Offering mortgage guarantee to all could cause same problems as Help to Buy – Star Letter 12/03/2021
The first comment came from Tim Hague, who replied to the article: Sunak expects first-time buyers to be main users of mortgage guarantee scheme
He said: “It will be critical to ensure scheme rules reflect the chancellor’s aims.
“By opening the scheme to everyone without fixing the housing supply shortage, the likely increase in house prices caused in the same way as the Help to Buy scheme, combined with affordability rules, has the potential to make owning a home even more challenging for first-time buyers.”
Hague added: “It will, of course, be fantastic news for next time buyers and a welcome stimulus for property sales more generally.”
Buyers are most accurate representation of prices
The second article to receive a comment was: AVMs provide more accurate valuations than surveyors – JLM
HEJ said: “Valuations are supposed to illustrate market value. They are there chiefly to protect the lender if a property is repossessed.
“As property values increase, and repayment mortgages predominate, then the risk of a valuation being inflated matters less and less as time passes.
“Similarly, most buyers pay a decent deposit – certainly more over the past 12 months as 95 per cent loan to value (LTV) and 90 per cent LTV lending has dropped away – and a very small number of properties end up being repossessed. So the value is, to a great extent, irrelevant from a lending risk perspective 99 per cent of the time.”
HEJ added: “Therefore, valuations are rather unimportant, except that lenders set great store in them. If market value is demonstrated by a buyer willing to pay a certain amount, and the risk to the lender being almost nil if this is slightly too high or too low.
“If we look at RICS figures on house prices, versus what has actually happened over the last few years, the surveying industry is too beset by negativity and paranoia regarding professional indemnity claims to be an impartial arbitrator of what represents true value. The market, by which I mean the buyer, is generally more reliable.”
Furlough approach has to be holistic
On the article: ‘Lenders have not got to grips with how the pandemic impacted borrowers’ – Hunt, Paul Barrett said: “Lenders can’t be blamed at all.
“They have to make holistic decisions, one of the major ones being whether an applicant has a confirmed job and relevant wage.”
Barrett continued: “If furloughed, no applicant can confirm this. Furlough has to end for a lender to know whether an applicant still has a job and income.
“Lenders are only being responsible when not advancing loans to furloughed workers. Of course, all this is extremely frustrating for all concerned but certainly, lenders are as much a victim of furlough as those furloughed.”
He added: “Until furlough ends nobody will know what the true status of any applicant is. It is all very annoying, but we are where we are.”
Home Survey Standard provides greater clarity and detail for borrowers – Arnold
The standard launched by the Royal Institution of Chartered Surveyors (RICS) marks a turning point in terms of engagement and accountability and should encourage more buyers to have more confidence in the value of the survey.
It puts more responsibility on a surveyor to be clearer about their observations and recommendations, and it puts greater emphasis on a homebuyer taking the most appropriate survey for their property.
Where the instructions to carry out a survey have been received from a third party, such as a lender or a panel manager, for example, it is stated that a RICS member or regulated firm should satisfy themselves that the instruction is best suited to the property and the needs of the client.
Where the RICS member finds the instruction is not suitable, the client should be given the reasons why and advised on the appropriate level of service.
Increasingly lenders are turning to automated valuations based on statistical trends as a way of cutting costs and so often in these transactions no surveyor enters the building to inspect the actual condition of the property.
In this situation, whose responsibility is it to ensure that the buyer has fully considered the undertaking that they are entering?
Anecdotally, we have already heard of mortgage lenders contacting applicants directly to check whether they are comfortable to proceed without a professional inspection of the property, which would indicate they already have some concerns about the potential for complaints in the future.
Where does this leave a mortgage adviser?
If a client engages you to give advice on how to finance a home purchase, will you also be accountable for other financial considerations, such as whether the property has potentially expensive defects?
At this stage we don’t know how the narrative will play out, but it would be sensible to adopt a cautious approach.
