The supply of residential mortgage valuations: A report on the supply in the UK of residential morgage valuations

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On 6 May 1992 we were asked to examine the arrangements for residential mortgage valuations. Our terms of reference (see Appendix 1.1) direct us to investigate and report on the possible existence of a monopoly situation in the supply of residential mortgage lending. We were, however, limited to examining agreements and practices relating to the making or procuring of mortgage valuations and the making of charges, including administration charges, in connection with these valuations.

There are more than 150 residential mortgage lenders in the UK. Since the 1980s the long-established building societies have been joined as lenders by banks and centralized lenders; building societies themselves have been allowed to widen their activities under the Building Societies Act 1986, for example into estate agency, insurance and pensions, and are able to compete more freely for mortgage business. The structure of the industry is competitive and home buyers who need a mortgage can choose from a wide variety of mortgage packages.

Prudential responsibilities mean that virtually all lenders require a valuation when lending on residential property. Building societies are required by law to have one in writing, made by a competent valuer, in their possession before making an advance. Such valuations are required not only for the initial purchase of a property but for remortgages and for further advances.

Valuations traditionally were commissioned by lenders from independent professional valuers, and most building societies operate panels of external valuers approved by them as competent in terms of qualifications, local knowledge and professional indemnity insurance cover. Most banks and centralized lenders also operate panels but appear to have been more flexible than building societies in accepting valuations from non-panel valuers. In recent years, larger building societies have increasingly used valuers employed in-house or in subsidiary firms. The sharp fall in house prices in the last three years has put residential mortgage valuations under particular scrutiny by lenders and brought to light cases of fraud or negligence by valuers. All lenders have reviewed, and in many cases tightened, their procedures for selecting and monitoring valuers, as a result both of their own experiences of fraud and negligence and of pressure from the Building Societies Commission (BSC), the police, and insurers.

We estimate that the total number of residential mortgage valuations carried out has fallen from a peak of about 2.4 million in 1988 to 1.4 million in 1992. The fall in total numbers of valuations required, the increasing reliance by some lenders on valuers employed in-house or through subsidiaries, and moves generally to limit the size of panels of approved valuers, have all led to a substantial fall in the number of instructions to inde-pendent valuers; single practitioners have found it particularly difficult to secure work from lenders. Most of the complaints about lenders' practices which gave rise to this inquiry came from such independent valuers.

We have established the existence of a complex monopoly situation, ie that at least a quarter of all residential mortgage lending is by lenders engaging in one or more of the following practices:

- refusing to accept valuations by any competent valuer;

- requiring a prospective borrower to pay a set fee for the valuation based on a national scale;

- paying external valuers a set fee based on a national scale established by the lender; and

- requiring borrowers to pay fees which do not separately identify the fee for the valuation from any administrative charges levied at the same time.

Lenders argued that, in order to satisfy their prudential responsibilities to establish that security for the proposed loan was adequate, it was necessary for them to control the selection of valuer and to be satisfied of his competence. They emphasized that the valu-ation was their property, commissioned by them for their own purposes, and it was for them, not the borrower, to make what arrangements they saw fit to obtain it.

However, borrowers are required to pay a fee to cover the cost of the valuation and in recent years it has become standard practice for them to see the report. Over the last decade a series of judgments have also established that in many circumstances the valuer owes a duty of care to the borrower. Many borrowers seem to rely on the report as a general guide to the acceptability of the property although some commission their own structural survey or a homebuyers report (which is similar but less detailed). We consider that these features taken together establish a recognizable borrower's interest in the arrangements for carrying out the mortgage valuation.

We accept that lenders' prudential responsibilities require them to be satisfied on the competence of a valuer, ie his professional training, local knowledge and possession of adequate professional indemnity insurance. In the absence at present of any authority able and willing to certify competence it is not unreasonable for lenders to operate panels and to contain costs by limiting numbers on these panels. We found no evidence that, as at present operated, restriction of panels leads to poorer quality of valuations, that the use of in-house valuers or valuers in subsidiary companies leads to lower standards of service to borrowers, or that their use significantly increased the risk of conflicts of interest arising. We consider that a lender should be free to employ such valuers as he sees fit.

We looked at the effect of lenders' selection procedures and set fee scales on levels of valuation charges to borrowers. Although it is difficult to disaggregate this sector of lenders' business, the information we obtained suggests that the largest lenders are making modest margins overall on valuations. We are not satisfied that, if lenders' fee scales for borrowers and valuers were abolished or if borrowers were free to negotiate their own charges with lenders or valuers, the general level of fees would fall. Nor do we see any better way of setting charges than the present fee scales linked to property prices.

We consider therefore that the borrowers' interests generally would not be assisted by reducing the lenders' control of valuation arrangements. We recognize, how-ever, that this situation disadvantages the minority of borrowers who have selected their own surveyor before making their mortgage application. If their chosen valuer is not on the lenders' panel they are likely either to have to abandon their choice or to pay the lender separately for the valuation and thus incur additional expense. We consider that the benefits that lenders' control of valuations provide for depositors, borrowers and the public generally in safeguarding loans and maintaining valuation standards outweigh these disadvantages. But for those borrowers affected the disadvantages are serious. We there-fore considered carefully whether some way could be found to introduce changes to lenders' present arrangements which would remove or lessen these disadvantages while retain-ing lenders' responsibility for control over selection. We considered a number of suggestions but all have themselves major disadvantages and could not in practice be combined with lenders' ultimate responsibility for the valuation. We consider the best guarantee that lenders will take a reasonable approach to borrowers' requests lies in the continuation of active competition between them and the borrower's ability to shop around between lenders. We therefore conclude that lenders' practices in the selection of valuers and the setting of fee scales for borrowers and valuers do not operate and may not be expected to operate against the public interest.

We bore in mind throughout our consideration the different legal framework for house purchase in Scotland and the different procedures operating there for providing mortgages and mortgage valuations. None of these differences affected our findings, which apply to the whole UK.

Finally, we examined the practice of many lenders of making administration charges, paid by the borrower at the same time as the valuation fee. The existence and size of these charges is not always made clear to the borrower. We see no grounds for objecting in principle to such charges and consider that in a competitive situation it is for lenders to decide how to recoup their costs. We think, however, that the borrower needs to have information on the nature and size of the charge as an element which may affect his final choice of mortgage package. He is more likely to examine critically the admin-is-tration charge than a valuation fee passed on by the lender. Not disclosing this infor-mation distorts competition and increases the danger that borrowers will not select the best mortgage offer for their needs.

We conclude therefore that the practice of not disclosing the existence and amount of administration charges operates and may be expected to operate against the public interest. We recommend that where lenders refer to valuation fees in their promo-tional material, including that made available in response to initial enquiries, and in mort-gage application forms, they should be required to specify separately and clearly the valuation fee and any administration charges levied in connection with this valuation fee.

We also point to difficulties for borrowers arising from the presentation of some of the other information they need and draw attention in particular to shortcomings in the APR (Annual Percentage Rate). We suggest the rules for calculating it should be reviewed.

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