Paragon Mortgages MD Calls for BTL Code of Practice

Paragon Mortgages MD Calls for BTL Code of Practice

11:36 AM, 5th December 2013, About 10 years ago 33

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John Heron, the Managing Director of Paragon Mortgages has been a good friend of mine for several years. Despite this I don’t agree with everything he has said in a paper he’s recently published calling for a Code of Practice for private sector BTL landlords.

To quote from his paper, Mr Heron said ….

John Heron Managing Director Paragon Mortgages

John Heron Managing Director Paragon Mortgages

“I have argued passionately for many years that buy-to-let is not a consumer product, that buy-to-let borrowers are financially sophisticated property investors and that they do not need the level of protection afforded to consumers under MCOB.”

The typical client of Paragon Mortgages may well fit this description, however, many people who enter the BTL market certainly don’t intend to own large property portfolio’s or treat BTL as their full time profession. They are just normal hard working folk who don’t trust pensions and the stock market and are looking for a home for their retirement nest egg. Many others become landlords because they move in with new partners and rent their former home as opposed to selling it. These people are consumers to my reckoning and deserve consumer protection. If things go well for these people and they go on to buy a few more properties does that make them sophisticated investors and if so at what point?

There has never been a definitive legal case which defines a landlord as a consumer. The closest I’m aware of was the case of OFT vs Foxtons which argued that a contract issued by the letting agent was unfair based on the Unfair Consumer Contract Terms Act 1999. The case was upheld which demonstrates that a landlord can indeed be treated as a consumer. However, there was no definition as to what circumstances would constitute a consumer landlord.

Some mortgage lenders base their lending criteria very much on a persons ability to support BTL mortgages from their earned income. These lenders tend to limit their criteria to financing only a handful of properties. The Principality Building Society are a very good example of this as they will not lend to a landlord who owns more than five properties. I would argue they are a consumer based lender.

The flipside to the above is The Mortgage Works who don’t pay much attention at all to their borrowers personal income and place far more emphasis, in terms of lending criteria, on the cashflow of the property/portfolio they are being asked to lend against.

I would like to see the industry develop a clear definition of what constitutes a consumer vs a professional/sophisticated landlord and for that to become a backdrop to lending criteria. Number of properties alone would not be a good enough benchmark in my opinion. If a person earning £25,000 a year was to inherit £250,000 and purchase a portfolio of 10 properties worth £1 million could they really be deemed to be sophisticated investors?

For landlords to be treated as “sophisticated investors” for funding purposes I also believe they should have a better than average understanding of what being a landlord is all about, whether they choose to outsource the management of their property portfolio’s or not. Basic knowledge can be obtained very efficiently though the landlord accreditation courses which are now run by the larger landlords associations.

Why don’t mortgage lenders who target landlords owning multiple properties make it part of their criteria only to lend to accredited landlords? Surely that would reduce their risk too?

I do agree with many of the other points made in John Heron’s paper which also touches on BTL mortgage funding being abused to purchase homes which would be deemed unaffordable on a traditional home owner mortgage basis.

You can read John Heron’s full article by completing the simple form below (available to Property118 members only – you must be logged in to see the form).

I am also interested in reading your comments, so my question is; what are your thoughts on this?

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12:41 PM, 5th December 2013, About 10 years ago

As far as I can see, being a consumer landlord would offer extra protection from lenders' sharp practices but being a classified as sophisticated would offer landlords no benefit at all. It would therefore be in the interests of all investors, if possible, to arrange their affairs so as to qualify as a consumer B2L borrower. Or am I missing a "quid pro quo" for being sophisticated?

13:18 PM, 5th December 2013, About 10 years ago

Hi Mark,

I worry that any distinction between "professional" and "amateur" landlords is a very negative thing from a tenant's point of view.

I would like to promote the message that all landlords must adopt a professional attitude and adhere to compliance.

As you say, the vast majority of the estimated 1.5 million landlords in this country are small landlords with one or two properties and are not "sophisticated". The large portfolio landlords are in the minority.

I would like to see lenders rewarding all landlords who use digital tools to manage their properties. Giving lenders access to your records to show you have your properties under control would be a sensible way to screen landlords for lending.

Prove that you are treating your properties like a business and benefit from better rates! SImpulz!

With the cloud now, there must be a way to do this.

