11:16 AM, 28th October 2010, About 13 years ago 6
It was 1992, we were at the tail of the property crash of the late 80’s and early 90’s. I was still cutting my teeth in the market of providing commercial finance broking facilities to property investors. The phrase buy to let would not be invented for another four years and the internet was in its infancy. Property prices had fallen by 30% and interest rates had soared to 15%.
Most landlords were on the verge of financial ruin but just a few landlords, those with plenty of cash in the bank were aggressively amassing hundreds of properties every year. One landlord we worked with purchased and refinanced 700 in just one year.
Lenders were repossessing and selling at auction like we had never witnessed before. A repo would sell at auction for around 50% of open market value, even at the 1990’s depressed prices, as nobody I ever met could get auction finance. It was a cash buyers market. Investors with cash were picking up quality terraced houses for around £20,000, spending around £8,000 on modernisation and getting them re-valued at £40,000. We were then refinancing them at up to 70% LTV(Loan-to-Value) with a few remaining lenders including Allied Irish Bank and Yorkshire Bank but our biggest lender by far was the Nationwide Building Society.
It was myself and a chap called Rob Cutts from the Nationwide who invented the “Forward Buying Facility” at that time. It was a line of credit, pre-agreed, to enable investors to move swiftly to refinancing once properties had been purchased, refurbished and were ready to let. The underwriting of the borrower was done up front. All that remained to be done was the valuation and the conveyancing as properties were added to the facility. It was a slick operation.
Next to jump on the bandwagon, in terms of lenders that is, was the commercial finance divisions of Northern Rock and Birmingham Midshires, both of which were still building societies at that time. Following on from that came National Homeloans who subsequently re-branded as Paragon Mortgages. That was in 1996, just after ARLA (The Association of Residential Letting Agents) coined the phrase “buy to let” and the market started to boom.
It wasn’t until around 2003 that I first came across the phrase ‘No Money Down’. Even though that’s effectively what our key clients had been achieving for over 10 years, it just didn’t sit right with me. The difference was, until then our clients had been speculating with their own money. They had made money and therefore they had everything to lose if they got it wrong. Was this really ‘No Money Down’ or could it have better been described as ‘no money left in’? The other important consideration is these loans were fully underwritten with proven track record ranking as a major factor in the decision making process.
Once the buy to let market began to mature we saw the emergence of property clubs. The Mortgage Works (TMW) actually devised a product for them which allowed people buying through a property club to borrow against a percentage of valuation, the purchase price was overlooked if it was less than the valuation. That didn’t last long though as they were being overwhelmed with new builds. Were these properties really Below Market Value (BMV) or had the valuation system been manipulated? With the benefit of hindsight I think we all know the answer to that one!
Then came the true beginning of the end. This was the relaxation of underwriting criteria as lenders started to rely on credit scoring to make decisions as opposed to researching their borrowers’ ability to build and manage a profitable portfolio. It was bound to end in tears.
Wet behind the ears, inspired amateur investors, one of which famously became a property millionaire from the humble beginnings of earning minimum wage as a warehouseman for Walkers Crisps, was one example. Good luck to him, it’s turned out well for him. He was lucky, his timing was right but several others would not fare so well and the lenders would pay the price as these people had nothing to lose.
So how did a person in his 20’s, no experience and not a penny to his name manage to become a property millionaire in just a few short years? The answer was bridging finance coupled with instant remortgaging. He didn’t need any money.
Using bridging finance to acquire the property felt like cheating to me. What were these so called investors risking? If the lenders were happy with this, why didn’t they cut out the middle man, increase their fees and go back to what TMW did and lend against purchase price if the client had found a bargain?
