The Effects of COVID-19: Valuations
Written on 26 March 2020 by
Following imposition of the lockdown, unforeseen consequences in the housing market, as everything else, are becoming more apparent every day. Some of the impact could have been foreseen. But even in the war we did not have lockdown, so it’s understandable that the Government and regulators are being hit with many unforeseen consequences. When the time comes for a post-event assessment of how everyone performed in this crisis a key question will be the speed and effectiveness of the action taken.
Prior to lockdown it was already obvious that purchase activity would fall dramatically, but now even those who do want to buy will struggle to do so.
With surveyors no longer able to do physical inspections, valuation options are limited to a desktop or an innovative solution not currently used, such as using a web cam - which some surveyors and lenders are considering. In this environment it’s difficult to see how any lender will be able to offer a high LTV (loan-to-value) mortgage and 60% seems to be emerging as a new maximum LTV. As at least one person in any chain is likely to need a mortgage in excess of 60% LTV this will make completing a chain exceptionally difficult.
So, once the current purchase pipeline has been worked through, lenders will be able to re-assign nearly all staff working on purchase business to other areas where customer demand has spiked, enquiries about payment holidays. However, it’s not only purchase activity that’ll be halted but so will much remortgage activity, for the same reason – no ability to obtain a physical valuation.
Many lenders already use desktop valuations on some remortgages and as the average remortgage LTV is lower than for purchases there will still be opportunities for remortgage business. However, for borrowers who don’t want to increase their mortgage, the attraction of a product transfer is enhanced - even if a remortgage offers better value - to avoid potential valuation problems. And, in some cases it will be the only option, especially at the higher LTVs. I expect lenders will be under pressure (i.e. told) by the Government and FCA to continue offering product transfers, which may present additional challenges to some non-mainstream lenders, depending on their funding model.
The problems of people who want to move or remortgage pale into insignificance compared to the problems many who have exchanged contracts but not yet completed will have.
Many removal firms are already cancelling bookings, meaning some people will physically not be able to provide vacant possession to their property on the scheduled completion date. Again, it only needs one person in a chain to have this problem and the whole chain is stymied, even if the others had little in the way of goods to move and were doing it themselves.
In some cases, everyone involved will exercise common sense and agree to vary the contract, setting a new completion date when the lockdown is lifted. Some mortgage offers are likely to have expired and so, particularly if a new completion date is more than 6 months from the mortgage offer, will the lender extend the offer period? Halifax has already said it will extend its offer periods by 3 months and where Halifax leads, other lenders often follow. Of course, not everyone is reasonable and in any case some people in this situation will have been laid off or made redundant.
This mess has the potential to be a legal nightmare, with the risk of multiple breach of contract claims. It may be that as the failure to honour the contract is due to Government action force majeure could be claimed, depending on the terms of the contract. When we get back to a semblance of normality the legal profession will be very busy! To resolve this problem the Government could exempt removal firms from the lockdown, specifically for removals where contracts were exchanged up to 23 March 2020.
Whether the new temporary maximum LTV settles at 60% or higher will depend on a number of factors, of which the lender’s risk appetite is only one. For example, valuer’s Professional Indemnity policies are likely to have restrictions on maximum property values - as well as maximum LTVs - for desktop valuations, which will of course have a disproportionate impact on London.
A surveyor getting into their car at home, driving to a property to do a drive-by valuation, taking photos from the car, and then driving to the next appointment, creates nil additional social contact risk. The Government has said it’s keen to mitigate the impact on the economy where it can safely do so. Therefore, a specific exemption from the essential travel rule allowing surveyors to visit a property to do a drive-by valuation is a good example of where an exception would do just that.
If you would like to keep up to date with Ray's blog, subscribe to our newsletter. For more information on the effect of COVID-19 and your mortgage, you can read our guide.
Category: Ray Boulger
The blog postings on this site solely reflect the personal views of the authors and do not necessarily represent the views, positions, strategies or opinions of John Charcol. All comments are made in good faith, and neither Charcol Limited nor Ray Boulger will accept liability for them.