Call for regulation as credit-crunch panic spreads.
By Lindsey Rogerson

First the Treasury, and then a powerful trade body, declared "the era of cheap mortgages is over" last week as a swathe of evidence exposed the extent of the looming crisis for UK homeowners.

With mortgage deals now being pulled daily, leaving few options for remortgaging, debt advisers fear that desperate homeowners will be swept into the arms of a new breed of mortgage "bottom-feeders" promising to make their financial problems disappear through sale-and-leaseback deals.

Citizens Advice has seen a 35% leap in people struggling with mortgage payments in the first two months of 2008 just as the Office for National Statistics disclosed that rocketing gas and electricity prices have helped push consumer price inflation to 2.5%.

Almost 40% of households report plans to cut back on the weekly food shop to help keep up the mortgage, according to financial information group, Fool.co.uk. One in five single parents are living in fear of losing their home in the next 12 months, says retail group, Brighthouse.

Commenting on the situation in Scotland, Yvonne Gallagher, chief executive of Money Advice Scotland - the umbrella organisation for free debt counselling - said: "I hate to sound all doom-and-gloom, but it is not a good picture."

Richard Brown, chief executive, of financial group Moneynet, is equally downbeat. Research into his own company's user base found that some 35% were juggling mortgage debt in excess of three times' their annual salary, while 30% were uncertain they could prove their income, making it virtually impossible for them to remortgage in the post-credit crunch world.

"These figures should not be interpreted as scaremongering," said Brown. "Nearly 10% of respondents admitted that they are at risk of missing mortgage payments in the coming year, with a staggering 22% prepared to consider using other means of credit to meet their mortgage repayments."

According to financial data group Moneyfacts, the past year has seen the number of mortgage lenders offering 100% or more mortgage loans drop from 35 to just nine. The number of products available in the subprime market has fallen by 76%, and borrowers with just a 5% deposit have seen their product options fall 29%.

In spring 2005, the UK's second largest mortgage lender, Nationwide, was offering two and five-year fixed- rate loans at 4.69% and 4.89% respectively. Then the average standard variable rate (which borrowers pay once the fix ends) was 6.66%. Last week, the interest rates on Nationwide's two and five-year fixes were 6.38% and 5.63% and the average SVR was 7.24%.

On the surface Scottish homeowners are in a stronger position than those in other parts of the UK, which have already seen house prices start to fall. The Bank of Scotland said last week that it was "not aware" of any hotspots of negative equity in Scotland, and that it still expects house prices to grow 4% north of the Border this year.

However, Janey Milligan, chairwoman of the Royal Institution of Chartered Surveyors believes that the Scottish housing market will become vulnerable later in the year as homeowners flock to sell properties ahead of the introduction of sellers' information packs at the beginning of December.

That mortgage providers are already building an equity cushion into their products is not in doubt, as evidenced by the reduction in no deposit deals.

THIS has fuelled the growth of the sale-and-leaseback industry. Such schemes allow owner-occupiers to sell their homes to a company and then to remain in the property by leasing it back. However, there is now mounting concern at the tactics of many companies in this unregulated sector. Providers of such products typically buy properties for at least 15% less than market value, while the majority of sellers are left with no more security than they would have under a short tenancy.

Operators' websites exploit the fears of distressed mortgage holders. One says "no for sale board", others promise homeowners that they will be able to claim benefit to help pay rent once their house has been bought.

Prompted by concerns raised by Citizens Advice, Shelter and the Council of Mortgage Lenders, chancellor Alistair Darling announced last week that he has asked the Office of Fair Trading to investigate potential consumer detriment in the sale-and-leaseback market.

A spokeswoman for the Council of Mortgage Lenders said: "While we welcome the review, it is disappointing that no immediate action will be taken to regulate sale-and-leaseback schemes.

"Homeowners in difficulty may currently be considering selling their property through these schemes at a discounted value, without an independent valuation of their home, and with no real security of tenure."

Money Advice Scotland's Gallagher is also concerned about the regulatory "no man's land" of such schemes, which, unlike home purchase plans available to older homeowners, do not fall under Financial Services Authority scrutiny.

In an effort to stave off their critics, around 450 of an estimated 2000 sale-and-leaseback providers formed a trade body, the National Association of Sale and Rent Back, late last year. It welcomed the OFT investigation and hopes it will "clean up" the industry.

However, Steven Hilton of NASARB admitted some of the consumer-friendly claims made by sale-and-leaseback firms, especially those promising homeowners they could buy their properties back later, were not realistic.

Shelter and the others aim to get greater protection for those entering such schemes and welcome social housing solutions. Indeed the Scottish government has been running its own sale and leaseback scheme - mortgage to rent - since 2003. A spokeswoman said: "This year, the Scottish government has invested over £9 million in the scheme, which has helped over 140 families to avoid repossession and to stay in their homes as tenants.

"Since mortgage to rent began in 2003, around 600 households have been assisted to remain in their homes."

www.moneymadeclear.fsa.gov.uk www.moneyadvicescotland.org.uk