Memorandum by the Council of Mortgage
Lenders (CML) (DHB 09)
INTRODUCTION
1. The Council of Mortgage Lenders (CML)
is the representative trade association for the mortgage industry.
Our 144 members comprise banks, building societies, insurance
companies and other specialist residential mortgage lenders, which
together represent around 98% of the assets of the mortgage market.
Our members lend to the residential market, buy to let and social
housing markets. We welcome the opportunity to contribute to the
Select Committee on the Office of the Deputy Prime Minister's
pre-legislative scrutiny of the draft Housing Bill.
SUMMARY AND
OVERVIEW
2. The CML agrees that the primary responsibility
for homes in the private sector rests firmly with the homeowner
or landlord. We also accept that the Government has a responsibility
to ensure that those in the private sector have the opportunity
of a decent home. However, in legislating to try to deliver its
policy aims the Government has a responsibility to ensure that
the legislation they implement does not restrict the ability of
the market itself to contribute to the stated policy objectives.
3. We recognise that the draft Housing Bill
is largely enabling legislation and as such, we broadly support
the aims of it. However, we do have major concerns about the way
the legislation might be implemented, particularly on the proposals
for reform of the home buying/selling process. We are concerned
that if the Government does not raise its game in terms of addressing
the practical concerns that we and other stakeholders have raised
in connection with the way the proposed Home Information Packs
will work in practice, the Government's aim of reducing the problems
with buying and selling homes will not be achieved. Our concerns
are set out in more detail below.
4. Our comments are structured around the
Parts of the draft Bill.
PART 1: HOUSING
CONDITIONS
5. Clauses 1-60 replace the existing housing
fitness standard with the evidence-based Housing Health and Safety
Rating System and generally there are no issues here for lenders.
We are, however, clarifying with ODPM how the provisions might
affect lenders who have been forced to take possession of a property.
PARTS 2-4: LICENSING
OF HOUSES
IN MULTIPLE
OCCUPATION (HMOS),
SELECTIVE LICENSING
OF OTHER
RESIDENTIAL ACCOMMODATION
AND ADDITIONAL
CONTROL PROVISIONS
IN RELATION
TO RESIDENTIAL
ACCOMMODATION
6. We recognise that these parts of the
Bill provide enabling legislation to introduce mandatory and discretionary
licensing of houses in multiple occupation (HMOs). Whilst we support
the Government's aim of securing a larger, better quality and
better managed private rented sector, we are keen to ensure that
the proposals in the Bill will not deter private investors or
damage the successful and growing Buy to Let market.
7. There is no doubt that the deregulation
of the private rented sector included in the 1988 and 1996 Housing
Acts made an important contribution to reversing the decline of
the sector. It is estimated that there has been an increase of
600,000 in the number of private rented sector homes in the last
decade. There is evidence that the inflow of funds from private
landlords has increased the choice and quality of the private
rented sector so that it is a much more viable choice for those
who need, or choose, to rent. The Joseph Rowntree report published
in 2002 "Social market or safety net? British social rented
housing in a European context" made it clear that meeting
demand in the housing market for those caught in the trap between
owner occupation and the social rented sector relies on small
investors in the private rented sector.
8. A number of lenders are now involved
in providing loans to investors who wish to purchase a property
for letting (Buy to Let). Buy to Let lending has contributed to
the recovery of the private rented sector over the past decade.
It has also dramatically increased the number of individuals who
are private landlords, ranging from those who have a single property
to professional investors with significant property portfolios.
In 1998 there were 26,500 loans with a value of £1.9 million.
By the end of 2002 there were more than 275,000 Buy to Let loans
outstanding worth at least £24.2 billion.
9. Lenders' experience of Buy to Let has
so far been extremely positive, with very low levels of default
and very few possessions (half the level of the owner occupied
sector). We would not want this positive environment to be damaged
by a licensing regime that does not recognise the needs of the
Buy to Let sector.
