Portfolio Landlord Endgame

[Bland Unsight]

Very speculative thread. Not so much counting chickens before they've hatched as speculating on the mechanics of their demise whilst it conjectured, but before it arrives. Some thoughts from a conversation.

We assume the following:

• At some point between 2016 and 2020 BCBS risk-weights start to widen the difference between mortgage interest rates on interest-only buy-to-let mortgages and rates on repayment mortgages offered to owner-occupiers, i.e. BTL mortgage rates go up
• Over the same time scale, Clause 24 of the Finance Act 2015 is applied in its current form turning cash flows on leveraged property portfolios net negative as the rents are inadequate to cover the mortgage interest and the tax, (any ability of leveraged landlords to raise rents is assumed to be inadequate to cover the rising cash outflows).

There are then two end games. Either the landlord pays the mortgage interest but starts to build up a debt to the Revenue on the income tax they owe or they pay the Revenue in full and slip into arrears with their lenders.

As discussed on the Tax Relief thread (h/t pipllman for the reference), where a creditor makes a bankruptcy petition against a debtor, as assets are disposed of by the trustee, when a CGT liability arises, the CGT represents the first charge, (i.e. AFAIK the Revenue skips in front of the secured creditor and gets paid first).

Considering a portfolio landlord, this means that once the Revenue make a bankruptcy petition and the landlord is declared bankrupt then as the BTL properties are sold, the Revenue are paid off and then the banks get what is left.

Now, some more speculation.

• A leveraged landlord in denial will presumably pay the mortgage interest charges as they arise and not make adequate provision for the income tax bill, hence when the bill arrives they won't be able to pay it, i.e. the supposition is that denial leads to a debt to the Revenue.
• The bank know that if the Revenue can force bankruptcy before the bank can repossess, the bank will face larger losses as the CGT has to be paid first, hence the bank are highly motivated to call in the loan before the Revenue can petition for bankruptcy
• The Revenue will know that if the bank get to repossess before the Revenue can petition for bankruptcy, then the bank may leave nothing but an asset-less ex landlord unable to pay their CGT.

The thing that is new is Clause 24. Before that, with low mortgage interest rates, you had nothing to rapidly bankrupt portfolio leveraged landlords, but now you do.

Edited January 1, 2016 by Bland Unsight

[long time lurking]

• A leveraged landlord in denial will presumably pay the mortgage interest charges as they arise and not make adequate provision for the income tax bill, hence when the bill arrives they won't be able to pay it, i.e. the supposition is that denial leads to a debt to the Revenue.
• The bank know that if the Revenue can force bankruptcy before the bank can repossess, the bank will face larger losses as the CGT has to be paid first, hence the bank are highly motivated to call in the loan before the Revenue can petition for bankruptcy
• The Revenue will know that if the bank get to repossess before the Revenue can petition for bankruptcy, then the bank may leave nothing but an asset-less ex landlord unable to pay their CGT.

HMRC win over the banks as the banks would be unaware of any looming bankruptcy as they are still being paid in full ,things start to get very interesting when both the bank and HMRC start seeing arrears then it`s first off the line wins

Edit to add HMRC will have a far better picture than the banks of the said BTL`er finances to base their call on

As you say no one wants to be left holding the baby

Edited January 1, 2016 by long time lurking

[Si1]

HMRC win over the banks as the banks would be unaware of any looming bankruptcy as they are still being paid in full ,things start to get very interesting when both the bank and HMRC start seeing arrears then it`s first off the line wins

Edit to add HMRC will have a far better picture than the banks of the said BTL`er finances to base their call on

As you say no one wants to be left holding the baby

But what about UKAR, being a government bank, will they not openly cooperate with HMRC?

[long time lurking]

But what about UKAR, being a government bank, will they not openly cooperate with HMRC?

I would guess data protection would say no to that ...but who knows

[Exiled Canadian]

But what about UKAR, being a government bank, will they not openly cooperate with HMRC?

I suspect that Landlords won't file timely tax returns in an attempt to defer the liability (DIY extend and pretend).

If I was a lender I'd be looking to act ASAP to recover my money before HMRC lurched into life with an enquiry........

[lastlaugh]

It's even better than that.