When I first found out about Instant Remortgaging I thought it had to be dodgy. It was smoke and mirrors. A game we all had to play to borrow more than criteria would ordinarily allow. For purchases, criteria was usually that borrowing was restricted to 85% of purchase price or 85% of valuation, whichever was the lower. Refinancing however, was based on borrowing 85% of valuation. Therefore, if you could buy a property for £85,000 using somebody else’s money and get it independently and professionally valued at £100,000 you could instantly remortgage it for £85,000 and effectively you owned a property without using any of your own money. That’s what became known as instant remortgaging, no money down financing and the bridging finance was dubbed daylight bridging. You only needed to borrow the money for a day. The lenders had no problem with this. You applied for a mortgage on the basis you were buying a property for cash and then remortgaging it. Valuation was done at that point and when you got your mortgage offer you exchanged contracts and put the bridging finance in place to complete the purchase. The same day the refinancing was completed and the bridging loan was repaid. Hey presto, you could now be a property investor and you didn’t even need to have any money.
I told the lenders they were crazy on numerous occasions but they all had their targets to meet for their next big securitisation deal. It wasn’t just Mortgage Express(MX) that was allowing this to go on, at one time is was all buy to let lenders. MX are probably the best remembered as they were so aggressively chasing this market at the time. Their criteria was the weakest, their pricing was the best and service was slick. They had the lions share of the market.
If the lenders were daft enough to do this, I wasn’t going to stand back and watch. I filled my wellies and acquired as many properties as I could. The difference was, I had cash reserves and I wasn’t going to get caught out by the glossy brochure brigade. I had experience; I knew what to buy, why and where. If a block of new build flats are all sold to investors at 15% BMV the deal isn’t BMV at all, it’s OMV (Open Market Value). Then you get the problem of competing with every other landlord for tenants. Void periods and lower than expected rents were inevitable. Nevertheless, some people just can’t be told can they? They all just pile in and get caught up with what I’ve dubbed “the hype and hope strategy”.
Did most brokers arrange these loans ? Of course they did! It would have been commercial suicide to turn this business away. However, for our own protection and for the protection of our clients, we would always tell our clients to make sure they disclosed exactly what they were doing to the mortgage lender via their solicitors.
Eventually the lenders began to see sense. Sadly, common sense underwriting was not their answer though. They simply requested brokers not to send them any more of this type of business. That put the cat amongst the pigeons! Brokers had come to rely on this business and we had just entered the credit crunch. The line between what was OK and what wasn’t got very blurred for a year or so. It was only when lenders stopped allowing instant remortgages that the line between right and wrong became very clear. Not all lenders stopped doing instant remortgages at the same time though. Mortgage Express hung on to this model pretty much right to the death.
The game wasn’t quite over though. Birmingham Misdhires still had a quirk in their criteria. Instant remortgaging had stopped but instant further advances remained. This allowed people with some cash to buy a property at 85% of the purchase price then apply for a further advance based on 85% of valuation and get their cash back out within days. When this loophole was plugged the shady dealers stepped in big time. They had built businesses based on selling so called BMV properties to inspired amateurs and didn’t want the gravy train to come to a halt. Enough was enough. If people couldn’t afford to buy a property, wait for it to rise in value and refinance later they shouldn’t be interested but some preferred to believe what the shady dealers were telling them.
The shady dealers came up with several quirky schemes that concealed the true purchase price from lenders. Assignable contracts was just one example, there were plenty more. I checked them all out and openly disclosed them to lenders but they were not interested. I ran them by solicitors and barristers and they didn’t like them either. These schemes involved one or more of the following crimes:
So, here we are in October 2010. All the loopholes have been plugged and yet we all know who the shady dealers are that are still pushing these schemes. It’s only a matter of time before they and their clients start to get closed down and find themselves behind bars I hope.
The one remaining question is, will ‘No Money Down’ and instant remortgaging ever return? Nobody has a crystal ball but I suspect it’s unlikely that we will ever see it return to where it was in the mid ‘naughties’.
Having said all of that, if you are a very high net worth individual and you have at least a million in the bank or very low gearing on a high value portfolio there are still private banks out there who will want to at least have a conversation with you about doing business. They will base their lending decisions on traditional values such as experience, pedigree and your ability to demonstrate that you can make profits from property. I bank with one such lender myself. I’ve been buying aggressively at auction since the credit crunch began and they have been lending me money when the properties have been ready to let. Having got themselves comfortable that I am a low risk, they’ve been lending on valuation.
Haven’t we just gone full circle?