10. Our main concern is that the Government's
proposals for licensing the private rented sector appear unnecessarily
complicated. Under the Bill that is now proposed, local authorities
will be required to license high risk Houses in Multiple Occupation
(HMOs). They will also have discretionary powers to license additional
categories of HMOs. In areas of low demand local authorities would
be able to apply to the Secretary of State for approval to license
landlords. Presumably, voluntary regulation of landlords not covered
by any other scheme would continue to be encouraged.
11. Local authorities will deliver the licensing
system under regulations made by the Secretary of State. It appears
that local authorities will have considerable freedom in the way
they operate the licensing systems. We believe the potential variety
and complexity of licensing schemes operated by different local
authorities in different ways is likely to deter potential investors
in Buy to Let. There is also the possibility that any additional
costs imposed by a licensing regime, coupled with the falling
yields within the sector, may cause some existing investors to
withdraw. Some landlords have large portfolios of properties covering
a number of local authority areas and if a number of different
schemes are in place it will make it difficult for them to know
what requirements they need to follow in which area. These people
are unlikely to be the "rogue" landlords that licensing
is targeted at but are likely to be caught by it. This would be
potentially damaging to the private rented sector, reducing supply
and limiting private investment.
12. The consultation paper accompanying
the Bill suggests that mandatory licensing will apply to HMOs
of three or more storeys occupied by five or more persons. We
do not see a difficulty with this. However, discretionary licensing
of other HMOs could include properties that would move in and
out of the private rented sector. This could quite easily include
semi-detached or even terraced properties that are not traditionally
thought of as HMOs. Clause 71 says that houses will need to meet
prescribed standards including standards for health and safety.
If these standards require that relatively major structural changes
have to be made to the property, such as the installation of fire
doors and emergency lighting, this would not only make it more
expensive for a potential landlord but would also make it difficult
for the property to return to the normal residential market. Again,
this may be potentially damaging to the private rented sector,
although we recognise the importance of ensuring appropriate safety
arrangements. We would like to be reassured that any guidance
to local authorities from ODPM on discretionary licensing would
be subject to consultation and highlights the need to consider
these issues.
PART 5—HOME
INFORMATION PACKS
(HIPS)
CML's position and other changes in the market
13. The CML shares the Government's aim
of improving the home buying and selling process by making it
easier, less stressful, more transparent, more certain and faster.
Such improvements would not only yield considerable benefit to
those buying and selling residential property but also improve
the environment within which our members do business. We recognise
that the draft Bill provides enabling legislation to require sellers
to produce a Home Information Pack designed to help the Government
achieve its aims.
14. However, we believe that there are other
important changes in the market that the Select Committee should
be aware of. These were highlighted in independent research commissioned
by the CML last year. The research also considered potential future
developments in the home buying and selling process (a copy of
the Executive Summary of the research is attached).
15. The research concurred with the Government's
view that there are significant problems associated with the home
sales process in England and Wales. However, it also highlighted
the fact that the last five years has seen significant improvement
and that there are a number of initiatives within the industry
that will build on this improvement over the coming five years.
The recent and imminent developments identified in the report
are summarised below.
(a) Information and communications technology
has had a significant impact on the way services are provided
and the information consumers have access to.
(b) Greater technology and instant credit
referencing has led to a speeding up of the time taken to issue
a mortgage offer (the average is now 14 days).
(c) Electronic conveyancing and the National
Land Information Service (NLIS) will considerably speed up the
conveyancing process by providing online access to title deeds,
contracts, searches and other key data required in the process.
(d) Greater systems integration will happen
in the next five years with XML protocols enabling the speedy
transfer of data between businesses using different IT systems.
16. Turning to the Government's Home Information
Pack proposal, the researchers stated:
". . . on balance, seller's pack legislation
is not necessary provided that the industry places greater emphasis
on embracing innovation and technology, improving customer service
and providing the consumer with better information earlier in
the process." (page 6)
17. However, the researchers also expressed
the view that:
"Not introducing seller's pack legislation
could send a signal to the less reform minded elements within
the industry that they do not need to change." (page 7)
18. The CML has consistently put the view
to Government that HIPs are not necessary if other initiatives
deliver the changes that everyone in the industry wants to see.
However, on the basis that Government is still totally committed
to the introduction of HIPs, and that there is some support for
the concept among lenders, we are continuing to assist and advise
Government on the practical issues to be resolved before HIPs
are introduced.
