Monday, 15 April 2013

Environmental concerns – what do lenders need to know?

 By Mark Milner, CEO of Landmark Information Group

With the recent high profile floods and the increasing number of brownfield site developments, there is an argument that environmental risks should be considered before a mortgage offer is made. Mark Milner, CEO of Landmark Information Group, discusses the issues

Over recent months, the topic of flood risk has been high on the agenda due to the successive bouts of rain that have brought widespread disruption and, for many homeowners, devastation.

During 2012, we witnessed the wettest spring on record, followed by additional rain in July, September, October and December, which brought weather warnings and flood alerts to regions across the country.

While flooding is particularly prominent in everyone’s minds at present, it is just one of many ‘environmental’ risks that are today facing homeowners, purchasers, and of course, the lending community.

Environmental concerns, such as flood risk, land contamination, pollution or subsidence could have adverse effects on the value or saleability of the home in question, or at its worst, even impact on whether a property is considered suitable for mortgage security.

One example of this recently featured on the BBC’s One Show, which highlighted the impact of abandoned coal mines on residential property values and mortgage lending. It reported how some homes are today unsuitable for mortgage security due to their proximity to disused shafts, which is having a knock-on effect for those looking to sell or buy properties within at-risk zones.

In fact, according to the Coal Authority, 7.7 million properties are located across coalfields, of which two million may face risk of potential problems as a result of previous mining.

Separately, a study by LV= revealed that over the next decade approximately half a million homes are set to be constructed on brownfield land that could pose future flood or contamination risk to homeowners, illustrating that this is an issue we are likely to see more of in the future.

Valuation process

With this in mind, we believe that the time is right for mortgage lenders to consider incorporating environmental risk-based due diligence into the existing valuation appraisal process. Currently, the valuation process doesn’t necessarily include due diligence regarding environmental concerns, and any risks may only be unearthed later on when the conveyancing process is fully underway.

From the surveyor’s point of view, they will only incorporate environmental information into a valuation report if they have personal knowledge that such issues exist. It is, however, not a standard requirement. Instead, the valuation is a simple physical inspection of a property, which confirms to the lender that the property’s value is sufficient security to cover the mortgage that has been applied for.

With such recent high profile floods and the increasing number of brownfield site developments, it creates an argument that environmental risks should be considered before a mortgage offer is made.

We believe there is scope, and a number of potential advantages, to integrating electronic environmental data within the existing valuation process, upfront. This could include flooding and coal mine reports as well as contaminated land studies.

When you look at the scale of the problem, specifically regarding contamination, it has been identified that more than half a million homes in the UK are located in proximity to current or former producers of toxic waste and more than 400,000 homes have been built on former landfill sites*.
As for flooding, the facts speak for themselves: according to the Environment Agency, at least five million people live in flood risk areas in England and Wales. On average, reports of flooding are now twice as frequent as they were 100 years ago, and property, land and assets which are ‘at risk’ equate to the value of £214 billion**.

Environmental reports

Currently, as part of the home buying process, environmental reports would be accessed at the conveyancing stage. Therefore, any potential hazards associated with the property may not be clearly identified until late in the home buying process.

A recent survey from Landmark Information Group raised some interesting points on this very matter however, as it identified that while 80 per cent of UK homeowners stated they would not buy a house that was at risk of flood, only 42 per cent of people actually investigated their flood risk before buying their home. It also found that 55 per cent of buyers expect their solicitor to investigate a property’s flood risk automatically as part of the conveyancing process.

This certainly raises alarm-bells that not enough due diligence is being undertaken prior to the completion of a property sale and so not only are homebuyers at risk of unearthing potential issues once they have moved into the property, but also mortgage lenders are at risk of accepting as security on a property whose future valuation could be compromised by such factors.

Ultimately, a property may tick all the boxes in terms of its nature and structural condition, however, lenders could be unaware that they are lending on a property that has been built on top of historical industrial works and a plethora of contaminants are waiting to be unearthed in the property’s back garden.

We believe that both lenders and insurers will have greater peace of mind and security if environmental information is automatically provided up front to chartered surveyors as part of the mortgage valuation instruction, as well as incorporated into automated valuation models for the cases that are managed via this route.

Electronic desktop reports could be fed directly into the existing process and could include everything from flooding reports and contaminated land studies, through to bespoke data extracts that trigger enhanced due-diligence workflow.

Localised data

Ultimately, we believe that by enabling surveyors to automatically receive localised, intelligent data that provides both historical and current information on a property and its immediate area, more accurate valuations can be passed to mortgage lenders for processing.

For example, if a property has been identified as being on contaminated land, it is the owner that is responsible for all associated clean-up costs. Therefore, if reports outlining such risks are provided as part of the valuation, a lender can review the affect this may have on the value of the asset and adjust loan-to-value parameters for a given product accordingly.

This will ultimately deliver a more detailed, dependable and informed valuation on which lenders can base their mortgage offer and means they should not be caught out by a property’s unknown history or unapparent environmental risks.

*Homecheck Professional Contamination Report
**Homecheck Professional Flood Report

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