We could transform sale and rent-back into a force for good

We could transform sale and rent-back into a force for good

The announcement that the Office of Fair Trading has begun an investigation into the sale-and-rent-back industry is very welcome. I can't think of any industry that needs investigating - and regulating - more.

For those of you who haven't read the tales of woe we have written on sale and rent-back, it's supposed to work like this: a financially distressed homeowner who can't manage his mortgage sells his home to a company at a heavily discounted price. The firm then rents the property back to the former homeowner, and all live happily ever after.

In reality however, some of the less scrupulous companies use aggressive marketing tactics, targeting people whose names have been listed in possession actions in court. They sign up their tenants on shorthold tenancy agreements, giving them little security. There is also nothing to stop the companies selling the properties on to new landlords, who would be completely unknown quantities.

Cash has reported on several cases in which former homeowners have been turfed out of their homes in these kind of circumstances. It will be interesting to see how sale and rent-back companies fare in a falling house market, but I would bet my last pound that it wouldn't result in any better outcome for the homeowners/tenants.

However, this week the City law firm Trowers and Hamlins came up with an interesting idea about how sale and rent-back could be used in a very constructive way to help borrowers. It argues that.....continued below

Advertisement starts

---

---

Advertisement ends

the government, local authorities and lenders should be looking for ways to enable housing associations to buy repossessed properties from lenders and then allow the former owner to stay on as an assured tenant. The money for these purchases would come from the lender, which would be replacing a rather unattractive defaulting private borrower with a much more appealing housing association as its customer.

Such a move would help to prevent the downward spiral in residential property prices caused by lenders putting repossessed properties on to an already weak market at fire-sale prices. It would also prevent the need for local authorities to fund expensive emergency housing for homeless insolvent borrowers.

The law firm admits this idea is not without its problems: the lender's duty to the homeowner is to sell at proper value, but the housing association would want to buy at a price that it could fund through a debt serviced by the rent paid by the former homeowner. That may require the lender to offer 'soft' lending terms to the housing association and the government to provide some capital subsidy.

The National Housing Federation, the body that represents housing associations, thinks this is a good idea - so good, in fact that some housing associations are already doing it using their own money. However it points out that if the government were to support such a scheme, the associations would be able to help far more people.

How much better to end up with a not-for-profit housing association, whose only interest is to create better communities, as your landlord than a private company that could boot you out after six months.

As Trowers and Hamlins points out, the government could regard such a capital subsidy as money well spent compared to the cost of repossession - both socially and to the taxpayer.

guardian.co.uk © Guardian Newspapers Limited 2008