Julian Knight: Parasitic they may be, but sale and rent-back schemes are here to stay
Sunday 12 July 2009
I don't like sale and rent-back schemes – firms promising to buy homes from people who are behind with their mortgage repayments at a knock-down price on the proviso that they become a tenant.
For me, sale and rent-back is an industry cut from the same cloth as ambulance-chasing law firms, consolidation loan companies and Individual Voluntary Arrangement providers: exploitative and parasitic.
In too many cases homeowners are left with a very poor deal: not only are they selling for as little as half the property's value but, also, the tenancy agreements can be short-term – sometimes as little six or 12 months. After these agreements come to an end the new owner can turf out the previous one, and often does.
Another risk to the sellers is that as tenants they rely on their new landlord to keep up mortgage repayments or face the ignominy of eviction – something they pay a hefty price to avoid. Post credit crunch this has become a real problem as some of the smaller sale and rent-back operators – we are talking single-person operations here, quite often – unable to service their debts.
Now, fortunately, a Birmingham County Court judge has stepped in and ruled that a sale and rent-back tenant cannot be evicted under such circumstances. Paul and Amanda Jackson had lived in their Shrewsbury home for 23 years when they entered into a sale and rent-back agreement. Their landlord apparently promised that they would be able to live in their home indefinitely, but this looked like an empty promise when their landlord fell behind with repayments. The lender went for repossession but the charity Shelter took the case to court on behalf of the Jacksons, and in a landmark ruling the judge said the couple could remain either by taking out a new mortgage themselves, or by renting the property from the mortgage lender. Let's hope this judgment holds water, and that other people in a similar position can gain similar protection.
Unfortunately, I don't think this is the end of sale and rent-back. The promise made to the Jacksons was highly unusual. In most cases, sellers are told upfront that they have short-hold tenancy rights only, and the credit crunch has killed off the smaller cowboy operators. What's more, the market is now subject to Financial Services Authority "part regulation" as a prelude to full regulation next year. Again, the regulator moves at the speed of tectonic plates.
There are those who will no doubt criticise the Nationwide for its 125 per cent home loan launched last week. Memories are still raw from Northern Rock's cretinous Together mortgage, which also offered 125 per cent loan to value.
But whereas the Rock's loan was simply top-of-the-market greed, Nationwide's move is sensible and to be applauded. As Chiara Cavaglieri reports on page 81, the building society's offering is designed to help those customers who can afford their repayments but are in negative equity. The idea is that customers will still be able to move home while porting over their negative equity, rather than having to sell up, repay what they owe entirely and then fund another house purchase. In short, it means that people who have to move – perhaps for family or work reasons – won't have to crystallise their loss.
Instead, they can move, take their debt with them and hope that the market recovers sufficiently that the negative equity will disappear or that they will pay down the loan. Realistically, this is only going to affect a tiny number of the million-plus families in negative equity, but if other lenders adopt a similar approach it will mean fewer lives are put on hold.
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