The secured loan market may no longer be viewed as a second class citizen in the eyes of the mortgage industry but when it comes to instructing a valuation the sector seems to be a long way down the pecking order.
Surveyor numbers have been dwindling for quite some time. Many surveyors left the industry or lost their jobs as a result of the credit crisis and many were not replaced.
It has been widely reported that a lack of new blood into the industry is to blame for recent delays to valuations – mostly in the South of the country, where house purchase activity is increasing.
However, the Royal Institution of Chartered Surveyors (RICS) claims there are enough surveyors to go around and the problem stems from surveyors not being paid enough.
In a statement, it says: “We are acutely aware of the large numbers of unsubstantiated negligence claims against our members which, in some cases, has been resulting in rising insurance premiums, with insurers hiking up payments or withdrawing from the market altogether.
“In tandem with this, valuers have seen fees pushed down to such an extent that the expenditure outweighs the reward. Put simply, it is often not in the valuer’s interest to take the job.”
RICS has commissioned an independent inquiry to consider the challenges facing the UK property valuation profession and look at solutions.
But with no immediate remedy to the problem on the horizon, many lenders in the secured loan market have started to turn to automated valuation models (AVMs) to help cope with demand – but is this the answer? Or would an increase in valuer fees increase productivity?
Richard Sexton, business development director at e.surv, says it is potentially more difficult for the secured loan market.
“Many larger surveying firms have contracts in place with the mainstream lenders and honour those contracts first and carry out a secured loan valuation only when it is possible to do so,” he says.
Tracey Bailey, head of residential underwriting at the Blemain Group, says, the large contracts usually go hand in hand with bigger fees for surveyors.
She says: “Some of the bigger mortgage and insurance firms may pay larger fees and provide high volumes, tying the bigger surveying companies into lengthy service levels agreements, which means they cannot always service others in the industry due to restricted availability.”
Those surveyors that are active in the market appear to be going where the money is.
Simon Stern, director of Prestige Finance, says the problems stem from when the market contracted and secured lending volumes shrunk.
He says: “The big boys took a decision to concentrate on the first mortgage market and to some extent neglected the secured market which then began to grow again, so there was obviously going to be shortage there.
“I have to pay credit to the likes of surveying firms such as Sonas, Gateway and Metropolis who have been very supportive of our industry, but there is a problem and it is impacting the time it takes to complete a loan.”
Many firms in the secured loan market do not have the weight and finances behind them to match some of the larger firms, so what can they do?
“I would be urging secured loan firms to sign up and get some commitments from valuers and part of that is going to be paying slightly more,” says Sexton.
“Second charge fees are probably in general not as good as mainstream fees, so they are competing on an uneven playing field,” he adds.
Increasing fees however is easier said than done, because unlike the first charge market, for second charge firms it is the broker that foots the bill for the valuation, even in cases where a deal falls through – which would explain why many may be reluctant to increase fees.
Bailey says: “In the first charge mortgage market the lender can pass the cost of the surveying fee onto the customer through the application fee – which will often include a valuation fee and can cost anything between £125 and £500.
“In the second charge market, the valuation cost is the same but paid by the broker as they cannot charge a fee upfront under the Consumer Credit Act. They bear the cost of all valuations, whether the loan proceeds or not.
“Because they do not charge an application fee – the broker is obviously trying to drive down some of the costs,” she says.
Barney Drake, group operations director at Y3S Group, says at times it can seem like valuers are a dying breed, with the number of them seeming to decrease all of the time.
He says: “The valuation report is often the last thing the broker gets because it is the most expensive. Just when you are getting to the final stages you have to get this crucial document and sometimes valuers are just not available.”
Y3S deals with a firm which has a panel of surveyors across the country.
But adds: “You are not dealing direct with the valuer and that direct relationship is what you need and their local knowledge.”
With The Loan Warehouse’s Secured Loan Index forecasting lending will hit £480m in 2013, the hope is that brokers may be able to up the fee they pay to valuers and leverage some of the risk of the loan falling through.
Sexton says: “A secured loan application can take weeks but there is a tendency for brokers not to instruct the valuation until the end. Brokers want to save money which I understand, but there is a trade off – if you instruct the valuation earlier, you may have more costs for cases that don’t go through in the end but you won’t have any headaches around turnaround times.”
One potential solution to the problem that has been touted is a bigger reliance on AVMs. Unfortunately AVMs have gained a somewhat negative reputation following lenders’ reliance on them during the boom years.
Sexton says: “I think AVMs are part of the solution, the problem is you can very easily abuse AVMs and there are always going to be cases where it is not appropriate to use them because they are higher risk or it’s an unusual type of property.
“They are definitely part of the solution but lenders need to not go too far and rely on them where they shouldn’t – as we saw some of the first-charge mortgage lenders do back in the day – and whose books are now devalued because of the amount of AVMs which were used,” he adds.
Shawbrook Bank has recently started to accept drive-by valuations across its range, while Prestige Finance has also expanded its use of AVMs and now accepts up to 65% LTV capped to £50,000.
But Stern says: “The AVM is not a solution – it is undoubtedly a help but not a solution, because at the end of the day, AVMs only provide a service to a certain level. We are doing 65%, I think that is quite a significant jump from where we were – we were at 50% until fairly recently – can we do more? It is too early to say.”
Blemain Finance has yet to increase its use of AVMs but says as the market starts to pick-up it is something it will consider.
Bailey says: “We haven’t increased our use of AVMs yet but it is definitely something we are in the process of looking at. The market has only just started to pick-up and the use and confidence of AVMs is reliant on properties that have sold. Now the market is turning upwards and more properties are being sold you will see the use of AVMs becoming more prevalent, not with just us, but other lenders.”
Drake says although the use of AVMs helps ease the problem it is not the overriding solution.
He says: “It helps with lenders relaxing criteria with AVMs and drive-bys – the underlying problem of there not being as many valuers is still an issue but as long as we can work directly with the valuers and lenders AVMs, we can take the edge off the problem.”
Tony Salentino, director at Complete FS, says the problem appears to be within the M25 and outside of this, normal service standards generally apply. But he says: “AVM’s tend to be used on lower LTV’s, so whilst they do not provide a thorough report they are a useful alternative and can be very effective when a client needs a quick decision.”
A number of surveying firms are tackling the problem by boosting their recruitment numbers. E.surv currently has 75 graduates that it is in the process of training, while Countrywide Surveying Services recently launched a surveyor trainee scheme as part of its plans to recruit 90 professionals into its surveyor team.
Sexton says: “The market will be the right size over time but it is going to be uncomfortable until then. It may take another year, as demand continues to outstrip supply.”
With lending volumes in the secured loan sector only showing signs of going up, it is hoped the shortage of valuers will not throw a spanner in the works when it comes boosting lending further.
A substantial increase in valuer fees does not seem like a practical solution for the industry until brokers and the market can be sure that its upward trend will continue and they will not be losing out. A more practical solution would appear to be an increase in surveyors, but this will take time to trickle through.
Lenders in the secured loan market have been quick to try and help the problem by increasing their use of AVMs and although not the long-term solution, it will hopefully help keep the market ticking along until more surveyors filter through. In the meantime, perhaps it is time for surveyors and secured loan firms to go back to the drawing board and find a business model that would be beneficial to both parties.