Mark Alexander - Founder of Property118

15:35 PM, 5th December 2013, About 10 years ago

Reply to the comment left by "Jerry Jones" at "05/12/2013 - 12:41":

Hi Jerry

The point I'm making is that lenders could reduce their risks by insisting upon the bigger players becoming accredited landlords. The benefit to the landlords would then be that they were able to borrow more, potentially at lower rates.

Mark Alexander - Founder of Property118

15:40 PM, 5th December 2013, About 10 years ago

Reply to the comment left by "Vanessa Warwick" at "05/12/2013 - 13:18":

As you know Vanessa, I also have an issue with the word "amateur" if it is followed by the word landlord. We are all doing this for profit, hence we must all be professional. It would be nice if all landlords were to recognise the benefits of professionalism, accreditation (by education not legislation) is an obvious starting point.

The mortgage industry and the property portals are in by far in the best position to create self regulation. Lenders can simply add to their lending criteria and the portals can refuse to advertise properties to let if certain conditions are not complied with.

Mark Alexander - Founder of Property118

15:50 PM, 5th December 2013, About 10 years ago

Further pointa regarding "sophisticated". The likes of Coutts & Co. and various other private banks only do business with "sophisticated investors". Their wealth criteria just to open an account rule out the vast majority of the population. However, clients of these banks can often access facilities many could hope to achieve. I met with my own private banker this morning and he explained that several of his clients had auction finance facilities at base plus 1.5% secured against other forms of investment portfolio's arranged by the bank.

Whilst there is no established case law for what constitutes a professional or sophisticated landlord there are several widely accepted definitions of "sophisticated investor" which have been tested in the Courts and by regulators. The criteria put in place by the FCA in response to the IRHP mis-selling scandal being one such example.

Adam Hosker

16:12 PM, 5th December 2013, About 10 years ago

If Landlords are Consumers, then Buy to Let would have to be a regulated activity. Which means affordability comes into play a lot more - no more basing BTL on anticipated income - just what the EU wanted but we fought off. The whole process becomes more expensive due to the added bureaucracy and due to complexity may turn lenders off.

For instance, Innovative Landlord products such as CastleTrust Partnership Mortgage can do 1st charge on unencumbered btl property. They can not on residential, due to this distinction consumer/business - or regulated/unregulated.

I don't follow Mark that it would mean better products for professional landlords, in my view most lenders take a NEGATIVE view on portfolio landlords and we insist with every BDM we see that this is something they need to change.

Contrary to what you say - I would suspect it would split the market, most lenders pulling out of "professional btl" and only doing "regulated btl" (where the quantity is).

Their would also be Tax changes, but not my area. No more relief for petrol or repairs.

I disagree with the premise of the opening post, in that some people enter Buy to Let and they don't know much so are a consumer. That is not the case, they establish a small business and are required to fund expertise until a point where they know.

An letting agent being a B2B supplier and a tenant being a customer, with the protections they require.

Mark - what your suggesting is that people must be accredited is a good idea to boost the business of Letting Agents. With lenders condition being use an accredited Agent or be accredited yourself. It would also boost business of ARLA to train people in how they do lettings.

Mark Alexander - Founder of Property118

16:55 PM, 5th December 2013, About 10 years ago

Reply to the comment left by "Adam Hosker" at "05/12/2013 - 16:12":

The polarisation of lenders and their criteria has been with us for some time and in my opinion is here to stay. There are at least three levels I can think of:-

1) The likes of Principality and BM Solutions who will only lend on a handful of properties
2) The likes of Paragon Mortgages and TMW which are geared far more towards larger portfolio's
3) The Private Banks which don't publish their criteria and will only ever consider speaking never mind lending to high net worth individuals

There are several hybrids but the polarisation is hardening if anything in my opinion.

An counter argument to your point regarding regulated BTL's is that they already exist. As you know, many lenders shy away from them.

The OFT vs Foxtons ruling clearly considers that some landlords are entitled to consumer based protection. Therefore, letting agents contracts can be overturned, and often are, if they bury important conditions in fine print. Great if you've got one property if you need that consumer protection but what if you own two or three?