19. In assisting Government, we have identified
a number of potential threats associated with the introduction
of HIPs that could disrupt the smooth running of the housing market
in England and Wales. We have highlighted these to Government
and are providing lender expertise to assist efforts to address
them.
20. We feel it is vital that Government
accepts that it has a responsibility to both acknowledge the threats
being highlighted and fully engage with the industry in addressing
them. We believe this is an area in which the Government's needs
to raise its game as we move from a debate regarding enabling
legislation to one regarding the specific regulations that will
define the legislative framework within which the industry will
be asked to make HIPs work. If it is not properly managed, we
face the very real possibility that the introduction of HIPs will
cause more harm than good.
INTERACTION BETWEEN
HIPS AND
OTHER DEVELOPMENTS
IN HOME
BUYING AND
SELLING
21. Beyond the legislative proposals for
HIPs we believe that the Government must accept that it has a
role to play in ensuring the potential benefits associated with
other developments within the home sales process are achieved.
Indeed, we would go even further and suggest that the potential
benefits of the NLIS project and the e-conveyancing initiative
are critical to the success of HIPs.
22. The provision of information at the
very start of the transaction is a proposition that few can argue
with. However, it is vital that the information is available quickly
so that there is no reduction in supply to the market because
of delays, time or cost associated in putting the HIP together.
The ability to transfer the information between professionals
quickly, the objective of the e-conveyancing initiative, is also
vital if the introduction of HIPs is to significantly reduce the
time between offer and exchange.
23. To expand on this point using the example
of NLIS, the provision of information quickly is exactly why NLIS
was developed. The Government backed project to automate and speed
up the provision of property related information held by local
authorities holds out the possibility of obtaining local authority
searches in a matter of seconds as opposed to days/weeks. This
would ease one of the industry's concerns with HIPs—ie that
they will delay the entry of properties to the market. Unfortunately,
the degree to which local authorities have introduced the technology
required to fully interact with NLIS is, to say the least, disappointing.
As at July 2002, 41 out of 375 local authorities (11%) had introduced
the technology required to fully interact with NLIS. As such,
we move towards the introduction of HIPs with local authority
searches still taking too long. There has also been no reduction
in the cost of providing local authority searches. As a result,
industry concerns regarding an effect on supply because of speculative
sellers being put off by the cost of a HIP remain.
24. The CML has grave concerns regarding
the limited degree to which Government is driving through the
changes needed to ensure the success of NLIS and e-conveyancing.
It is vital that Government accepts that they have a responsibility
to do all they can to ensure their success.
LENDER CONCERNS
WITH HIPS
25. The CML has been involved in the debate
regarding the introduction of a HIP since the idea was developed
just after the 1997 election. As such, we are well placed to assess
the research that has been undertaken in developing a concept
into a workable policy. Our current assessment is that there are
a number of critical issues yet to be resolved despite six years
of debate.
26. Whilst acknowledging that there are
a number of research projects in place to examine how best to
implement HIPs, it is our view that a vast amount of work remains
to be done prior to there being any possibility of successful
implementation. We understand the difficulties of undertaking
development work prior to the Bill receiving Royal Assent. In
light of this we feel it is vital that the provisions within clause
150 that allow the Secretary of State to provide grants for development
work are brought into force as soon as the Bill receives Royal
Assent.
27. It is well known that the major concern
of lenders is the inclusion of a Home Condition Report (HCR) within
the pack (these are set out in paragraphs 41-54 below). In spite
of this, there are a number of issues regarding the wider pack
that cause us concern.
(a) Cost
28. Within the Regulatory Impact Assessment
published alongside the draft Bill it is suggested that the overall
costs associated with buying and selling a home will not significantly
increase. Indeed, APPENDIX P of the separate consultation paper
on the contents of the HIP suggests that the total cost to buyer
and seller will actually be reduced when HIPs are in place. The
CML is not convinced of this.
29. Currently only 20 to 30% of buyers undertake
an independent Homebuyer Survey and Valuation. The majority of
buyers rely on the lender's valuation. A compulsory HIP would
include a HCR. Thus, at the aggregate level, some 70 to 80% of
transactions would face an additional charge of at least £280.