An easy way to do this is to partner with a surveyor who can have this conversation with a client on your behalf.
On a practical level, this will mean reviewing your terms of engagement to ensure your clients have provided consent to be contacted by third parties and putting the processes in place to facilitate those conversations.
A well-managed and well-communicated survey can help hold a deal together, showing there is nothing to hide when it comes to the condition of the property.
Brokers are in a good position to discuss this early in the process and if it’s not discussed early it can be picked up by conveyancers at the point of exchange, which can lead to delays of weeks at a crucial stage of a transaction.
So, with the arrival of the new Home Survey Standard think about what responsibilities you have to your clients, and what steps you can take to protect their financial wellbeing when they buy a home.
AVMs provide more accurate valuations than surveyors – JLM
We’re thinking specifically of lenders’ use and acceptance of automated valuation models (AVMs), particularly through the first lockdown last year, which appears in sharp contrast to the recent almost total return of physical inspections in some cases.
AVMs are a somewhat controversial subject in this space, although a large part of that controversy is bewildering.
Of course, a number of specialist lenders were unable to use AVMs because of issues relating to how they are funded and how they securitise their assets.
We would hope this has been rectified for the future, because in our view, the accuracy of the AVM should not be in doubt.
Indeed, we would go as far as to say we enjoyed the move to AVMs last year, with valuations coming in at highly accurate levels, and the models used working efficiently throughout the period. More of that please.
More accurate valuations
Can we say the same since physical valuations have become the norm again?
We’re not sure we can; indeed, the self-styled pre-eminence placed on the work of certain surveyors as somehow being more accurate than AVMs seems utterly misplaced.
A more cynical observer might think surveyors are trying to prove their worth to lenders, before their role is made defunct by technology.
The number of ‘down valuations’ – a concept some surveyors seem to believe does not exist but is a very real part of our market – is up, with some surveyors appearing to think they have a duty to ‘protect’ the lender against accurate valuations.
This concept no doubt being predicated on a belief that house prices are going to drop dramatically at a point in the future – with no-one being able to accurately say when.
Valuations based on last year
We wonder whether some surveyors have those 20-plus per cent drops in house price predictions still in their heads from last year, and are basing their values on those, rather than the current market, property supply, local comparables, and such.
It’s got to a point where we’ve had cases where the surveyor has down-valued the property by approximately three per cent on purchases, and been unable to provide accurate comparables for that decision.
This has led lenders to overturn these purchase valuations once they’ve been reviewed by their own staff surveyors.
And even after this type of result, we’ve still had to deal with a number of arrogant surveyors who dispute the black and white data they’re presented with and are still trying to flex their perceived muscles in order to get the lender to accept their flawed valuation.
If surveyors are taking this approach because they are fearful of greater use of AVMs, then they are going about it the wrong way.
Being inaccurate is likely to make AVMs more popular not less and placing a value on a property based on predictions last year, or a future drop which is not assured by any means, is only going to cause more work for all involved, and less trust placed in physical valuations.
In that sense, surveyors have been warned – the machines are on the march.
Roma and Together update LTVs and valuation processes
Roma has increased its loan to value (LTV) by five per cent on residential bridging and will now consider applications up to 75 per cent, returning to pre-Covid levels.
It is also working with selected packagers to allow them to instruct their own valuations which should allow faster completions and give packagers more control over cases.
Previously Roma had controlled all the valuation instructions.
Nick Jones, commercial director of Roma Finance, said: “In 2021, it is essential we continue to make advances with products, processes and technology to maintain the speed intermediaries and customers need for their property investments.
“These enhancements will allow more customers to access short term finance and enable even faster case processing and completions.”
Together increases AVM use
Meanwhile, Together has updated its criteria to allow more automatic property valuations which it expects will reduce costs and speed up mortgage applications.
It believes more than half its cases can now be completed through digital valuations, up from a third in 2019.
