Indecision is something of a recurring theme within the government at the moment. Putting aside the subject of personnel changes at the top, even many of its policies seem to be built on shifting sands, as shown by the change of stance over the Home Information Packs (HIPs) initiative.
After a number of years of trumpeting HIPs as the solution to the problem of almost a third of all UK house purchases collapsing every year, costing consumers around £350 million in lost fees, the government has back-tracked on a major part of the initiative, leaving many to wonder whether HIPs will be of any use whatsoever.
In theory HIPs are a good idea – they provide more information about a property upfront to the prospective buyer so they are made aware of any potential problems before they make an offer and commit to costly surveys and other reports. Unfortunately the government’s plans were not well thought out and were flawed in a number of key areas, causing concerns from stakeholders including the Royal Institution of Chartered Surveyors (RICS) and, of course, many mortgage lenders.
Achilles Heel
The real Achilles Heel though was the Home Condition Report (HCR), the part of the HIP intended to inform the would-be buyer about the state of their prospective purchase. The HCR was to be pitched somewhere between existing valuations and the more detailed Home Buyers report – but crucially the HCR would not contain a valuation element, causing major headaches for both consumers and lenders.
Valuations are vital for mortgage providers when making their lending decisions, as well as giving prospective buyers the confidence that the property they are interested in is not overvalued. The proposed HCR would be useless for both of these requirements. In addition to this, there was a great deal of concern over the availability and capability of the new home inspectors required to carry out the reports.
In terms of lending decisions, an alternative to a traditional valuation is to use automated valuation models (AVMs) – essentially a computerised database that tracks the values of property based on information such as selling prices, size and type of property, and location. The government decided AVMs were the solution to the valuation issue and even cited Nationwide Building Society as an advocate of the scheme. The building society replied by saying that although it did use AVMs, this was primarily for re-mortgages and lower loan-to-value (LTV) purchases and as such would not be the answer in every mortgage situation.
Indeed Kensington, along with most lenders in the UK, is using AVMs more often and their use will be much more widespread over the coming years. But there will always be situations where AVMs cannot be used, particularly in the specialist market or for LTV mortgages in excess of 75 per cent.
Non-conforming issues
Another worry for specialist and non-confirming lenders is how the lack of a RICS valuation could impact on the securitisation process, possibly adversely affecting the price of mortgage portfolios when brought to market because of concerns from investors and ratings agencies over properties without a full valuation.
We have always made it clear that, at least in the short-term following the introduction of HIPs, buyers would still have to get a RICS-approved valuation for their prospective property, a stance adopted by many other lenders. This would have added more cost and more time to the house buying process, two areas where the government had promised savings.
And speaking of savings, this is another area of concern about HIPs, because it places all of the near £1,000 cost of the pack onto the shoulders of the seller. This puts an extra burden on more vulnerable sellers, such as the elderly who are downsizing to smaller properties or even retirement homes, and in particular those owners who are selling their homes due to financial problems, possibly even mortgage defaults. The last thing they want is to have to find an extra £1,000 before they even start to extricate themselves from their situation.
HIPs could also potentially hand estate agents a huge amount of power and influence in the house buying process. A number of companies have already set up in business to offer HIPs, but ultimately estate agents will probably become the major distributor as they are the first point of contact for would-be house buyers. With such a powerful position estate agents could also end up influencing consumers in other parts of the process, such as where they get their financial guidance, raising a question mark over whether customers will get best advice.
Moving the goalposts
The goalposts, however, have now been moved and the government has changed its approach to some parts of the HIP. In July the Department for Communities and Local Government (DCLG) announced that HCRs would not be mandatory when the packs are introduced next June, citing the possibility of consumer detriment.
Following a regional trial of HIPs, Yvette Cooper, Minister for Housing and Planning, said: “As part of the development of the dry-run, we have engaged in detailed consultation with a wide range of stakeholders and have gathered substantial information on the progress of implementation so far. As a result, we have concluded there would be significant risks and potential disadvantages to consumers from a mandatory ‘big bang’ introduction of full HCRs.”
This does not mean HCRs have been junked completely, as further investigations into the impact on consumers are ongoing. However, Cooper did say that concerns over lenders requiring their own valuations on top of a HCR was one of the reasons for the government’s decision, so hopefully it is taking steps to address this issue before finally deciding to make HCRs compulsory.
So HIPs Mark II won’t include HCRs as standard but will feature local searches and Energy Performance Certificates (EPCs), and will now only cost around £150. Whether the government’s aims of increasing efficiency in the purchase process, improving long-term transparency and raising awareness of the energy efficiency of property will now be achieved via HIPs remains to be seen.
Listening to the industry
The energy efficiency element had previously not been a highlight of the HIPs proposals, but when Cooper announced the changes to the HCR requirements in the Summer she stressed this was a major element of the government’s desire to reduce energy consumption. She said: “Because of our commitment to addressing climate change we do not want to jeopardise the successful introduction of EPCs at the earliest possible opportunity by pursuing the ‘big bang’ mandatory introduction of full HCRs at the same time.”
Yet Cooper is still clinging to the idea that alternatives to traditional valuations will help pave the way for an eventual full-on roll-out of HCRs. She said: “Once AVMs are in place, HCRs should mean buyers get cheaper and swifter valuations and mortgage offers.”
I think the Minister needs a bit more insider advice, as AVMs could eventually bring cheaper and valuations for some borrowers, but not all. It is this lack of market and industry understanding that has caused so many problems with HIPs thus far, and, to be honest, it is the kind of statement that strikes fear into the hearts of any financial organisation whenever a government agency starts to get involved in financial legislation.
The same was true during the run-up to mortgage regulation where the Financial Services Authority (FSA) proposed the banning of self-certification – a popular and important product – while leaving anomalies such as no regulation for buy-to-let (BTL) mortgages. Thankfully, the FSA has changed its attitude over the last year or so and is adopting a more pragmatic way of working with the mortgage industry, focussing more on principles and the spirit of rules rather than a strict reading of legislation.
Perhaps the government should take the same approach to the UK’s property market and make time to reassess HIPs, HCRs and the entire industry – starting with the urgent regulation of estate agents. The UK market is vibrant and, as a result, the accompanying mortgage industry is one of the most innovative in the world. The HIP initiative could have a massive impact on both, so isn’t it important to have workable and effective legislation to makes things better for all those involved, rather than more indecision?
Ian Giles, Director of Marketing at Kensington Mortgages
Ends
1400 words