However we do not believe the HCR has been properly costed and
believe that the actual cost may be nearer the current Homebuyer
survey of £370.
30. Secondly, the estimates provided by
the ODPM suggest that the cost of searches will remain the same
when HIPs are in place. Clause 144 allows the Secretary of State
to make regulations prescribing the contents of a HIP, including
in clause 144(5)(c) copies of relevant records. Our information
suggests that currently the average conveyance includes roughly
three searches. In the separate consultation paper on the content
of the HIP, ODPM is suggesting that the HIP will include four
searches, the additional one being an environmental search. Clearly,
the provision of additional searches will incur additional cost
for the seller.
31. A related point is the degree to which
the four searches it is suggested will be required within the
HIP will satisfy the buyer's/lender's legal representative. In
many circumstances additional searches will be required (eg a
Coal Authority Search). Unless these are included within the HIP,
the buyer will have to pay for the search to be undertaken once
an offer has been made and delay the purchase until the search
is available to his/her legal representation. It is our view that,
should the HIP be introduced, clause 144 (5)(c) should be implemented
in full so that all searches relevant to the property are included.
32. Finally, there is the issue of the validity
of the contents of the HIP at completion. Lenders currently require
searches and valuations to be no older than six months at completion.
By requiring the provision of both searches and a HCR, which will
include information that lenders may use to arrive at a valuation,
up to three months prior to marketing there is a distinct possibility
that many searches and valuations will be out of date by completion.
This will result in the buyer facing the additional cost of updating
the documents or obtaining insurance as the seller will not be
required to ensure the HIP remains current.
33. To recognise the fact that lenders require
searches to be no more than six months old at completion we think
the secretary of State should have the power in clause 144 to
set a time limit for the validity of part or parts of the pack.
(b) Marketing
34. As currently drafted, clause 137 of
the Bill requires a HIP to be in place prior to the property being
marketed. This, realistically, will take some 10 to 15 days and,
in conjunction with the cost of assembling the HIP, may dissuade
speculative sellers from entering the market.
35. Estate agents have highlighted this
issue as critical to the supply of properties onto the market.
As the vast majority of sellers are likely to also be buyers it
is possible that a reduction in supply may well be accompanied
by a reduction in demand. However, the question that arises is
whether or not the level of supply and demand is optimal. If the
introduction of HIPs were to stop spontaneous sellers from moving
when they otherwise would then, clearly, the level of supply would
be sub-optimal. It is not clear what plans the Government have
to monitor the supply of properties coming to the market and it
would be helpful to know what they are.
36. In addition, if under clause 137 the
person responsible for producing the pack has 14 days to produce
a copy of any document in the HIP why could this period not be
used for marketing the property? At present any marketing activity
is precluded until a pack is produced under clause 139.
(c) Licensing of Estate Agents
37. The Estate Agent Ombudsman recently
expressed the view that all estate agents should be licensed.
It is interesting to note that all professionals involved in the
residential property industry, with the exception of estate agents,
are already closely regulated.
38. The CML believes that Estate Agents
should be licensed. We think this should happen whether or not
HIPs are introduced. We believe there is an even stronger case
for licensing if HIPs come into existence as Estate Agents would
more than likely take on an advisory role regarding interpretation
of the HIP for both buyers and sellers. We believe that HIPS should
not go ahead without licensing of estate agents in place.
39. There are a number of options open to
the Government in this area. There is the possibility of a more
effective implementation of the Estate Agency Act, a requirement
that all estate agents sign up to the Ombudsman scheme or the
setting up of a new compulsory regulatory framework. The CML has
expressed these views to the Office of Fair Trading as part of
its ongoing investigation into Estate Agency and would be happy
to engage in any further debate on the issue as to how licensing
can best be achieved.
(d) Enforcement
40. Under clause 146, trading standards
officers will be responsible for provisions of the HIPs provisions.
The consultation paper accompanying the Bill suggests that the
fixed penalty for breach of the provisions would be in the region
of £150 to £200. The proposed penalty looks low compared
to the estimated cost of the pack which is £665. We suggest
that the penalty is unlikely to act as much of a deterrent.
