Would it surprise you to know that one niche of the financial services industry remains almost entirely unregulated, despite having played a leading role in the housing bubble of the past 10 years and the subsequent collapse of several leading mortgage lenders?
Buy-to-let mortgages have much to answer for. The rate at which lenders threw money at property investors during the boom years inflated house prices even further, made it tougher for first-time buyers to get on the housing ladder and ultimately saddled banks and building societies with mounting bad debts. At lenders such as the now-nationalised Bradford & Bingley and Northern Rock, as well as big buy-to-let players such as HBOS, the default rate on these loans is much higher than on conventional advances. And where have police concentrated most of their inquiries into mortgage fraud over the past 12 months? Step forward buy-to-let again.
When the Government asked the Financial Services Authority to begin regulating mortgages five years ago this month, buy-to-let loans were excluded. The rationale was that these are commercial loans agreed between two professional parties, with no consumer protection issues.
In the wake of a housing market boom and bust caused, at least in part, by a flood of ordinary people switching to bricks and mortar as their primary asset for long-term savings, that distinction looks odd. Since March, however, when Lord Turner presented an FSA discussion paper on reform of regulation that included a call for a debate about policing buy-to-let mortgages, there has been no progress.
The British Property Federation, a group that represents landlords – and which issued another public call for buy-to-let regulation yesterday – says it first warned the Treasury and the FSA about dubious practices in 2005, but that both insisted the responsibility was the other's.
It's difficult to understand why there has not yet been official confirmation that the sale of buy-to-let is to become a regulated process. Many lenders now treat the products in the same way as their conventional mortgage book – not least to save money on systems – and it's true the gung-ho practices seen before the crash have now been abandoned. But without greater supervision, the worst practices of the bubble will eventually return.
Since mortgage lenders are used to complying with FSA supervision on most of their business, adding buy-to-let to the list of regulated products shouldn't mean significant additional cost for lenders. And in a world where the case for greater regulation of the banking sector is universally accepted, this remains an unfathomable oversight.Reuse content