I would expect portfolio landlords to have mortgages with different lenders. The banks aren't just in competion with HMRC, but with other lenders. If one bank repossesses then it can still trigger a CGT liability, which can bankrupt the rest of the portfollio leaving the other lenders out of the money. The lenders are incentivised to get the boot in first and early.

It's better still. If a landlord uses multiple lenders, then each lender can never see the performance of the entire portfolio. They can't assume the portfolio is healthy just because their little corner seems to be performing. They have to assume all portfolios are potentially toxic. It makes new lending especially risky, and should generate a very specific kind of credit crunch.

For the lenders, a dominant strategy emerges :

REPOSSESS NOW, REPOSSESS EVERYTHING.

Happy New Year, you BTL-W@nkers!

[mattyboy1973]

• The bank know that if the Revenue can force bankruptcy before the bank can repossess, the bank will face larger losses as the CGT has to be paid first, hence the bank are highly motivated to call in the loan before the Revenue can petition for bankruptcy
• The Revenue will know that if the bank get to repossess before the Revenue can petition for bankruptcy, then the bank may leave nothing but an asset-less ex landlord unable to pay their CGT.

How exactly does this work? If the bank repossesses, is the CGT not due in the same way?

If not, then I agree - should prices dip then we should see BTL margin calls on a completely different scale than the last crash. That could be interesting.

[Bland Unsight]

How exactly does this work? If the bank repossesses, is the CGT not due in the same way?

If not, then I agree - should prices dip then we should see BTL margin calls on a completely different scale than the last crash. That could be interesting.

My understanding, and I live to learn, is that presently on repossession you get a sale and hence the CGT lands on the landlords self-assessment tax return, presently annually with, and for paper returns due in October the personal tax year that end in April. This is, as the youngsters say, bare time. For example if you had a property repossessed and subsequently sold by your lender on April 10th 2014, you would not have needed to report the CGT arising liability to the Revenue until 31st October 2015.

Wasn't there something about moving self-assessment to a quarterly cycle? OK google "Tax returns to be quarterly for landlords and self-employed" and you get an FT article.

New regime begins 2016-2017. Just another one of those weird coincidences...

[Bland Unsight]

It's even better than that.

Absolutely. That is, least in part, the point of the thread. Setting aside all fear of pretentiousness, Clause 24 and BCBS risk-weights change the game and therefore when you attend to the game theoretical aspects of the situation we might anticipate that the lenders will behave completely differently as me move forward. Until prices correct, there is money on the table to be fought over. If a leveraged landlord can sell to anyone then the proceeds of the sale are in the game. Who gets them? The bank wants them, the government wants them. Pre-2008 it was a different game. Fix up the borrowers with ludicrous loans, more lending means more bank profits. More bank profits and more transactions means more Corporation Tax and more SDLT. Post-2008 it gets more complicated. Post-2015 you can start to see that the banks' and the Treasury's interests are no longer aligned.

[Neverwhere]

...For the lenders, a dominant strategy emerges :

REPOSSESS NOW, REPOSSESS EVERYTHING.

Happy New Year, you BTL-W@nkers!

I love it!

[Neverwhere]

It seems plausible that lenders might have some inkling that there could be a potential problem given they should have some idea of rents and portfolio size at the time that the loan originated at least, and they certainly have a fair few clauses in their standard BTL T&Cs they could use to break the contracts at a time of their choosing if they wanted to.

One of the key variables may be how easy (or not) it actually is for them to gain possession, and therefore what kind of circumstances would need to be in place in order to make it worth their while to seek a court order for possession instead of taking the relatively easy route of appointing an LPA receiver (in which case, as I understand it, HMRC would get first dibs on the proceeds of any sale, as with an out-and-out bankruptcy)?

[long time lurking]

My understanding, and I live to learn, is that presently on repossession you get a sale and hence the CGT lands on the landlords self-assessment tax return, presently annually with, and for paper returns due in October the personal tax year that end in April. This is, as the youngsters say, bare time. For example if you had a property repossessed and subsequently sold by your lender on April 10th 2014, you would not have needed to report the CGT arising liability to the Revenue until 31st October 2015.