The rules apply across all personal finance products, with a maximum LTV of 70 per cent or 65 per cent for regulated bridging, and to a maximum loan size of £250,000 and a confidence level of 5+.
The lender now has no maximum property value on automatic valuations for regulated bridging and first charge loans, while for second charge loans this has increased to £750,000.
Previously the limit for all application was £500,000.
For home purchases, Together will accept the minimum Hometrack valuation or purchase price, or the council valuation for right to buy properties.
Physical valuations will still be needed on shared ownership properties, those of non-standard construction and new-builds, it added.
Head of intermediary sales Sundeep Patel (pictured) said: “We estimate that changes to our rules mean we will be able to use Hometrack’s automated valuation model in more than 50 per cent of personal finance applications, up from about a third of cases in 2019.
“It’s an incredibly useful tool, particularly under the current Covid-related lockdown restrictions, and could reduce costs for intermediaries submitting cases to us, while speeding up the application process by removing the time it takes for physical valuations of properties.”
Santander warns valuations may be slower in lockdown
However, it has warned that these may take longer than usual and this could have a knock-on effect on mortgage offers.
In a message on its broker portal, the lender said: “Further to the national lockdown announcement by the UK government on Monday 4 January, our valuation partners have confirmed that they continue to provide valuation services at this time in England, Northern Ireland, Scotland and Wales.
“However, please be aware that valuations could take longer than usual which could impact the time to mortgage offer.
“Thank you once again for your continued support and patience during this time.”
Helen Harrison, head of intermediary distribution at Santander, said: “Working with our valuation team, we’re pleased to be able to continue to progress mortgage applications during the latest lockdown.
“While valuations may take longer, for example due to problems entering a property where an occupant is self-isolating, we are working hard to ensure as many customers as possible can continue as quickly as possible on their homeownership journey.”
Surveyors confident of continuing
With the housing market allowed to continue operating during the latest set of restrictions it is hoped services will be largely unaffected, especially as the vast wave of homebuyers are aiming to take advantage of the stamp duty holiday which ends on 31 March continues.
Countrywide Surveying Services, one of the largest surveyors in the UK, confirmed yesterday that its operations would not be affected.
SDL Surveying today confirmed its surveyors were still able to value and survey homes.
It has also toughened up protocols for in-depth assessments such as homebuyer reports by requiring all residents to be outside the property during the internal assessment.
The firm is also urging its surveyors to contact all forthcoming appointments, to highlight the changes and check whether occupants have had any changes in their circumstances, for example, a renewed need to shield.
Last month lender MT Finance highlighted that it was starting to see surveyors and solicitors withdrawing from meetings or visits as the latest coronavirus wave took hold.
Valuers and solicitors hesitating as new Covid strain takes hold – MT Finance
The specialist lender noted that it was starting to see firms operating in these sectors becoming more hesitant about working practices in the current situation.
MT Finance commercial director Gareth Lewis (pictured) revealed the developments when commenting on the HMRC property transaction figures for November.
“We expect the market to go from strength to strength in the New Year as long as stricter lockdowns don’t preclude people from doing their jobs, such as carrying out valuations,” he said.
“Concerns over the new strain of Covid could prove to be a stumbling block.
“We have already had a couple of valuations pulled at the last minute where surveyors have been able to view a property but chosen not to, as well as solicitors saying they are uncomfortable about meeting clients face-to-face.”
‘Could cause severe delays’
Lewis told Specialist Lending Solutions the firm had seen a number of issues over both legals and surveying, with the goalposts moving slightly.
And he warned while lenders could be flexible, changes in approach could present delays given the current need to meet the 31 March stamp duty holiday deadline.
“A few surveyors have postponed inspections and one solicitor refused to hold a face-to-face meeting with our client, resorting to Skype instead,” he said.
“’The impact could be serious in both these instances if you have an inflexible lender, but we are well placed to work with these challenges to find a resolution with alternative surveyors and flexibility as to who can witness documentation.
