25 September 2010

212 degrees - The Extra Degree

05 September 2010

Changing Goal Posts – Bradford & Bingley sues solicitors over same-day remortgage deals.

Bradford and Bingley – parent company to Mortgage Express who were UK’s largest buy to let lender is looking to pursue negligence claims against law firms over advice received on same day remortgage buy to let deals using the concept of a closed bridge. For the full news article that was published by FT please see:
http://www.ft.com/cms/s/2/d2a0f9fa-ac7d-11df-8582-00144feabdc0.html

The practice of a close bridging loan being used to build a portfolio is common and was widely promoted pre-credit crunch by property related professionals including solicitors, mortgage brokers and other finance professionals. Bradford and Bingley is now alleging that legal firms involved in this activity breached anti-fraud guidelines and legislation as per the Council of Mortgage Lenders Handbook. If you speak to with anyone involved in the buy to let property industry at the time, they will tell you that despite the claim now that the lenders were not aware of this practice, this is hard to believe as this was one of the main topics discussed by all in the industry at the time and lenders made adjustments to their lending criteria based on minimum ownership period which at a stroke stopped the same day remortgage practice. Mortgage Express were promoting their products to the broker community on the basis that they did not operate on a minimum period.

For those of you who could do with some background information; a number of innovative property entrepreneurs created the concept of the Below Market Value (BMV) / No Money Down (NMD) deals as well as coining phrases such as motivated sellers. These property entrepreneurs worked out that the if you could persuade somebody – to sell a property cheaply enough, you could buy it for effectively no money down and even take money out from the deal. The concept used to finance this below market value deals was a closed bridging loan. This allowed the purchaser to effectively use the property’s own equity as the deposit. This created the boom and suddenly property investment became a viable option for all and sundry!
A number of people set about buying property at an unsustainable pace, with one or more purchases per week not being uncommon. The real problem was that these new property investors were taking as much money as possible out of the deal where the rental income was not supporting the mortgage interest, effectively creating a pyramid where the only way to support the deal was by doing more deals.
The reality of the situation was that a motivated seller becomes so, because he is threatened with repossession. Cue the BMV investor who wants to buy their home from them at a substantial discount and allow them to stay in it in return for a rent lower than their mortgage had been. Considering the alternative for the homeowner is repossession and then sale by the original lender at an even lower price, with the lender then pursuing the homeowner with the loss incurred by the lender. Therefore the BMV investor has done the motivated seller a favour. The lenders’ indirectly benefit by this system as well, as they have not needed to repossess and have earned fees from continuing to sell their mortgage products as well and thus creating an all-round win/win situation.
In theory this is fine but what has happened since it that the people who were buying as BMV investors where often financially naive themselves and there was no contingency plan to their business and unfortunately sizeable losses have been made by individuals and subsequently the lenders themselves.

The lenders now are denying all knowledge of all such practices and the law suits will be of interest to many and definitely this is a story that I will be following.