We welcome news that the Financial Services Authority (FSA) has temporarily shut down the Sale and Rent Back (SRB) market, following a review that identified ‘widespread poor practice.’
SRB schemes and ‘declaring bankruptcy’
The SRB scheme offered near bankrupts the opportunity to sell their homes to an SRB company at well below market value. The SRB Company would then rent the property back to the homeowner.
The homeowner/debtor could then file for bankruptcy, without fear of the equity becoming a bankruptcy asset. Sometimes SRB schemes provided that the mortgage company took a shortfall. Inevitably they deprived creditors the possibility of realising the equity, generally the only asset in the estate.
We have encountered several of these schemes. In each case an insolvency solicitor advised us we could do little to overturn the undervalued transactions.
Upon bankruptcy discharge
Although never admitted, we believe some SRB companies offered informal and non-contractual buy back agreements. So upon bankruptcy discharge, the bankrupt would be able to reverse the deal in order to recover his equity.
In fact the FSA identified a particular mischief
The FSA appears to have accepted that some of these schemes, attractive to a near bankrupt, were in fact scams.
It found that having purchased a property at a low price, the SRB Company would later jack up the rent to an unaffordable level, repossess the property and then sell it at a substantial profit.
The FSA identified some 22 regulated firms who had been carrying on a sale and rent back business. All have been forced to stop. One firm has been referred to the FSA’s enforcement division.
