financial Times and the Daily Mail have shown in the past, the advice offered at such seminars is often misleading; heavily biased towards returns that investors could make rather than the risks they face with their investments, particularly in terms of investing in new developments.

Neither the advice nor sourcing of the property for investment is currently classified by the FSA as needing regulation; they’re not seen as particular investment products like the case of independent financial advisers. The BPF maintains however that property investment clubs had a significant influence on amateur investors’ decisions during the prosperous market and as a result regulation of the advice these clubs distribute is long overdue. The BPF would thus desire such clubs to be registered with the FSA to regulate the advice that is given to investors.

Finally, as the ‘sub-prime’ mortgage situation has evolved, there has been a growing realisation that more careful checks should have been in place in terms of property mortgages. Now that the worst of the economic storm is (hopefully) over, the BPF believe lenders should now institute more careful processed for checking candidates’ suitability for mortgages. This, however, is not the same as not offering finance at all. The current state of up to 50 percent deposits for mortgages on commercial property mean that most potential investors are being driven away from the market, prolonging the recession. As such, the BPF advises that banks be cautious rather than defensively locking their treasure chests completely.

Arguably, the effects of poor decisions in property financing were born out far more in the residential property market than in the commercial sector and its of little surprise that the BPF have issued this advice towards this sector as a result. Yet the residential property market has already seen a degree of bounce-back in the market to the degree that the commercial sector has yet to experience. As a whole, the property industry is now arguably past the worst of the downturn. If relevant BPF suggestions are adopted, similar situations may hopefully be avoided in the future.

To view the BPF report visit: www.bpf.org.uk