Wasn't there something about moving self-assessment to a quarterly cycle? OK google "Tax returns to be quarterly for landlords and self-employed" and you get an FT article.

New regime begins 2016-2017. Just another one of those weird coincidences...

Oh dear me they wouldn't would they ,surely GO has made another mistake

Was there also something about paying SDLT or CGT in X amount of weeks ?

Edited January 2, 2016 by long time lurking

[Fatmanfilms]

Surely a first mortgage has priority, it's registered at the land registry. The mortgage does not just disappear

[spyguy]

It seems plausible that lenders might have some inkling that there could be a potential problem given they should have some idea of rents and portfolio size at the time that the loan originated at least, and they certainly have a fair few clauses in their standard BTL T&Cs they could use to break the contracts at a time of their choosing if they wanted to.

One of the key variables may be how easy (or not) it actually is for them to gain possession, and therefore what kind of circumstances would need to be in place in order to make it worth their while to seek a court order for possession instead of taking the relatively easy route of appointing an LPA receiver (in which case, as I understand it, HMRC would get first dibs on the proceeds of any sale, as with an out-and-out bankruptcy)?

I'd say a big 'No' on that.

If lenders had any idea on achievable rents than there is no way they would have lent so much money. Most of big players in BTL lending are little players in the world on finance. They are delusional about the rental market as the landlord.

[lastlaugh]

Surely a first mortgage has priority, it's registered at the land registry. The mortgage does not just disappear

My understanding is that bankruptcy is a unique and special situation. In the case of bankruptcy all assests are frozen. All creditors can make a claim on whats left of the estate, but HMRC goes first.

So if someone is declared bankrupt owing HMRC £100K and has a mortgage of £100K. If their only asset is a house worth £100K then the lender will get nothing.

As has been said many times on this forum, the lenders have completely mispriced the risk. Their mortgage assets behave like Scrödinger's Cat. They don't know the value of the asset until it's realised. They could get all their money back, they might get nothing. They believed LTVs would protect them, but they wont and can't. Even residential mortgages are at risk if the mortgagee goes bankrupt.

[lastlaugh]

I'd say a big 'No' on that.

If lenders had any idea on achievable rents than there is no way they would have lent so much money. Most of big players in BTL lending are little players in the world on finance. They are delusional about the rental market as the landlord.

I have to agree with this. I don't think lenders have a clue. If they did, they would be pricing the risk more realistically. Instead, there is no due dilligence, they just rely on LTV to do all the work. The lenders are in the business of selling money, snake oil even. They're not in the business of dissolving portfolios and chasing receivers for scraps.

[Bland Unsight]

I'd say a big 'No' on that.

If lenders had any idea on achievable rents than there is no way they would have lent so much money. Most of big players in BTL lending are little players in the world on finance. They are delusional about the rental market as the landlord.

I have to agree with this. I don't think lenders have a clue. If they did, they would be pricing the risk more realistically. Instead, there is no due dilligence, they just rely on LTV to do all the work. The lenders are in the business of selling money, snake oil even. They're not in the business of dissolving portfolios and chasing receivers for scraps.

Hopefully in due course their error will sink in and interest rates on BTL products will rise in the hope of shedding some lending before chickens come home to roost. Also, hopefully, fearfulness predicated on ignorance will lead them to shoot first and ask questions later when arrears occur.

[long time lurking]

My understanding is that bankruptcy is a unique and special situation. In the case of bankruptcy all assests are frozen. All creditors can make a claim on whats left of the estate, but HMRC goes first.

So if someone is declared bankrupt owing HMRC £100K and has a mortgage of £100K. If their only asset is a house worth £100K then the lender will get nothing.

As has been said many times on this forum, the lenders have completely mispriced the risk. Their mortgage assets behave like Scrödinger's Cat. They don't know the value of the asset until it's realised. They could get all their money back, they might get nothing. They believed LTVs would protect them, but they wont and can't. Even residential mortgages are at risk if the mortgagee goes bankrupt.

