The U.K. government last week announced a draft law for the introduction of home information packs that could lead to increased risk in the housing market for buyers and lenders as well as investors in RMBS deals, reported analysts at Fitch Ratings.
The packs are intended to speed up the home-buying process by providing a package of legal inquiries including local authority searches, title documents, a draft contract and a home condition report but not valuations. Buyers however are still responsible for valuations for mortgages on top of the new costs of the packs. Fitch is concerned that, in an effort to keep extra home purchase costs to a minimum, lenders will be faced with the pressure to reduce costs of the valuation process. The market already suffers from some degree of "drive-by valuations" with some lenders using automated valuation models backed by databases of sale prices and previous valuations to give an appraisal on the nearest comparables, but these are typically executed for less risky mortgages and under extensive testing.
"[Automated valuation models] have their place in underwriting less risky mortgage lending. However, our fear is that the introduction of [home condition reports] forces lenders towards using [automated models] more extensively in their underwriting, potentially in cases where it may not be appropriate," said Fitch Associate Director Jeremy Deacon. "While human beings can be prone to error, we believe a surveyor valuation and opinion remains crucial, for example in the case of higher loan-to-value lending or for more esoteric and non-homogeneous properties."
The concern is that ultimately lenders will be forced into providing faster valuations across the board, without performing adequate testing. The government has been consulting on this issue since 1999 and the formal proposal was announced in November 2003, subsequently forming part of the Housing Bill of August 2004 and is expected to become law next year.
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