LENDER CONCERNS
SPECIFIC TO
THE HCR
41. The HCR has always been a major concern
to lenders. The provision of the equivalent of a Homebuyer survey
within the HIP is understandable in terms of informing consumers
of the condition of the property they are selling or buying. However,
lenders require information that can be used within their underwriting
process to assess whether or not to lend. With regard to the property
itself this revolves around an independent, reliable and timely
assessment of value. Such a valuation will not be included within
the HCR.
42. The Government have suggested that lenders
will, in the majority of cases, be able to use the information
contained within the HCR, in conjunction with innovative valuation
techniques such as an Automated Valuation Model (AVM), to arrive
at an acceptable valuation for use within their underwriting process.
However, AVMs are not widely used in the industry at present so
it is speculation as to how far they will be relied upon by 2006.
In addition, AVMs will only ever be suitable for a limited proportion
of low risk cases. Lenders will always want to retain the right
to commission a valuation to ensure that the property represents
a suitable security for a loan. We would like to see this right
expressed on the face of the Bill in clause 145.
43. We believe there are a number of outstanding
problems with the HCR that must be addressed prior to implementation
of HIPs.
(a) The format and content of the HCR
44. If lenders are to use the HCR to obtain
a valuation without a full inspection, using an AVM or more traditional
methods (for example by a qualified surveyor at a desk or drive
by), then it is vital that all the data required for a valuation
is contained within it. The current model being trialled does
not.
45. While the HCR and AVMs may be used in
certain circumstances to arrive at a valuation that can be used
within a lenders underwriting process it is important that both
the Government and consumers are not given the impression that
this will be the case in the majority of circumstances.
46. Lenders assess risk when deciding whether
or not to provide a mortgage. When the risk associated with a
loan is perceived to be relatively high they require a more rigorous
assessment of the security, ie the house, on which they are lending.
Thus, when an application is for a high loan to value ratio, the
applicant has a poor credit rating or the property on which the
loan will be secured is of a non-standard construction type it
is likely that lenders will require a physical valuation rather
than be prepared to use a HCR in conjunction with an AVM. If such
a decision is taken it must be remembered that the buyer will
be charged for the valuation. The current average charge for a
valuation is £180.
47. Such a decision is not only sensible
from a lender's business perspective but also fits in with requirements
for prudent lending, the forthcoming regulatory framework of the
Financial Services Authority and the capital adequacy requirements
of Basel II.
(b) Databanking
48. In recent years, lenders have invested
heavily in their mortgage processing systems. This has resulted
in a reduction in the time taken to issue a mortgage offer.
49. Home Inspectors will log HCRs on to
a central databank. It is vital that the databank is designed
and implemented in such a way that allows lenders to extract data
from it in a format that feeds seamlessly into their current systems.
If this is not the case, the introduction of HCRs will threaten
the efficiency gains achieved over recent years.
(c) Insurance
50. In clause 145(5) the draft Bill, quite
rightly, proposes that the home inspectors who will carry out
the HCR have suitable indemnity insurance in place. While the
CML fully supports the need for insurance, we do have some concerns
as a result of the research that the Government has been doing
into how best to provide an insurance solution.
51. The current state of the market for
professional indemnity insurance means that it is unlikely that
insurers will provide insurance for a new profession that will
be providing a new product without any claims history. In light
of this, we believe that the only sensible solution will be for
the Government to underwrite the indemnity insurance for a period
of time. As insurance is vital to the success of the HCR, the
Government should give this serious consideration, getting Treasury
approval for the principle if necessary. If the HCR is introduced
without home inspectors being covered by indemnity insurance,
lenders will not be able to rely on the HCR at all.
(d) Recruitment and Training of "Home
Inspectors"
52. A statutory requirement to provide a
HCR with every residential property sale will increase the demand
for Homebuyer surveys by four to five times since only 20-30%
of current buyers have this level of survey done. Hence, the number
of Home Inspectors will have to be four to five times greater
than the current number of surveyors undertaking Homebuyer surveys.
