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Balancing act

In the good times overvaluations were not uncommon, now it’s talk of downvaluations that gets everyone hot under the collar. It’s clear valuers have to juggle a different kind of pressure in today’s sluggish market

It only takes a cursory glance at newspaper headlines to realise Britain is obsessed with house prices.

The sheer volume and regularity of price indices is astonishing and the public laps it up, desperate to know the value of their biggest asset. Surveys on property prices are published by Nationwide, Halifax, the Royal Institution of Chartered Surveyors and the Department of Communities and Local Government to name but a few.

The valuation of a home is hugely important, with websites like springing up to feed the national appetite. There are many ways brokers and consumers can check an estimated value of their property now. None of this though can act as a substitute for a professional surveyor to assess the value of a property at the instruction of lenders. Unlike amateur valuers using websites, surveyors take on a huge responsibility and face pressures from borrowers and lenders to up or downvalue.

The pressure to get the value right has always been high but in a static economic environment it increases.

Paul Chapman, head of field operations in the surveying division at Countrywide, says that in a stagnant housing market valuers are bound to find their jobs more difficult.

“In a market that isn’t growing year-on-year, valuations will always come under more focus than they would have done before the crisis,” he says.

Despite the downturn the same pressures that have always been placed on valuers apply just as much today.

“The pressure remains of trying to get a valuation that the valuer is comfortable with and one that satisfies clients and lenders,” says Chapman.

He welcomes online tools such as Zoopla as adding to a surveyor’s armoury but says they are no replacement for professional checks.

“Anything that gives valuers a readily available sense of the market is helpful,” he says. “Obviously they will still always be driven to more concrete evidence from the Land Registry or sales achieved. The success of quality comparables as databases become more complete is useful.”

One of the main pressures is access to accurate data in a low transaction environment, with fewer comparables and a greater possibility of distorted figures.

Surveyors have to make more convoluted judgements in areas where there isn’t much comparable data to use

In December 2011 RICS reported the average number of sales per surveyor stood at just 15.2. “Surveyors have to make more convoluted judgements in areas where there is not much comparable data to use,” says David Dalby, residential director of RICS.

Rental incomes are also difficult for surveyors to assess due to a lack of comparable rental income data.

“The only area where it is even more difficult is buy-to-let properties as there is no central database of rental income,” says Dalby.

“For house prices Land Registry statistics inform surveyors for their valuations but it is more difficult to find comparables for rental incomes.”

These old pressures continue but the effect of the crisis has added a host of new difficulties – from facing down claims by lenders to obtaining professional indemnity insurance.

Confetti claims

Surveying firms have faced a huge increase in claims from lenders for alleged overvaluations in the boom period.

Most of this is cyclical – as repossessions rise so do lenders’ claims – but numbers have been particularly large this time around.

Industry titans active in the market during the boom have been forced to make millions of pounds of provision to deal with the potential for claims. Countrywide made another significant provision of £9.3m in 2011 after putting aside £11.9m in 2010, bringing its total to £21.2m.

“In common with others in the industry we continue to experience PII claims in our surveying division arising from the property market between 2004 and 2007,” its results state.

Its rival LSL Property Services saw its total claims pot fall from £10.9m in 2010 to £9.6m last year with no new provision needed.

Surveyors say prudent valuers have to treat claims seriously, even those with little chance of success, and that means putting money aside.

Earlier this year a landmark case, Countrywide versus GMAC-RFC, raised hopes for surveyors that many of the lender claims would be dismissed. The case was based on the valuation of a property in 2004 and GMAC-RFC began proceedings in 2008.

The judge ruled that Countrywide was not negligent and that if it had been found liable, GMAC-RFC was contributory negligent for not verifying the borrower’s income and other information on the mortgage application. While it was ruled that GMAC-RFC’s sub-prime lending was not in itself contributory negligence the judge said he would have deducted 60% of any award.

Back in August 2011, Countrywide said lenders were spraying claims around like confetti and it had received a claim on every single property it valued from one unnamed lender.

Others say lenders are submitting claims on properties even before repossession when the loss crystallises, and are doing it at arrears stage. Simon Davies, technical director at Valunation, says that the sheer volume of claims lodged have made it a tough few years.

“The last few years have been difficult because of the actions of claimants,” he says. “Some are justified but some aren’t and that has made it a tough environment. The number of claims has slowed slightly but as time goes by there will surely be more valuers put out of business by it.

“What’s annoying is that these things happened five or six years ago but it is the current insurer, rather than the insurer at the time of the valuation, that pays.”

The claims culture has led to severe difficulties in surveyors being able to obtain PII.

“One of the reasons for the high cost of insurance is the lack of competition in the PI market for surveyors,” says Davies. “There are only a handful of insurers prepared even to offer quotes. I’ve heard that a new entrant is coming to the market and that could be good timing because things are on the bottom and risk is manageable.”

