Sale and rent back is not always the best option, the report says
Tighter regulation is needed of firms offering sale and rent back deals to struggling homeowners, according to the Office of Fair Trading (OFT).
Under these deals, people struggling to pay their mortgage sell their home at a discount to firms who let them stay on in the property as tenants.
But an OFT report found that this was not the best option for some, and others were quickly evicted.
It wants the estimated 1,000-plus firms involved to be more transparent.
An unknown number of amateur landlords are also involved in the relatively new industry.
The OFT said that about 50,000 transactions of this kind have already taken place.
"Our research shows that sale and rent back deals have potential to cause serious and permanent harm to often vulnerable homeowners," said OFT chief executive John Fingleton.
"The unfamiliar and highly pressurised situations that these people find themselves in may leave them particularly vulnerable to misleading statements or valuations from sale and rent back firms looking to make a deal.
"Even those customers for whom sale and rent back might be the best option could be unaware they are currently bearing almost of all the risks."
He added that statutory regulation, which should be outlined by the Financial Services Authority (FSA), was necessary to stop "unacceptable behaviour" of some operators.
Consumer groups have called for regulation of these schemes, also known as mortgage rescue.
Advertisements for these deals often target those facing repossession, Homeowners can accept a quick sale at a discount, and then rent the property until they might be able to buy it back again.
The Council of Mortgage Lenders predicts that there will be 45,000 repossessions in the UK in 2008, up from 27,100 in the previous year.
But the OFT study suggested there were better options for some of these consumers.
Other findings included:
- Misleading details, with some tenancies only guaranteed for six to 12 months although residents believed they could stay in their homes for years.
- Some landlords raise the rent substantially and quickly evict tenants who struggle to pay.
- Former homeowners who become tenants have lost their homes anyway, because the new landlord has defaulted on the mortgage and the property has been repossessed.
The OFT wants sale and rent back firms to be more transparent about valuation and sale prices, and about the terms of tenancy and the rent required.
These should match the assurances they give when approaching customers.
The watchdog also wants a requirement that firms tell customers about free, impartial and independent advice available to them before they decide to sell.
It is unhappy that even if sale and rent back is the best option for some homeowners, they are unaware that they bear almost all the risk.
'No quick fix'
The report warned that regulation of the industry would not be quick.
Various groups are calling for regulation to be brought in quickly
But it said that some firms might be breaking existing regulations aimed at protecting consumers in general. The OFT said it would work with trading standards officers to take action against these firms.
The National Landlords Association (NLA) said that there was a place for ethical use of sale and rent back schemes in the housing market, and it wanted to see a code of practice in place.
"We believe the majority of sale and rent back landlords act with professionalism and integrity," said NLA chairman David Salusbury.
"A small number of rogue operators have now brought the entire market under close scrutiny."
The Council of Mortgage Lenders and Citizens Advice called for the swift implementation of regulation in the sector.
"While sale and rent back agreements might be the right thing for some people, consumers need the sort of robust and binding safeguards that only statutory regulation is likely to provide," said Citizens Advice chief executive David Harker.