This property scam is now taking place under the 'careful' eye of the watchdog yet new regulation does little to protect vulnerable homeowners.
There are few industries more questionable than sale and rent back. This area of the housing market has an appalling reputation - one it richly deserves. And finally the regulator is stepping in to try to clean it up, and enforce new rules to protect those homeowners forced to go down this route.
The trouble is, these new rules don't go nearly far enough.
What is sale and rent back?
Let's start with what sale and rent back is.
Basically, if you find yourself struggling to meet your mortgage bill each month, rather than allow the situation to reach the repossession stage, you can sign up to a sale and rent back deal.
The sale and rent back firm will buy your property from you, and allow you to continue living there as a tenant, paying rent. So you don't have to move home, and also get a boost to your coffers.
But it doesn't work like that
It all sounds lovely, but due to the fact that it has up to now been an unregulated industry, it has very often fallen short of the brilliant solution it is pitched as.
These firms have been accused by the Office of Fair Trading (OFT) of deliberately misleading buyers about the value of their home - inevitably purchasing the property at a massive discount - and then being deceptive about just how long they could stay in the property, kicking these poor people out onto the street just a couple of months down the line.
In the interim
Back in July the FSA finally took up the task of cleaning up the sale and rent back sector. It got off to a fairly inauspicious start, launching an 'interim' regulatory regime, which included rewriting sections of its consumer website Moneymadeclear, and the introduction of some vague 'near final' rules on the providers.
I didn't think that was anything like the right attitude it should be taking, and wrote as much in Watch out for this massive scam.
And now, a couple of months later, the FSA has unveiled its plans for full regulation of the sector. Drum roll please.
It's not all terrible
Let's start with the good points.
The first regards the new rules on the promotion of these schemes. Thankfully, the FSA has followed the OFT's lead on this one, and clamped down on the 'emotive terms' these firms rely on to drum up business.
Firms will no longer be able to use terms like 'fast sale', 'mortgage rescue' and 'cash quickly' in promotional literature. Cold-calling and posting promotional leaflets have also been banned.
These are all good moves, and should help in preventing vulnerable homeowners signing up to these deals when it is not in their interest to do so.
The FSA is also right to introduce an obligatory 'cooling off' period so the consumer can take their time over making a decision over whether to go for the scheme.
And I also approve of the FSA's decision to require the provider - not the customer - to pay for the valuation. Hopefully, this should help prevent vulnerable people being completely ripped off at a moment when most will be desperately counting the pennies.
The advice process
However, in my view it's the advice side that is the most important area in all of this. Who should provide counsel to the customer, and give them guidance on whether a deal is right for them?
Certainly not the provider. Only an idiot would suggest that....
Yes, you've guessed it. It's here that the FSA's proposals trouble me greatly.
One of its main ideas the FSA has put forward is that, in each sale, the sale and rent back firms will be required to check the customer can afford the deal and that it is the right one for them.
So not only will these firms be providing the deal, but they will also be left to adjudicate whether it is the best deal for the customer as well!
This leaves the whole transaction wide open to abuse.
Frankly, I don't think you should be allowed to sign up for one of these deals without going through an independent adviser. Otherwise, it would be like going into your local banking branch and asking them whether they think you should take out a credit card with them - what do you expect them to say?!
And it's no good saying that there is paperwork and checks and balances in place to ensure the advice is correct.
Those exact measures were in place for mortgages, but just look at how many people signed up to mortgages that weren't really the best deal for them, and are now drowning in debt. Hell, they might even be the very same people now tempted by sale and rent back.
Out of the frying pan and into the fire, courtesy of the FSA!
You're still not secure!
What's worse, the FSA is also stalling on providing real security to borrowers who sign up to these deals.
In the interim regulatory regime, the FSA required providers to make clear, at two separate stages, how long they would have security of tenure - in other words how long they would definitely be able to stay in the property.
That's ok, but doesn't really convince me as being enough to protect the most vulnerable borrowers.
The FSA have acknowledged that thanks to the Housing Act 1996, they could require that these deals take place as an assured tenancy, ensuring that providers cannot renege on agreements and kick the tenant out after six months. And they are now considering applying this.
In my view, this should not even be up for consultation - it should be a rod on which the rest of the regulation is built!
Providing proper, legally enforceable, security of tenure is exactly what the industry needs. For FSA regulation not to include it, right now - at a time when many homeowners are facing repossession and need protection - is, quite frankly, a disgrace.
A start - but not enough
Still, overall, this plan for full regulation is a step in the right direction.
But the FSA's current scheme has some fairly major flaws which leave me very uneasy.
Until sale and rent back is regulated in the way it should be, I don't think you should go anywhere near it. If you are struggling with your mortgage payments each month, why not have a look at going interest-only? At the very least you should speak to your lender and get some independent debt advice.
For advice on how to deal with your debts, why not have a read of Five ways to destroy your debt! or Get out of debt with free advice, while if you want to reduce your mortgage spend you should definitely read the tips in our Cut the cost of your mortgage and pay it off early and have a watch of How to...slash the cost of your mortgage payments.
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