I agree completely with your points about landlords employing the services of professionals until such time as they are competent to go alone. My preference is that self regulation deals with this as opposed to legislation managed by Civil Servants who know little if anything about the mechanics of the PRS. I think that was what John Heron's article was eluding to, therefore, I support his call for a Code of Practice in principle, but as always the devil is in the detail. The Code should not be drafted by lenders alone, the entire PRS should have a say. The problem with that is getting the professional bodies to agree on anything, the analogy of herding cats springs to mind!

Adam Hosker

17:59 PM, 5th December 2013, About 10 years ago

I think FoxTons had bad legal representation, see definitions set out in Article 2 for consumer. From the judgement is would seem FoxTons conceded landlords are consumers when the Judge expressed his personal opinion in which he writes "Those are my terms and not terms in the legislation".

It is though just one instance, many for the counterpoint including the fact that Landlords are classed as SME for BTL purposes. It would seem the judge having that point written in the judgement - leaves it open for appeal.

My point about regulated Buy to let is just that. At the moment they are rare as few use them, if BTL was to become regulated (LL = Consumers) then it would be the "norm" and all lenders switch to this.. Leaving professional landlords with little options other than 3. Private Banks.

It would not be a good idea to separate the two or class novice Landlords as consumers in my opinion.

The article alludes to LENDERS requirement to self regulate to avoid the EU directive. I suspect this will be undertaken by the Council of Mortgage Lenders to ensure BTL follows Treating Customers Fairly requirements and avoid Mis-selling.

I don't really see the requirement in the UK lending market for this - can not name a lax lender that does not follow "best practice" established by residential process.

As for Landlords regulating themselves its a bit past that. Theirs soooo much regulation for Landlords to follow - that their is a requirement as you say to utilise professionals or take advice from Property118/NLA/RLA.
We should continue to fight the pressures to add further and consolidate what we already have to comply with.

Brian Smart

18:37 PM, 5th December 2013, About 10 years ago

Reply to the comment left by "Mark Alexander" at "05/12/2013 - 15:35":

To me there are two separate issues here. I regard myself as a professional landlord because I make my living from it. I care about my properties and I care about my tenants. My first property 24 years ago was bought on a residential mortgage and I lived there a few years before moving out and letting it. That is how I got started.

I am NOT a professional investor. When I started increasing my portfolio I needed more mortgages. These were obviously based on the viability of the property and its yield as my own income hadn't changed and wouldn't support more than one mortgage.

It took me a while to discover that a mortgage is not a mortgage is not a mortgage. The mortgages I had known all my life were for life, not just for Christmas! In the early nineties when rates went up into the mid teens, my lender sent an agent to my house and we agreed a way to keep going and eventually capitalise the arrears.

In 2008 when the banking crash occurred I discovered the about BTL mortgages, and I discovered how ruthless and uncaring these lenders were. Mortgage Trust, a Paragon company, were one of them and I have issues with them to this day about the way they treat me. But there is nothing I can do and Mortgage Express has virtually ruined me in the last five years, even going back on arrangements I had made with them and denying they were ever made.

I cannot see that this happened because I did something wrong. It happened because these were unregulated mortgages and the importance of this was never explained to me. The lenders can do what they like, grab your properties when they like and install LPA receivers on a whim. Then they can sell your properties to their friends for 30p in the £ and come after you for the rest. And there is nothing you can do.

If being considered as a consumer means that I will get mortgages that have some protection and are regulated then bring it on! I want to carry on looking after my tenants and my houses in a professional way and not have to worry about a particular lender's agenda. I want to be protected by some regulations. The press has been full of how RBS has been calling in loans and stripping their customers assets but there has been no mention of what Mortgage Express have been up to apart from in this forum.

My credit rating is screwed now but I know that with regulated mortgages I could have negotiated a way through the worst years. What the big boys with mega-portfolios want to do is irrelevant to me. They probably don't manage their own tenants. I do and I want to be treated differently and given some protection.


Mark Alexander - Founder of Property118

18:44 PM, 5th December 2013, About 10 years ago

Reply to the comment left by "Adam Hosker" at "05/12/2013 - 17:59":

I don't think any of us (me, you or John anyway) are in favour of additional regulation. It would be nice to see enforcement of existing legislation first! I am particularly thinking of TCF (West Brom and BoI immediately spring to mind) and of course the powers the authorities had to deal with issues such as anti social behaviour, over-crowding and dangerous properties well before any of the "jobs for the boys" licensing schemes were ever dreamt up.

I think we may just have to agree to disagree on the consumer landlord issue 😉

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