Select Committee on Office of the Deputy Prime Minister: Housing, Planning, Local Government and the Regions Written Evidence

Memorandum by the Council of Mortgage Lenders (CML) (DHB 09)


  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.


  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.


  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.


  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.


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.


  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.


  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.


  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.


  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.


  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.


  60.  The CML supports this part of the draft 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.


  63.  This response has been prepared by the CML Secretariat in consultation with members. Any queries or comments should be addressed to Alex Solomon (, tel: 020 7440 2268, fax: 020 7440 2262 in the first instance.

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