Crackdown on controversial housing schemes
Companies and individuals that buy people’s homes and let them rent it back are to be regulated from July amid widespread concerns that vulnerable homeowners facing repossession are being ripped-off.
Sale and rent back schemes 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.
Last year, an investigation into sale and rent back by the Office of Fair Trading (OFT) 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 find their rent increased dramatically during the tenancy.
The OFT also found that people felt forced into selling their homes because of the threat of repossession, when in reality it wasn’t the best option for them.
The Financial Services Authority (FSA) proposed the regulation of sale and rent back schemes in response to the investigation, promising to protect consumers, especially those under pressure to sell because of the credit crunch.
It will introduce new rules on 1 July on an interim-basis, with a more “comprehensive regime” starting on 30 June 2010.
Ed Harley, head of mortgage policy at the FSA, says: "Firms entering our regime will need to run their business in a way that means customers are treated fairly. This includes making clear to customers important details, such as the length of time they can stay in the property, before they enter into the arrangement."
In addition, firms will have to prove to the FSA they have sufficient resources to manage a portfolio of property. This is to prevent repossession down the line.
Andrea Rozario, director general of Safe Home Income Plans (SHIP), the equity release trade body, welcomed the new rules: “This is a natural step to protect consumers as economic conditions worsen and more people need to release equity from their homes.”
She adds that sale and rent back is not the same as equity release, despite some consumer confusion. The two main differences are security of tenure, as all regulated equity release products provided by SHIP members give the customer the right to live in their homes for life, and the fact that, with equity release, homeowners do not have to pay rent.
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.
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.
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.