Simon Bevan of BDO has raised the spectre of second valuations – a well-meaning gesture in the ongoing battle against fraud. But this would not just be ineffective; it would actively damage customers’ interests.
The practice would add significant cost, duration and complexity to the mortgage process, undoing decades of progress in what has become a highly streamlined industry.
Mortgage fraud is a billion pound business in itself, a serious crime and a real problem for everyone involved. Experian’s latest figures are particularly worrying. They show a 22% increase in application fraud between April and June.
The increase comes at a time when mortgage lending remained flat in Q2, and remains at around a third of pre-crash levels. Many consumers, desperate for finance, would certainly pay corrupt valuers for an overvaluation if they could.
But the answer is not a second valuation.
Second valuations are standard in the United States, but didn’t prevent a decade of fraud that indirectly helped bring down the global economy.
The US sub-prime crisis was caused by irresponsible lending, made far worse by a swathe of fraudulent over-valuations.
Fannie Mae releases monthly statistics on US mortgage fraud – fraudulent property values still represent well over 10% of all mortgage fraud.
With fraud in around 10% of applications, this means roughly 1% of all mortgage applications in the US are still inaccurate specifically because of valuation fraud.
Such a cost comes despite spending double on these valuations in the first place.
There’s nothing to suggest that two valuers don’t experience the same temptations as one. It sometimes even emerges that both valuations have been carried out by the same person.
Simon Bevan is right about one of his claims – banks will never pay for a second valuation.
While they’re still constantly trying to reinforce their own balance sheets, any extra cost involved in mortgage lending will not be born by the lenders.
That will leave consumers picking up the tab. As the average cost of moving approaches £10k in total, consumers will be even more resistant to paying another £300 - £600 for a second valuation.
And the shift to higher fees and lower rates means product design already contributes to mounting up-front costs.
Delays would be a whole other issue. The wider cost to a fragile housing market is harder to quantify, but extra hold-ups could cause many sales just to fall through –the last thing anyone wants at the moment.
A second valuation also ignores solicitor fraud. The FSA’s thematic review highlighted solicitors as a potential weak link, even quoting one large lender which identified solicitors as critical in around 50% of cases.
Although two valuations is not the solution, lenders do need to address the problem.
They can make their own systems both fairer and more profitable by knowing they base their decisions on reliable information.
Surveyors are partners in the process and if lenders can’t trust one of them then there’s little reason to hope they can trust two. Screening out fraudulent valuers quickly and permanently is the way forwards.
Better sharing of information would have a real impact – we should try to keep momentum going after some progress in the last few years.
The Information from Lenders scheme is a step in the right direction. Since the CML set up the IFL in 2006, and with increased attention from the FSA, most people in the industry are now more aware of the need for more rigorous oversight and management of suppliers.
The next step is to implement this approach, managing risk properly. The Home Office and FSA report many individual cases where tens of millions of pounds have been at risk.
With prosecutions now preventing hundreds of millions of pounds in losses, the current path of information sharing is making a dent on the estimated £1 billion mortgage fraud industry.
Second valuations would be a step backwards.
