Page last updated at 13:01 GMT, Friday, 9 May 2008 14:01 UK

Repossession figures ignore many in trouble

Analysis
By Andrew Verity
Co-presenter, The Truth About Property

Mortgage possession action graph

The headlines are all about the rising number of people losing their homes.

But both the government and mortgage lenders have been eager to point out that the number of homes actually repossessed last year was 27,100, which is barely a third of what they were at their peak in the early 1990s.

While repossessions are projected to reach 45,000 this year, that is still well below the levels of the last recession.

But does that reveal a true picture of how many people are losing their homes because of their debts?

Trauma

Government figures have revealed that 38,688 people were taken to court to face a claim for repossession in the first three months of this year.

Over the whole year to the end of March 143,098 people have been through the experience, far more than have actually been thrown out of their homes by their lender.

So what accounts for the difference?

Some of it is because this is the first stage of the legal process.

Borrowers can contest a claim for repossession, though many lack the legal understanding of how to do so.

Most claims do result in a court order granting the lender the right to seize the borrower's home.

A further reason for the difference is that borrowers, having faced the trauma of a court order for repossession, will come to an arrangement with their lenders, such as paying a reduced level of repayments over a longer term, or adding any arrears to the value of their mortgage.

That results in a large proportion of orders being suspended.

Long process

A third reason is that the court claims for repossession include applications from so-called second-charge lenders.

These include debt consolidation companies and those who grant additional secured loans to allow people to tap their equity by borrowing against it.

When they apply for repossession, the courts record it; but the government releases no information on how many of these claims go through to repossession, and neither does the industry body, the Council of Mortgage Lenders.

Other mortgage borrowers choose to sell their home before the repossession process, which takes months, is finished.

By cashing in the large amounts of positive equity that most homeowners still have, they can pay off their debts and even walk away with a profit.

In the early 1990s, many homeowners facing repossession adopted this solution.

But there is one big difference between now and the early 1990s: the buy-to-let boom.

Tabloid temptation

A growing number of people facing repossession are selling their homes to buy-to-let investors through so-called "sale and rent back" schemes, also known as "mortgage rescue".

As prices have risen, it has become harder for buy-to-let investors to obtain properties at the right price.

If they pay too much, they may get less rent from tenants than they need to pay the mortgage.

However, buy-to-let investors can make a profit if they obtain properties at below market value.

At property investor shows, conferences and seminars, the instructions given to the amateur buy-to-let investor are the same: get property at below market value by advertising for distressed sellers.

 Aquicksale.co.uk website screengrab
A number of firms are looking to cash in on repossessions

In advertisements in the tabloid press and on the internet, people in financial trouble are attracted by bold headlines such as "Avoid Repossessions".

They are then offered the opportunity to sell their property and stay in it by renting back.

When borrowers in financial distress respond, they are then told the deal.

In exchange for a quick sale, they are expected to cut a large amount from the value of their property, typically 20%.

The buyer then becomes the landlord and the seller becomes the tenant.

As one such investor, Rav Shastri, says: "A lot of people have got a lot of problems and I'm starting to do what's called rent backs.

"People will rent it off me and they've got the option of buying it off me in a few years.

"What it's got to be is a win-win situation. It's good for me, not everyone buys them back, and it's good for them because they're not thrown out of their house as a repossession."

Regulation needed

No-one knows the exact scale of the mortgage rescue business because the investors running the schemes are simply buy-to-let investors.

There is no regulation and no requirement even to register at Companies House.

However, one of the largest firms, a-quick-sale.co.uk, says there are at least 3,600 investors.

Residential street in Newport, South Wales

Glen Ackroyd, director of the company, says that on one property forum for mortgage rescue operators, Property Tycoon, there are 3,600 investors.

He estimates that 20,000 people now sell their homes to mortgage rescue companies every year.

"My own company bought 2,000 houses last year. The number of inquiries we are getting from people is going through the roof. Earlier this year we had about 5,000 inquiries in just one month."

Mr Ackroyd leads a trade association, the Property Buyers' Association, and is pressing for regulation.

Both the homeless charity Shelter and the Council of Mortgage Lenders have called for mortgage rescue schemes to be regulated.

However well-intentioned the investors may be, the business model can be problematic.

If the problem that led to the threat of repossession was a poor credit record, then after the sale and rent back takes place, the new tenants tend more than most to be poor payers.

If enough of them fail to pay the rent, the companies will have too little income to pay the interest on their buy-to-let mortgages, forcing them to go bust.

Lenders may then repossess in any case.

See more about this story on The Truth About Property at 8pm on Monday 12 May on BBC2.




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