That's my understanding of how it works ,if declared bankrupt but i think the OP was more about will the banks try to get in first and repossess before the BTL `er gets into position where HMRC can act (C24 is going to give them a massive incentive to do this) .....effectively pushing them into a position of zero forbearance/margin calls /breach of T&C`s at the first inkling of trouble ...if they fail to act swiftly they could lose the lot

Effectively when it comes to BTL+ C24 this means extend and pretend is no longer an option ..sounds good to me

[Si1]

My understanding is that bankruptcy is a unique and special situation. In the case of bankruptcy all assests are frozen. All creditors can make a claim on whats left of the estate, but HMRC goes first.

So if someone is declared bankrupt owing HMRC £100K and has a mortgage of £100K. If their only asset is a house worth £100K then the lender will get nothing.

As has been said many times on this forum, the lenders have completely mispriced the risk. Their mortgage assets behave like Scrödinger's Cat. They don't know the value of the asset until it's realised. They could get all their money back, they might get nothing. They believed LTVs would protect them, but they wont and can't. Even residential mortgages are at risk if the mortgagee goes bankrupt.

Nothing at all for the mortgage company? I thought that even following bankruptcy, or as part of the settlement, a mortgage company could take an amount of income from the debtor until the debt was paid off? Are mortgages not special cases vis a vis bankruptcy? ( honest question)

[Si1]

I have to agree with this. I don't think lenders have a clue. If they did, they would be pricing the risk more realistically. Instead, there is no due dilligence, they just rely on LTV to do all the work. The lenders are in the business of selling money, snake oil even. They're not in the business of dissolving portfolios and chasing receivers for scraps.

+1

From personal experience, individuals working for said lenders are individually bullish and invested in property themselves

[dances with sheeple]

Absolutely. That is, least in part, the point of the thread. Setting aside all fear of pretentiousness, Clause 24 and BCBS risk-weights change the game and therefore when you attend to the game theoretical aspects of the situation we might anticipate that the lenders will behave completely differently as me move forward. Until prices correct, there is money on the table to be fought over. If a leveraged landlord can sell to anyone then the proceeds of the sale are in the game. Who gets them? The bank wants them, the government wants them. Pre-2008 it was a different game. Fix up the borrowers with ludicrous loans, more lending means more bank profits. More bank profits and more transactions means more Corporation Tax and more SDLT. Post-2008 it gets more complicated. Post-2015 you can start to see that the banks' and the Treasury's interests are no longer aligned.

That is where reality and theory start to diverge IMO. Both parties want the BTL`er for the most part to hold his position, pay the mortgages and a bit off the top to the tax man, not to panic and flood the market with property. I don`t believe they will want to force too many into bankruptcy as this means no mortgage paid and no tax? How it plays out will depend on the sentiment of BTL`ers, I believe many will try to hold on by not declaring if they can, trying to raise rents, and generally just being in silly childish denial. Some will have moved already and be shifting property (Fungus would like people to believe he is in this camp, but I don`t believe his sort of money is on the table at this point in the game)

[long time lurking]

Nothing at all for the mortgage company? I thought that even following bankruptcy, or as part of the settlement, a mortgage company could take an amount of income from the debtor until the debt was paid off? Are mortgages not special cases vis a vis bankruptcy? ( honest question)

Yes they can attach a charge on future income ...i thinks that`s known as sloppy seconds

[dances with sheeple]

Short version; Two arms of the PTB coming together (or competing) to cause a HPC wet dream is something I will believe when it happens, much like forensic checking of back-due tax on rental income by HMRC. However the global position and the government position may be so bad that they are going to do something radical, I don`t know.

[CunningPlan]

Nothing at all for the mortgage company? I thought that even following bankruptcy, or as part of the settlement, a mortgage company could take an amount of income from the debtor until the debt was paid off? Are mortgages not special cases vis a vis bankruptcy? ( honest question)

I am 99% sure that secured debts get paid off from any sale proceeds of the secured assets before any other creditor gets a look in. If there is a shortfall that goes into the mix with all other non preferential creditors.

[long time lurking]

I am 99% sure that secured debts get paid off from any sale proceeds of the secured assets before any other creditor gets a look in. If there is a shortfall that goes into the mix with all other non preferential creditors.

That's my understanding HMRC are always first to the table once bankruptcy is declared

The banks need to act first if they wish to avoid this situation they don`t need a declaration of bankruptcy to repossess and recover their stake HMRC do