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
http://www.homecheckpro.co.uk
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