Dalby says firms are notoriously private about their PI renewals but he believes it is becoming slightly easier.

“We are seeing fewer of the confetti claims where lenders submit for almost any case,” he says. “A lot of our conversations with lenders and their legal representatives concern the need for due diligence at the start of a claim. It would make sure there is some substance to claims and that there is the potential for negligence. Prices are not going to stay the same endlessly so valuers can’t be responsible forever.”

Dalby has also heard reports of new insurers entering the marketplace but it remains to be seen whether they are big players.

“Insurers are sensing an opportunity,” he says. “Since the crunch most firms have got robust processes so offering PI cover will now be a secure bet for insurers. Many will start to see it as a less risky area and some will view it as an opening.” RICS is considering whether PII is a sustainable solution for the surveying market in the long term. It now considers insured individual valuations as a possible replacement and there is some talk around this concept. The new system would see each valuation rather than whole firms insured for, say, six years when the cover would expire.

The move is in response to firms struggling to obtain PII and some being forced into bankruptcy when it proves impossible. PI cover renewal periods can be worrying times for surveyors as cover becomes more expensive and difficult to obtain.

Dalby says the number of administrations is low but many firms are hanging on by the skin of their teeth.

RICS has an assigned pool that acts as an insurer of last resort and it currently has 40 firms using its facilities. It only accepts firms that can prove they have sound businesses barring the ability to get covered and that this is not simply down to a poorly run business.

He believes more firms will fall by the way side as they go through the economic cycle. Spinnaka was forced to close after it failed to obtain PI cover but relaunched in a pre-pack administration as Pure Panel Management in late 2010. Ashdown Lyons and Christopher Cook are just two more of those that stopped trading in February 2009 due to tough market conditions.

Sunnier times

Some believe there was a tendency for valuers to be too optimistic as the housing market was going through an unprecedented boom.

“If it was a sunny day and the newspapers were positive about house prices some surveyors would value upwards,” says Mike Fitzgerald, sales and marketing director of the Emba Group.

Now the situation is rather different as the housing market has been through a severe downturn and is static. In such an environment there are few optimistic valuations and some now believe the pendulum has swung the other way. Speculation exists that lenders are exerting pressure to downvalue property so they don’t have to lend as much money. Surveyors inevitably rubbish these allegations stating they are professionals providing an independent service according to RICS guidelines.

Simon White, director at London’s Surveyors, says he is not aware of lenders putting pressure on surveyors to down value.

“In recent years the opposite has been true, where lenders have been trying to over value,” he says. “We deal with the higher end of the prime central London market and with private banks lending at 50% LTV, so there is no pressure on us. If it does happen it is more likely to occur at the mass market level.”

Andrew Frankish, commercial director at Mortgage Talk, says he’s seen no pressure from lenders in the mainstream market either.

“I haven’t noticed it but surveyors have their own PI cover to worry about so there is an air of caution around their valuations,” he says. “They are professionals though and the majority want to get it right first time. The big firms have their own panel management and they are good at it. It is more difficult for the smaller ones going out of their local area, as local knowledge is crucial in valuations.

“The pressure to get it right is high and if they don’t there is the risk of future comeback. If there are repossessions then lenders are going to try and claim money back from the valuers.”

Fitzgerald agrees, claiming that the main pressure to downvalue could come from valuers themselves concerned about future claims.

“The pressure may also come from the surveying industry itself because there were so many that got carried away in the heat of the moment,” says Fitzgerald.

If there are repossessions lenders are going to try and claim back some of the money from the valuers

“To stop being sued for overvaluations they did swing the other way. Downvaluations don’t happen as much when surveyors know an area but in an out of area valuation they would err significantly on the side of caution.

“If it doesn’t affect the deal for the client then many valuers will price properties slightly lower,” he adds. “There was pressure from lenders but now there is a bit more appetite so downvaluations have dropped a little. We haven’t had a noticeable downvaluation case now since before Christmas.”

New-build premium

However, in the new-build market some lenders have specific criteria to force down the price of homes and eliminate the new-build premium. Some instruct surveyors to value new-build homes on a second-hand basis over concerns that any new-build premium will be wiped out immediately.

Nationwide and Leeds Building Society were the two biggest lenders to value new-build on a second-hand basis but last year both changed stance and agreed to instruct their valuers on a new-build basis. ING Direct still values new-build homes on a second-hand basis but says it is reviewing the policy in light of market conditions.

“It is simply good housekeeping rather than pressure from banks,” says White. “If I was an underwriter I would do the same as I wouldn’t want a hefty new-build premium.”

But Frankish would prefer to see all new-build homes valued on a new-build basis so it was pleased when it saw Nationwide reverse its stance.

“We would prefer to see new homes priced as new homes but some lenders want them priced at second-hand market value,” he says. “The reasoning is that new homes are often custom-made for the buyer with specific kitchens and décor.

