The Green Factor

Peter Stimson, Managing Director of Landmark Quest, features in the March edition of industry publication, Mortgage Finance Gazette, discussing the topic of the importance of understanding environmental risks in making mortgage lending decisions.  

Peter suggests that  the use of environmental data in the mortgage application process can be used in one of two definitive ways to help lenders understand any potential risks: as a means of providing some certainty to other checks lenders conduct, such as Automated Valuation Models, in addition to providing surveyors with additional support and direction in the valuation process: 

The Green Factor

"Those of you who have worked in the mortgage market like me, for a number of years, will have noticed how much things have changed over the last 20 years. Mortgages have gone from a local relationship with a branch where cases where manually underwritten to a large centralised administration unit, where the bulk of cases will barely be seen by an underwriter.

Whilst some may pine for the days of being able to talk through cases locally and get those ‘exception’ cases through, the stark reality is that, from a bank’s perspective, all the automation and centralisation has resulted in two clear outcomes.

Automation
Firstly, it needs less people and hence less money to process cases. Secondly, the standardisation of risk and criteria and the use of technology, in particular credit scoring, has had a dramatic output on default rates. Whilst an exception case may turn out to be an exception and perform well, they are generally never the rule.

In my view, the game changer in risk occurred in the early 1990s with the advent of credit reporting. Rather than relying on an applicant’s honesty (or otherwise) and a few paper checks, it becomes apparent (to some lenders much later than others…) that you could tell an awful lot about an applicant and particularly his propensity to repay simply by looking at his previous history.

Surveyors
Whilst the mortgage process has changed, one aspect however remains very much the same as it ever was: the property risk assessment. In over 95 per cent of instances there is still a reliance on a physical inspection and the same pressures on a surveyor to get it right or ultimately down the line, risk being sued.

This reliance on a surveyor does put pressure on the whole process and ultimately is often the reason why mortgage offers take as long as they do. Whilst surveyors are putting in place processes to address some of the issues that occurred in the market last year, particularly in and around London, the fact remains that a lot more could be done with the available data in the market, either to reduce surveyor pressure at peak times of demand or, to assist the surveyor in getting the job done right."

To read the full article - visit the Mortgage Finance Gazette website.

Whose Responsibility Is It Anyway?

From 26 April, the Mortgage Market Review comes into force, and brings with it stricter affordability rules.  As such, it increases lenders’ obligation to determine affordability – both now and in the future.

Some worry however that the rule change may see mortgage application fraud rise, in avoidance of more rigorous checks.  For those with income verification worries, there is concern they may target alternative mortgage products.

With self-certification ended, we have been warning clients to ensure that they incorporate strict fraud alerts on unregulated loan business.   In fact, Buy-to-Let is increasingly being mooted as the potential ‘replacement’ to self-certified loans; a straw poll by a broker magazine asked its readers whether any clients have attempted to buy property for residential purposes via a buy-to-let mortgage.  Out of 275 responses, 52% had witnessed such attempts.

Systems are in place with many lenders to detect this activity, however it is important that the industry remains vigilant. But who in the property purchasing chain is actually responsible for policing or reporting related concerns?  Where does the responsibility truly lie?

Estate Agents

At the start of the process, Estate Agents are in an ideal position to gather information on the purchaser and the property, including its potential for rental, and to understand how the purchaser intends to use the property.  Once a purchase proceeds the agent is less likely to be involved in the financial transaction – unless the applicant happens to use their in-house financial advisor.  Perhaps there is scope to incorporate feedback from agents in the process, so their initial findings can be analysed?  As unregulated professionals this may be a long shot, but there’s no doubt that most agents will know the purpose of a given purchase.

Brokers

Mortgage brokers are often considered to be in the ‘hot seat’ as it is their recommendations that will be adopted by the applicant in terms of which mortgage product they should opt for. It is therefore up to brokers to extract enough information on the applicant, their intentions and plans for the property plus their relevant financial history, to make an accurate judgement.  Brokers have a duty to report any suspicions they may have, whether related to falsified ID or income data.  We are seeing lenders tightening up their management of broker panels with some refusing to accept further business if fraudulent applications are submitted.   

Surveyors

We've spoken about the surveyor community as being the ‘eyes and ears’ of the industry, and believe they are in a strong position to identify any suspicious activities. Surveyors not only meet the current occupant during the valuation but also physically assess the property.   We believe this places surveyors at the heart of the risk management process and in a prime position to identify factors that may add up to a fraud referral when combined with other information sources.

Conveyancers

As the last line of defence, legal conveyancers have a responsibility to ensure the transaction is fully transparent.  As ‘gatekeepers’ of the mortgage process, conveyancers undertake detailed identity verification checks, have a view of the source of funds, and also have an insight to the property, including a range of detailed property search information. 

There has been some interesting debate over whether the data available to conveyancers could be used earlier in the purchase process, with obvious benefits for instance if lenders were able to make use of Land Registry charge information when deciding how to value a property.

Lenders

Lenders are of course at the heart of fraud detection and prevention with their profitability directly affected by bad lending, and now a strong focus from regulators not only on their processes and controls but also on capital requirements for different categories of lending.

Fraud teams walk a tightrope between ensuring that the customer journey for the majority remains smooth and trouble free, whilst at the same time investigating as many cases as possible, making it genuinely tough to gain approval for a mortgage when criteria are abused or significant suspicion persists.

The IT systems which today form a key part of lenders’ defences aid this process by analysing every potential loan at various stages, from the moment of application through valuation and even the conveyancer’s certificate of title process.

By analysing both applicant and property data – for example, looking at previous loan applications or the property’s transaction and listing history – risk systems can work together to issue alerts if the application meets specific criteria, as determined by the lender. Detailed investigations can then be undertaken by the lender’s fraud team before the application is allowed to proceed.

What this shows is that there isn't a definitive single body that is responsible for policing, detecting or reporting cases of fraud, and whilst lenders are clearly driving the process from the centre, each ‘link in the chain’ has the ability to influence the overall strength of the anti-fraud toolkit. 

Knowledge in this arena clearly equals power, and the provision of new data driven solutions that intelligently analyse all facets of the proposed transaction will enable the entire industry to make better informed decisions – first time, every time.

Richard Groom

Product Development Director

Financial Risk - Landmark Information Group