Buy-to-Let Mortgage Lenders - The Next Wave of Landlords

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    Buy-to-Let Mortgage Lenders - The Next Wave of Landlords

    Despite the good news announced yesterday about interest rate cuts, Landlords that are defaulting on their mortgages are forcing UK Banks and Buy-to-Let Mortgage Lenders to consider alternative options to repossession sales.

    Traditionally, if a home owner or investor defaulted on their mortgage, the lending Bank would repossess the property, instruct a ‘Receiver of Rent’ to manage the tenancy out, and then engage with a local Estate Agent to sell the property on the open market in order to minimise any further financial loss on the loan. The selling Agent would usually be given a maximum of 6 - 8 weeks to find a buyer for the property and if they were unsuccessful, the Bank would then put the house up for auction to be snapped up by another budding investor buyer!

    Although the Banks were forced to accept a lower sale price on the property, it was the strength of rising house prices that would support any lower offers accepted which effectively, caused an ‘acceptable’ difference between the sale price and the true value of the property.
    However, as of the last 6 – 12 months, house prices have continued to fall and selling property at auction has become a definite ‘last resort’.

    The fall in house prices and the increase on cost of living has had a knock-on-effect on repossessions as more and more home owners fall into negative equity. The number of properties repossessed by mortgage lenders in the UK has risen by 48% in the past year.
    The Council of Mortgage Lenders (CML) said there were 18,900 repossessions in the six months to June, up from 12,800 in the same period last year.

    Nowadays, if a Bank is to repossess a property and try and sell it on the open market, they could expect to achieve a selling price of at least 20% - 30% under market value leaving a massive deficit on the original loan. Great news for the prospective investment purchasers looking to ‘fill their boots’ with bargain investment deals (if they can secure a mortgage that is) however, a major headache for the Lenders – hence, a shift in pattern is forming.

    Buy-to-let Lenders will now face the task of becoming Landlords themselves.

    As a Landlord defaults on the mortgage, the Lender will appoint the receiver of rent, in this case, this will be the Lender itself and the ‘in-house’ Property Management Department will then manage the tenancy throughout its fixed term period. The Lender will assume the role of the Landlord and fulfill any obligations set out in the original tenancy agreement.

    At the end of the fixed term, instead of repossessing the property and selling it on the open market, it will be in the Banks best interest to maintain a tenancy or find new tenants and ride out the next 12 – 18 months or at least until the housing market finds it feet again.
    Last edited by LandlordZONE; 09-10-2008, 18:41 PM.
    lettingaproperty.com
    Nationwide Online Letting Agent
    0844 567 0578

    #2
    If the banks did that then it is a big gamble.

    Lets say if a mortgage is 180k, but the property value is now 170k.

    So the loss for then bank is 10k.

    However, if property prices fall to 150k and the bank is forced to sell, then it could it would make a loss of 30k.

    But the original borrower, might still be sued for losses.... so what does he owe the bank 10k or 30k?

    And the rent will only cover the interest payment (at todays bank rate).....

    Also, unlike landlords who provide their labour for free, with a bank they willl need to employ staff to manage....

    Comment


      #3
      Rajeshk4u - you have raised some good points and I want to reassure you that the information I have supplied has come directly from the CEO of one of the UK's largest Buy-to-let Lenders (I will not disclose due to confidentiality reasons.)

      I agree, it is a big gamble however, as we would hopefully expect from a Bank, more of a calculated risk.

      They are ‘banking’ on a strengthening market over the next 18 – 24 months which would minimise the shortfall of the £30k that you have used in your example as they believe that if the property fell to the £150k today, if they can hold onto a tenant to pay back even a proportion of the interest, then in 18 – 24 months time, the value of the property would be more in the region of the original value or at least close to it.

      The question is, would there be a breaking point in the falling price of the property that would force the bank to sell?

      In terms of labours costs, a property management department will come with a certain expense; however, these banks have sufficient funding aside for projects such as this one. The top Buy to let banks are in fact still recording millions in profit despite current market conditions.

      This could be viewed positively and a bold move from Banks to minimise financial loss and maybe a hint to the public that they are optimistic about a turnaround in house prices.
      Last edited by Editor; 17-11-2008, 14:44 PM.
      lettingaproperty.com
      Nationwide Online Letting Agent
      0844 567 0578

      Comment


        #4
        The problem is that increasing number of independant experts are talking about 50%+ drops. Where vested interest experts have increased their predictions on growing loses and still being proved wrong the independants who use to talk of higher falls of 30-40% have also increased predicted loses.

        In London we are starting to see some cases of 50% falls already so the longer the banks hold them the bigger their lose. Guess who will have to fund this, yes jolly tax payer again.

        Comment


          #5
          So how long do you reckon before we start getting members called 'Mr HSBC'
          or 'Mr Lloyds'
          I offer no guarantee that anything I say is correct. wysiwyg

          Comment


            #6
            Originally posted by sjcollett
            The thing here though is whether that loss is actually 'realised'. A house may have fallen by 50% of it's value but if you do not sell then this is merely a paper loss.
            You are quite right, and this is exactly why we are seeing a massive increase in the number of new properties to let coming to the market, which is great news for tenants (choice) not so great news for landlords (over-supply). I know of an independent Estate Agent that recently opended their doors to Lettings and within a week, they had converted 17 Vendors into potential Landlords! This is happening all over the Country.

            So what do experienced Landlords do in this situation? Do they set about improving the condition or USP's of their properties (upgrade to broadband; paint and decorate; new carpets etc) or do they reduce the rental price as to appear more competitive in a flooded market? If they opt for the latter, we will see (and in some areas we already are) rental prices start to flatten out. Any suggestions?
            lettingaproperty.com
            Nationwide Online Letting Agent
            0844 567 0578

            Comment


              #7
              Originally posted by Brit1234 View Post
              The problem is that increasing number of independant experts are talking about 50%+ drops. Where vested interest experts have increased their predictions on growing loses and still being proved wrong the independants who use to talk of higher falls of 30-40% have also increased predicted loses.

              In London we are starting to see some cases of 50% falls already so the longer the banks hold them the bigger their lose. Guess who will have to fund this, yes jolly tax payer again.
              Have you got any sources, or citation for those 50% falls - I would be interested in seeing them.

              Is this from peak or from current?

              Comment


                #8
                Originally posted by kayak View Post
                Have you got any sources, or citation for those 50% falls - I would be interested in seeing them.

                Is this from peak or from current?
                50% + from peak

                Its just basic maths and risk management. Property investment vehicles are stone dead so banks can't sell off mortgage packages to get more money. That leaves them with traditional lending sources IE savings. Banks can lend £10 for every £1 of savings. Traditionally that means lending of between 3-4 times salary. Now factor in increasing loses as prices plummet and properties are increasingly repossessed, ys that mans even less money to lend.

                So with a restricted pot of lending money banks are going to prioritise only the best clients, non new builds, no gift deposits, big deposits, high credit ratings etc.

                End result big, big falls in property prices.

                Anyway the IMF was saying British Property was 40% overvalued in 2006, there was nothing substantial holding prices up it was just mis guided sentiment.

                Comment

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