BSA response to the Conservative Home-Buying Review

Response to:

Mr Grant Shapps MP
Shadow Housing Minister
Conservative Party

The Building Societies Association

The Building Societies Association (BSA) represents all 59 building societies in the United Kingdom. Building societies have total assets of just under £325 billion and, with their subsidiaries, hold residential mortgages of over £250 billion, approximately 20% of the total outstanding in the UK. Societies hold just under £210 billion of retail deposits, accounting for about 20% of all such deposits in the UK. Building societies also account for over 37% of all cash ISA balances. Building societies employ over 50,000 full and part-time staff and operate through more than 2,100 branches.

The Conservative Home-Buying Review

With building societies playing such a key role in the home buying process, we welcome the opportunity to contribute to those areas of the review where we have particular expertise.
We share your wish to improve the efficiency of the home buying process. Although many of the questions that you asked in your paper are outside of our remit, we have the following comments to make on several of your questions which believe have particular relevance to building societies:- 

Should buyers look for a house armed with an "in principle" mortgage offer, subject only to finding the right property at the right price?

We do not believe that giving buyers an “in principle” mortgage offer would bring about any meaningful improvement to the house buying process. Such conditional offers of a mortgage are already available for people who want them. However, in practice few buyers ask for such an offer.

This is because there are a wide number of variables that will affect how much the aspirant buyer will need to borrow. With house prices being so high, even a small variance between different properties can result in significant differences in the amount that is required to be borrowed that could make such an offer pointless.

The housebuying process is also a lengthy one. This is partly the consequence of the checks that lenders have to make on the property being mortgaged, and just because the income and financial circumstances of a buyer are appropriate for a mortgage of a certain level doesn’t mean that it will be appropriate for a building society to lend against the particular property that is being bought. These checks would still have to be done, even though the buyer had an “in principle” mortgage offer.

And even with such an offer, it is highly likely that the building society would still expect to verify the applicant’s income when the mortgage was processed. In view of the amount of time that can elapse before a house buyer starts his search, the lender would want to satisfy itself that the buyer’s financial circumstances had not changed.

Gazumping and gazundering 

We believe that the introduction of a system, similar to that used in Scotland, where the agreed price becomes legally binding (subject to the findings of a survey) is the only way to prevent this.

However, we remain sceptical that gazumping is as widespread as is often maintained, and we do not believe that significant change is required to prevent this.  We would also stress that as well as protecting buyers, it is also important that the interests of sellers are upheld, and that they are protected from buyers who wish to prevaricate, drag out the process and modify the details of any verbal agreement. 

What can be done to improve the speed and efficiency of surveys and valuations?

We are keen to see the speed and efficiency of surveys and valuations improved.

However, underlying this needs to be recognition of the important role of the survey and valuation in the house buying process. Not only do they provide confidence to the lender and the buyer, but they are also a major barrier to fraud.

For us to be able to support any change to the existing practices, we would have to be confident that these changes in no way result in poorer surveys or valuations and that lenders would still be able to have confidence in the results.

It is not just lenders though who need to have confidence in the survey and valuation systems. Purchasers also need to be sure that they understand the information that they have been given and to act on any issues that are raised by the survey or valuation, and it is important that they are given enough time to do this. Achieving fully informed purchasers should be regarded as being as important as a quick and efficient system.
 
Is the "buyer beware" system appropriate to home buying?

We believe that there is no alternative to the “buyer beware” system for home buying.

Although the purchase of a home is probably one of the most complicated transactions that most people will undertake during their lives, they do not do so alone. As they go through the house buying process, they are advised by a wide range of professionals.

These professionals, whether mortgage adviser, lawyer, surveyor or other adviser, are all themselves subject to regulation to ensure that they are offering advice to the buyer that is appropriate and of high quality. So although the buyer is making one of the most complex transactions of their life they are also supported by a range of professionals in a way that is almost unique to the house buying process.

Although the regulatory systems that these professionals operate under ensures that they should be providing only high quality advice, should their services be found to be deficient, buyers have the opportunity to seek legal redress against them. This ensures that buyers can be confident that they are receiving good quality advice to help them with their purchase.    

De-mystifying the process for both buyers and sellers

We do not accept that that it is the behaviour of mortgage lenders that is making the house buying process complicated. Indeed, building societies are anxious to streamline the mortgage approval process as much as they can, with it representing a cost to them that they seek to minimise.

As such, we believe that it is the legal and regulatory requirements associated with the house buying process that make it complicated and causes delay, rather than the mortgage application process. And although building societies are making strenuous efforts to continue to streamline the house buying process, they also need to ensure that they, and the borrower, have confidence in the purchase and the valuation on the property.

Building societies are keen to help promote affordable housing. However, affordable housing loans are particularly complex from both a borrower and a lender perspective. For prospective borrowers, this makes products unattractive. And this is especially so as many have little understanding of how the mortgage and housing market works.

From a building society perspective, the complexity of processing many affordable housing mortgage applications increases the time that each one takes and consequently the cost. This serves as a major disincentive for them to offer such products, especially when the market for such products is so small.

A particular issue concerns the use of section 106 (s 106) agreements by many housing associations and local authorities. Such agreements are used to ensure the provision of affordable housing by local authorities and housing associations. However, each one tends to use s 106 to impose different conditions on a property, and these conditions all have to be investigated by the building society to see what the implications of the agreements are for them. This introduces further delay and cost into the mortgage processing system for the society, and serves as a major barrier to greater society involvement.

The Housing Corporation has produced a set of standard s 106 clauses that can be used and that meet lenders’ needs. Requiring housing associations and local authorities to use such clauses would represent a major boost to the willingness of building societies to lend to affordable housing buyers.

I trust that you find our comments of interest. If you would like any further information, or if you would like to discuss any of the issues that we have raised, please do not hesitate to contact me.