The obvious questions that arise are where these additional people
will be recruited from and how will they be trained. We have yet
to be provided with persuasive answers.
53. Clause 145(5) of the Bill allows the
Secretary of State to make regulations covering the certification
scheme for home inspectors and that the scheme contains appropriate
provision for ensuring that members are fit and proper persons
who are qualified (by their education, training and experience)
to produce HCRs. Lenders currently require valuations to be undertaken
by Chartered Surveyors who have at least two years' post qualification
experience. The Government proposes that those with a level three
NVQ qualification will be able to carry out HCRs. This level of
training is significantly below that of a Chartered Surveyor.
If lenders are to rely on the information collected within a HCR
for use for valuations and underwriting they must be persuaded
that the training and ongoing monitoring of Home Inspectors is
of a sufficient standard.
54. Indeed, Basel II requirements for capital
adequacy will state that a suitably qualified individual assesses
the value of security. If Home Inspectors are not considered "suitably
qualified" by the FSA then lenders will be unable to accept
the information they collect for use in assessing value at all,
meaning that a physical valuation would be needed in the majority
of cases, thus increasing the cost to the consumer of the legislation.
CONCLUSION
55. The policy objectives associated with
the HIP are admirable. However, the issues set out above highlight
the challenge now facing both the Government and the residential
property industry. There is a great deal of work to be done in
transforming a concept into a proposition that will work in the
real world and deliver the Government's policy objectives. The
CML stands ready to work with Government to achieve this. Our
fear is that, should the Government push ahead with implementation
prior to addressing the myriad of outstanding issues, the introduction
of HIPs could increase the problems associated with buying and
selling homes in England and Wales rather than reduce them.
PART 6: OTHER
PROVISIONS ABOUT
HOUSING—THE
RIGHT TO
BUY
56. The CML supports the concept of the
Right To Buy (RTB). The RTB has enabled many tenants to achieve
their aspiration of owning their own home. It has also been successful
in maintaining communities by encouraging successful tenants to
remain in their existing locality, and has helped to achieve mixed
tenure on social housing estates.
57. The continuing popularity of the RTB
is demonstrated by the annual take up which remains at around
40,000 sales each year. In spite of this, RTB discounts were reduced
in the late 1990s and, earlier this year, discounts were reduced
again in 41 local authority areas.
58. The CML understands that the changes
proposed in the Bill are designed to curtail abuses of the RTB
and protect the availability of affordable housing in high demand
areas. We support these aims. However, as a recent report commissioned
by ODPM makes clear, abuses of the current system are only localised
in extent. In addition, the Government has recently established
a Home Ownership Task Force to consider ways to allow access to
home ownership for a greater number of people. The CML would therefore
wish to make clear that the changes to RTB must be a once only
reform for a specific purpose, and should not be part of a continuing
erosion of the RTB.
59. The RTB is popular with tenants, and
has been shown to be good value for the public purse. In addition,
research has demonstrated that it is of very limited significance
in its effects on the overall supply of affordable housing. In
supporting the extension of home ownership, the government is
reflecting the desires of the majority of families throughout
England and Wales. The RTB continues to be a proper part of any
strategy for achieving that objective.
PART 6: OTHER
PROVISIONS ABOUT
HOUSING—SOCIAL
HOUSING OMBUDSMAN
FOR WALES
60. The CML supports this part of the draft
Bill.
OTHER PROVISIONS
NOT CURRENTLY
CONTAINED IN
THE HOUSING
BILL
61. The Housing Corporation is seeking certain
additional powers of a technical nature to deal with existing
anomalies in regulation of housing associations. We have no serious
issues to raise in connection with these changes.
62. However, there are some technical issues
in connection with shared ownership that are not proposed to be
included in the Bill that we feel would help to make the market
more attractive to lenders. We will be raising these issues with
ODPM and the Housing Corporation.
FURTHER CONTACT
63. This response has been prepared by the
CML Secretariat in consultation with members. Any queries or comments
should be addressed to Alex Solomon (alex.solomon@cml.org.uk),
tel: 020 7440 2268, fax: 020 7440 2262 in the first instance.
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