“However, these issues can cause severe delays given timescales and pressures to complete,” he added.
Lendy valuer settles £625k PII claim for £2m over-valuation as company boat sold
It is believed to be the first successful action taken against a valuer by the administrators to help recover short falls in loan recoveries, and was revealed in the latest half-year update.
Administrators have been taking action in many ways, including on personal and corporate guarantees or making claims for negligence against third-party professional advisers.
In this case, following a mediation meeting in October, the administrators agreed a settlement with the valuer and insurer for £625,000.
According to details on the Lendy website, the property in Leatherhead, Surrey was valued at £4.25m in February 2016 with a loan of £2.975m granted to refinance the original loan help complete works on it.
However, the developer initially completed the works without planning permission which required further funds from Lendy to bring it back into line with regulations.
Eventually, a valuation from a third party of £2.25m was given in early 2018 as the top sale price in that area and a buyer purchased the property for £2.1m – leaving investors £1m short.
Lendy loans overvalued
Speaking at the NARA property receivers conference last month, RSM Restructuring Advisory partner Damian Webb who is overseeing the recovery of as much capital as possible for investors, said one of the biggest issues at Lendy was the accuracy of valuations.
He confirmed that only around 30 per cent of the original values are being collected on average against outstanding loans.
Speaking about wider issues with valuations within the peer-to-peer sector, and not specifically those at Lendy, Webb noted a lack of processes where borrowers were allowed to appoint their own valuer.
“The borrower would then say the value needs to be ‘X’ and the valuer would sign off on it and you would consistently see valuers working on a range of projects for the same lender,” Webb said.
“The P2P lenders would also lean on the valuers as they wanted to deploy the capital, so it wasn’t just the borrowers.
“So they would encourage the valuation level and would ignore things such as connected party leases, they wouldn’t read the title documentation properly, they wouldn’t engage properly.”
In the bi-annual update, Webb also revealed the administrators had taken possession of the company Stingher Rib boat and sold it for £50,000.
In June a worldwide freezing injunction over the assets of the former directors, Liam Brooke and Tim Gordon was obtained, as well as proprietary injunctions on properties owned by companies linked to the directors.
Proceedings were commenced against Liam Brooke, Tim Gordon, RFP Holdings Limited and LP Alhambra Limited and during the period these claims have been progressed, the administrators added.
Overall the Lendy loan book has 29 development and bridging finance loans outstanding worth £117m, with 24 of these in formal insolvency proceedings.
The administrators have so far reclaimed 18 loans worth £16.8m.
The administration has been extended by 36 months to midnight on 23 May 2023 but RSM said it was not possible to ascertain at present when it would actually end.
Pepper allows advisers to kick start valuations
Pepper automatically instructs a valuation once it has assessed all of the decision-making documents, but the change means advisers can choose to instruct the valuation earlier to speed the progress of the case.
Advisers are free to use any of the valuers on the Legal & General panel which is used by Pepper.
“So, if a broker is confident their customer’s documents will be verified, they can get a head-start by instructing the valuation sooner,” the lender said.
Paul Adams, sales director at Pepper Money, said it was an important tool for brokers as it meant they could give their customers an advantage in a competitive market where time is of the essence.
“Why let your customer wait for a valuation when you are confident a case is going to proceed?” he said.
“We give brokers more control over the progress of their applications by instructing their own valuations as soon as the application has been reviewed, which means they no longer have to wait for all of the documents to be reviewed to get the ball rolling on the valuation.”
Nothing to stop remote valuations with securitisations, lenders need to get behind it – Ward
As it turns out the problem was fairly short-lived and attention moved into other areas including dealing with a surprising uptick in mortgage volumes on the back of the stamp duty holiday.
This meant little real time was given to better ways for risk assessment going forward or future proofing businesses against future valuation lockdowns.
This needs to change.
We are now in a new national lockdown in England, after Wales just exited its shorter version.
