Sale and rent back to be regulated
The controversial practice of sale and rent back is to be regulated by the financial watchdog amid widespread concerns that vulnerable homeowners facing repossession are being ripped-off.
Sale and rent back schemes, which can be operated by a company or individual, buy property directly from owners, often at under market value. In return, the owner is allowed to rent back the property for a pre-agreed period of time. However, many people find themselves booted out after just six months.
The Financial Services Authority (FSA) has proposed the regulation of sale and rent back schemes in order to protect consumers, especially those under pressure to sell because of the credit crunch. It says an interim regime will be introduced in July to “address the most significant problems” faced by homeowners, followed by full regulation in spring 2010.
A recent investigation into sale and rent back by the Office of Fair Trading (OFT) found that many homeowners agree to enter one of these schemes because they are concerned about their finances or are facing repossession. However, the OFT says that, in many cases, this wasn’t the best option for them.
It also uncovered evidence that some scheme operators mislead customers about the value of their homes, or promise to allow them to rent it back for years when it reality only offering a short-term tenancy of six or 12 months. Many former homeowners also find their rent increased dramatically during their tenancy.
Dan Waters, director of retail policy at the FSA, says the issues uncovered by the OFT investigation “warrant a fast response”. From July, anyone wanting to run a sale and rent back scheme must meet certain conditions set by the FSA.
The news that sale-and-rent-back is to be regulated has been welcomed by the housing industry.
The Council of Mortgage Lenders (CML), which has been campaigning for this practice to be regulated for several years, says the current climate of rising arrears and possessions is putting a greater number of consumers at risk of falling victim to unscrupulous schemes.
Michael Coogan, director general of the CML, says sale and rent back is an alternative to repossession for some people, but that those who do turn to this practice must be offered basic protection. “In the meantime, consumers should continue to make sure they have explored all the options with their lender before considering this route and if they choose sale and rent back be extremely careful," he adds.
One issue highlighted by the industry in the past is the way sale and rent back firms advertise, with terms such as “equity release” accused of causing consumer confusion.
Unlike sale and rent back, equity release schemes are regulated by the FSA. Although not suitable for everyone, people who take out an equity release scheme have full security of tenure and no rent obligation.
Andrea Rozario, director general of the equity release trade body, Safe Home Income Plans (SHIP), has welcomed proposals to regulate sale and rent back schemes.
However, she warns that consumers must be given better information about the dangers of selling their homes in return for a tenancy agreement.
“The concern held by SHIP members has been over the lack of information given to customers about the risks associated with sale and rent back,” she explains. “Regulation of this sector will address this as providers will be required to be clear about the risks involved. Ultimately people need choice but they need to make informed decisions after consideration of all of their options.”
A stockmarket security (a form of derivative) issued by companies on their own ordinary shares to raise capital. A warrant has a quoted price of its own that can be converted into a specific share at a predetermined price (called the conversion price) and future date. The value of the warrant is determined by the premium of the share price over the conversion price of the warrant. Warrants give the same economic exposure to an underlying security without actually owning it, and cost a fraction of the price of the underlying security.
A homeowner’s worst nightmare; repossession is an action of last resort by mortgage lenders to recover money from borrowers that have failed to keep up with repayments on their mortgage or other loan secured on their home (see secured loan). Repossession is a legal procedure that has to go through several processes before the homeowner is evicted and the property reposed. These are: if a borrower keeps defaulting; the lender applies for a solicitor’s notice; the lender instigates possession proceedings through the court; at the court hearing a possession order is granted and sometimes a possession warrant; a bailiff is appointed and an eviction notice issued at which point the homeowner has two to three weeks to vacate the property.
A term to describe financial products or ‘plans’ that help older homeowners turn some of the value (equity) of their homes into cash – a lump sum, regular extra income, or sometimes both – and still live in the home. There are two main types of equity release: lifetime mortgages and home reversion plans (see separate entries for both). Whichever type you choose, you borrow money against the value of your property, on which interest is charged, and the loan is repaid when the house is sold after your death.
“Arrears” tend to be associated with debt. If you fall behind and miss payments on any outstanding debt, the amount you failed to pay is an arrear – the amount accrued from the date on which the first missed payment was due.
The Financial Services Authority is an independent non-governmental body, given a wide range of rule-making, investigatory and enforcement powers in order to meet its four statutory objectives: market confidence (maintaining confidence in the UK financial system), financial stability, consumer protection and the reduction of financial crime. The FSA receives no government funding and is funded entirely by the firms it regulates, but is accountable to the Treasury and, ultimately, parliament.