The Council of Mortgage Lenders has responded formally to the Treasury's consultation on whether to extend the scope of mortgage regulation.

The CML said it agreed with proposals to extend regulation to cover second-charge mortgages, and to ensure that borrowers were sufficiently protected when mortgage books were sold on.

But it disagreed for several reasons with the proposal to extend "conduct of business" regulation to buy-to-let lending.

On second-charge lending, the CML's longstanding position has been that all secured lending should be regulated in the same way under the FSA. This would create a coherent and comprehensive framework, more aligned with EU regulation, although there is a need to ensure that the impact on low-cost home-ownership is properly considered before proceeding.

The CML said it also agreed that consumers could potentially suffer when mortgage books were "sold on", and that regulatory scope should be extended to address this. However, regulation should only cover acquirers when they take day-to-day decisions on the interest rate, other charges, service levels, and arrears management. Where the power over these decisions has been delegated to a servicer or administrator, which is itself regulated for these activities, then there should not be "double" regulation. The CML cautions that it is also crucial to avoid unintentional problems for securitisation and covered bond transactions.

However, the CML disagreed with the proposal to extend regulation to buy-to-let loans. It would not result in increased consumer protection, would almost certainly capture an inappropriate range of commercial transactions, and failed to address the issue of advice on whether to invest in property at all, which was much more likely to be a cause of consumer detriment than the mortgage itself. It is also the wrong way to address concerns about systemic risks, which are more appropriately addressed through prudential rather than conduct of business regulation.

The CML's response said: "Fundamentally, the CML still believes that buy-to-let loans are essentially commercial transactions with an investment dimension, and should not be subject to retail mortgage regulation. Inappropriate regulation could further damage buy-to-let lending, which has shrunk substantially in the last two years, at a time when the Government is separately promoting investment opportunities in the private rental sector. Extending the FSA's scope as proposed would undermine the Government's wider housing policy."

CML director general Michael Coogan said: "While we support some of the proposals to extend regulatory scope, the Treasury and the FSA need to tread carefully to avoid unintended negative consequences. As far as buy to let is concerned, the regulatory proposals are barking up the wrong tree - for amateur property investors, poor investment advice is the issue, not the mortgage.

"The recently-published consultations from the Treasury and the Department for Communities and Local Government on the role of the private rented sector are far more relevant and influential in determining the role played by buy to let. The Treasury recognises that regulation has in the past dampened incentives to invest in the private rental sector. The proposals to extend mortgage regulation designed to protect home-owners to the buy to let sector would simply repeat this mistake."

Market Update January 2010

Demand for rented homes is outstripping the supply of properties available to let following a rise in reluctant tenants. The Association of Residential Letting Agents said fewer homes are available to let but demand for rented accommodation is rising because people are struggling to find properties to buy or mortgages they qualify for.

Around 41% of letting agents said there were more potential tenants than properties in the final quarter of 2009, up from 24% in the previous quarter. Last year the rental market was flooded with properties from so-called accidental landlords, as people unable to sell their home when house prices were falling were forced to rent it out instead.

The number of "accidental" landlords has fallen in recent months because the property market has picked up. Many people who would like to buy a home are struggling to find somewhere suitable because of a shortage of properties for sale. Others are unable to raise the deposits needed to meet strict lending criteria of banks and building societies, forcing them to rent instead. Around 54% of letting agents said consumers are being forced to rent a property rather than buy one.

Paul Singleton, Managing Director of Faulkner Said "New tenants include those homeowners who were forced to sell their home during the last year either due to financial instability or a job move"

According to figures compiled by Paragon Mortgages, 10 percent of all residential landlords expect to purchase new rental properties within the next three to four months. Those in the buy-to-let sector that plan to expand their portfolios hope to do so during the first quarter and prefer well-built modern homes with one in four looking to purchase a semi-detached house. A smaller proportion (one in five) is looking to extend their rental business by purchasing a flat. But at the moment, Paragon found that the least popular option among landlords is to purchase a fully detached house