Disappointing as this is to be repeating lockdowns, it can’t come as a total surprise to anyone following the data and political responses around the world.
So turning to valuations, how important are they? Very is the short answer.
When making a mortgage, from a risk perspective there are only a handful of things that really matter:
- Does the borrower exist?
- Does the property exist?
- Is the property being offered as security the same as the one being valued and subject to a legal charge? It may seem obvious but believe me ‘accidents’ have been made in this respect before.
- And, taking all relevant things into account, is the value correct?
- Have I got a valid, subsisting first legal charge?
Focussing on the valuation
Ideally lenders like to send a qualified valuer to visit the property.
This has been getting harder as valuers are an ageing population and there are now far fewer of them practicing. Professional Indemnity Insurance is also becoming scarcer.
At the same time, technology has been advancing.
We have had automated valuation models (AVM) for many years now and accessibility of data and sophisticated technology has improved the risk management process.
Some lenders are happy to rely just on AVMs for lending, particularly where the loan is low risk such as a sub-60 per cent loan to value (LTV).
While that’s all well and good I think there are better ways to improve the risk process.
This can be by incorporating a valuation review, which uses other data sets such as an AVM; Land Registry data, showing where the title is for the property that needs valuing incorporated with Ordnance Survey map data; and date and value of last sale.
Environment Agency data is also necessary for flood, mining and subsidence, as well as comparable tools that search for similar properties, either for sale or sold, with pictures both internal and external, satellite and street imagery.
So, if a qualified valuer, or the lender for that matter, can access all of this information it is possible to deal with all but the last one on my list of five bullet points above.
And if a lender is unhappy to take this leap into a new way of assessing the risk of a property it is entirely possible to take out insurance protection against the value being wrong and also covering the final bullet point being the first legal charge. Game set and match.
This is where the industry is heading, and some forward-thinking lenders have already got there.
Others are lagging.
But what about securitisation?
I often hear that this is a barrier to implementation and less understood rules about the US Dodd Frank Act are paraded as part of the problem.
Simply put they are not and there is nothing inherently in securitisations that stop us from using these more developed risk management techniques.
It frustrates me that, as one of the earliest practitioners in the European securitisation markets, we thought of ourselves as innovative and cutting-edge.
But that was 1985 and the residential mortgage backed securities (RMBS) market hasn’t kept pace with risk management techniques and technology.
In effect the RMBS market still relies on 1985 processes. It is time they were revisited.
This is not just about lockdown and scarcity of valuers but focussing on the real risks and adopting better practices to ensure better risk outcomes.
Lenders, originators and issuers need to spend time with their investment bank funding partners in educating them about how things could be done better and then take this to the rating agencies. This will not change unless lenders get behind it.
The other benefit of course is that future lockdowns needn’t stop pipelines completing if physical valuations get suspended again.
LendInvest extends desktop valuations to bridging
It is the latest lender to make such a move as the second lockdown in England begins and as the second wave of the Covid-19 pandemic hits at the start of winter.
While valuers are still allowed to visit properties as part of the restrictions, it has been noted that times to agree appointments are extending and there is concern the number of visits blocked by isolating residents will increase.
LendInvest is making desktop valuations available for borrowers seeking residential bridging and auction products on loan sizes up to £250,000 with a maximum loan to value (LTV) of 65 per cent.
These valuations will be available for properties in England, Wales and Scotland up to a value of £1m.
It will be utilising desktop valuations through Connells to ascertain the security value, in absence of a valuer being able to make a physical visit to the property.
LendInvest director for bridging Justin Trowse said: “As we continue to operate through unpredictable times, it is imperative to be prepared for any sudden changes to the way we are able to work.
“While at this time physical valuations are permitted to go ahead, we realise we must be equipped for any eventuality should that change in the future.
“Adding the capability to utilise desktop valuations for more of our product suite allows us to stay one step ahead, and ensure we can deliver the finance our borrowers need with the same speed and flexibility we always have.”