“Lenders say that another buyer will not want to pay as much for it when it comes to be sold. The CML has a crass example of a new car losing its value when it is driven off the forecourt. We think new homes should be valued at what they are worth.”

Fitzgerald says surveyors have come under pressure on new builds to help lenders get that back book in order. And Davies says lenders feel the premium given to new-build properties is a risk that they are unwilling to take.

“There is a concern about possible manipulation of new-build sales prices and the second-hand approach makes sure that isn’t the case,” he says.

“Leeds Building Society and Nationwide have taken the view that things have improved and have dropped their second hand approach but some others still adopt the policy.”

Lenders offer guidance on geographical locations of some valuations, as local knowledge can be an important factor.

“Sometimes a valuer can be based in an area but their patch could be somewhere else because they commute or have only just moved,” says Chapman.

“It is important for lenders and those on its panel to have consistent dialogues about these issues. It is happening more these days and any successful partnership needs that.”

Homing in

The latest internet sensation, Kony 2012 – a propaganda film to encourage the capture of Ugandan warlord Joseph Kony – shows that geographical distance means little in today’s world. The internet has ensured that we all live in a genuine global village.

In valuations there is a significant amount of technology available to help surveyors do preliminary checks before arriving at properties.

Tablet computers are being doled out at some firms to give valuers as much information at their fingertips as possible.

“There is such a wealth of desktop valuations now from Zoopla to local estate agents, so that by the time valuers get to the location they can have a pretty good idea of a price,” says Fitzgerald. “Brokers can go on to websites too and question a valuation in the context of similar homes.”

Certainly house prices remain such an important feature of British life that the number of tools available will only increase. Making accurate valuations is a difficult skill and the pressure facing surveyors is large, but in a downturn these increase.

There is greater scrutiny over downvaluations as clients could potentially lose thousands on the value of their most significant asset.

The claims bonanza by lenders is also having a major impact on the industry, from large ones setting aside provision to a tough market for PI cover. Such claims are always cyclical and correlate directly with repossessions so any rise in people losing their homes could see claims increase and provisions rise further.

The surveying market has lived through a brutal crisis and any improvements this year will be small in a housing market that remains stagnant. With house prices so important it is little wonder that the pressure facing valuation firms is so high.

If anyone routinely seeks to influence value it’s the applicants themselves

Richard Sexton
Business development director

With intermediaries fighting for every application they submit it’s no surprise that frustration creeps in if the valuation is less than expected. But the belief that there is some underlying conspiracy by lenders to reject applications by influencing the value is fundamentally flawed.

They simply aren’t interested in directing outcomes in this fashion and I’m sure the Financial Services Authority would not be too pleased to see this type of behaviour either.

Surveying firms themselves also have a vested interest in ensuring their valuers adhere rigidly to the Royal Institution of Chartered Surveyors Red Book guidelines when calculating value.

Going outside these rules could generate an expensive professional indemnity insurance claim and typically result in disciplinary proceedings within most firms.

Individual valuers have earned their chartered status after many years of study and experience and they guard this accreditation with passion and pride.

Expecting them to vary their opinion under management or other pressure would be like expecting a doctor to change his diagnosis to please the NHS.

In my experience, there is only one group that routinely seeks to influence value – the applicants themselves.

Brokers can save themselves a lot of heartache by undertaking some arm’s length research on estimates provided by clients.

I might be so bold as to suggest that the trick is then to pay attention to what the figures are telling you, rather than press on in hope.

In any regard, objectively, the assumption itself is flawed. We track the number of over-estimates on a granular basis on behalf of our clients.

In Q3 2008, 53% of cases were valued below the estimate supplied, while today it is only 28%. So there were more downvaluations in 2008 than today – not fewer.

Of that 28%, our research tells us that 90% still go on to complete, albeit at higher LTV in many cases – and therein lies one clue as to why opinion of value can be an emotive issue.

While some firms continue to experience high levels of PII claims related to what can be seen in retrospect to be optimistic opinions, it does feel like reverse engineering to suggest there was a historic issue with respect to overvaluations.

For example, I don’t recall a single instance of a client contacting me to say that we had overestimated a case at the time.

Today, a number of lenders have taken the view that valuation figures cannot be challenged.

When the lender allows, valuers can and should consider any additional information available, but it should be no surprise that in most cases there is no change to the original figure.

Historically, new-build valuations were more challenging, although the differences in lenders’ policies between second-hand and open market value are gradually disappearing.

Incentives can complicate the calculation but the Council of Mortgage Lenders’ disclosure of incentives form has introduced clarity and issues have greatly reduced as a result.


Delicate task of making global rules local

The outbreak of the global economic crisis in 2007 was a brutal awakening for banking regulators. In December 2010 the Basel Committee on Banking Supervision agreed on a global response to the crisis, known as the Basel III Framework, which sets regulatory standards on bank capital adequacy and liquidity.


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