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www.york.ac.uk/ chp Housing Studies Association 2015 Dr Alison Wallace BUY-TO-LET MORTGAGE ARREARS: Understanding the factors that influence landlords’ mortgage debt

Www.york.ac.uk/chp Housing Studies Association 2015 Dr Alison Wallace BUY-TO-LET MORTGAGE ARREARS: Understanding the factors that influence landlords’

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www.york.ac.uk/chp

Housing Studies Association 2015

Dr Alison Wallace

BUY-TO-LET MORTGAGE ARREARS:

Understanding the factors that influence

landlords’ mortgage debt

www.york.ac.uk/chpwww.york.ac.uk/chp

Outline of study

• Funded by Lloyds Banking Group

• Grew out of policy discussions with Shelter and others about reform of the private rented sector

• Based on mixed methods:

• English Housing Survey- Private Landlords Survey 2010 (c.1000 landlords in England)

• Lenders BTL loan book data (c.330K loans, September 2013)

• Interviews- 25 landlords across UK, 2 landlord advocates, 8 lenders (c. 60% BTL market)

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BTL Mortgage Arrears 2008-2013Fig. 1: Rate of arrears BTL and residential (%)

Sources: CML Table AP8

2008 2009 2010 2011 2012 20130.00

0.02

0.04

0.06

0.08

0.10

0.12

0.14

OO

BTL

Fig.2: Rate of possessions BTL and residential (%)

2008 2009 2010 2011 2012 20130.0

5.0

10.0

15.0

20.0

25.0

Fig.3: Buy-to-let possessions % of all possessions

• BTL loans commercial• Moved through arrears

process more swiftly• BUT unsure if propensity

of individual BTL loans to fall over is lower than residential

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Landlords Finances

• Diverse spectrum of landlords, largely ‘cottage industry’, various submarkets, (Rugg and Rhodes)

• Landlords more affluent than wider population, BUT significant % financially constrained (Lorde et al.; BDRC)

• Crook et al. show finances influenced by market and business risks

• Scanlon and Whitehead- Landlords do not always provide a rational response to market signals

• Bevan and Rhodes- work even prior to the boom showed a pool of landlords not breaking even

• Other potential risks evident: policy risks and personal risks

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Regional rents 2006-2013

Annual change existing rents English region 2006 to2013 (Source: IPHRP)

darker line=region; broken line= England

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EHS –Private Landlord Survey 2010

• 16% small problems 6% serious problems with mortgage costs

• Selective licensing associated with problem mortgage costs, but fell away in statistical analysis

• Tenant receiving housing benefit associated with tenant rent arrears but not with landlord’s loss of income, direct payments HB to tenants or HB shortfalls/ top ups

• Problems with housing benefit administration was associated with problematic mortgage costs

• NB: Survey data collected 2009/10

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EHS-PLS factors increase likelihood of problematic mortgage costs

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Lender BTL loan book data 09/2013

• 3% loans 1 month or more in arrears.

• 1.4% 3 months or more in arrears (Higher than industry average at time 1.16%)

• Higher mortgage arrears (1+ month in arrears):

• Northern Ireland 6%, NW

• property types, 5% flats/apartments

• landlords, 8% landlords with multiple loans

• year of advance - 1/3 loans advanced in 2007 in arrears

• Data indicates remortgaging or sales difficult to achieve negative or low LTV –

• Half of loans >75% LTV – 1/5-1/4 loans in Scotland, NW. NI unable remortgage regular loans

• 11% estimated negative equity (NI 26%, NW 25%, Scotland 22%)

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Lender loan book data (2013) Factors increase likelihood of 1 month arrears

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Landlord and Lender Interviews

• BTL conceived as a business but not always operated as such. For some no due diligence or business acumen

• Sitting behind formal arrears figures are pool of struggling landlords not in arrears

• Many landlords trapped by negative or low equity (weak housing markets)

• Adverse events in personal or other business lives spilled over into BTL arrears (all housing markets)

• Lenders complicit in underwriting poor investments

• Mixed evidence on policy risks- HB and licensing challenging in context difficult markets, but in some areas cannot avoid HB

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Discussion

• Policy concern as c. 50-60,000 tenants’ landlords in arrears , more struggling financially and constrained in ability to fulfil obligations and signalling exits from market when able

• Formal rent recovery risky and unaffordable to some landlords so could undermine confidence in longer lets

• Wider welfare changes undermine tenants in market more than lender policies

• Argue that lending criteria a poor fit for qualities required for stable market investment, business not hobby

• Institutional investment seen as solution to stable rental markets but lenders could also have a role in securing more stable BTL market

• Implications for regulation in BTL mortgage market.

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Summary

• PRS critically important as access to social housing and homeownership constrained

• The factors that influence landlord mortgage arrears can contribute to weaknesses in the sector

• Landlords letting activity threatened by interaction of poor business practice, market change, incursion of personal difficulties into letting activities, and policy shifts.

• Policy concern as ambition for professional safe secure stable PRS

• Lenders could consider how their lending criteria could contribute to these goals

• Greater regulation required but lender/landlord resistance strong

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Thanks for listening

Dr Alison Wallace

[email protected]

www.york.ac.uk/chp/

@CHPresearch