UK House Prices -The next bubble waiting to burst ??

Lenders and surveyors debate new-build valuation scams

Tue Jan 3, 2006 8:44 AM GMT

LONDON (Citywire) - The Council of Mortgage Lenders and the Royal Institution of Chartered Surveyors have begun talks to deal with reports of over-valuations on new-build properties, following a move by some mortgage lenders to pull out of lending on new developments.

At the beginning of December The Mortgage Works announced that it would no longer accept any new applications for buy-to-let mortgages on newly built properties. The lender will now only accept buy-to-let applications on properties aged over one year.

Announcing the change, Matthew Wyles, director of The Mortgage Works, said: "Owing to the current over-supply of newly built property, valuation in this sector is more of an art than a science. Some developers are now prepared to do deals on price outside of the formal contract."

As a result, lenders are being ripped off. What happens is that the developer agrees to sell, say, a 300,000 pound property. The buyer obtains an 85 percent mortgage and borrows 255,000 pounds. On completion, the developer grants a discount of 15 percent and gives the buyer cash back of 45,000 pounds, leaving the lender with a 100 percent loan on the property.

Wyles explained at the time of announcing the ban: "In these cases the lender may be unaware of the actual price being paid and end up relying on a valuation which might in turn be based on erroneous assumptions."

Confirming that talks between the CML and RICS are taking place, Bernard Clarke, spokesman for the CML, said: "The CML is in discussions with the Royal Institution of Chartered Surveyors and we are looking for a satisfactory outcome."

The CML maintains that concerns over new-build buy-to-let should not be confused with problems over valuations. "There is some confusion here as to what the key issue is - there isn't a particular problem with buy-to-let. There is some concern about valuations in some areas. Lenders need to be sure of the valuation of the property before they lend on it. Lenders continue to need to lend prudently," Clarke said.

The RICS claims that overvaluations are coming to light because the market is no longer rising. "When prices are rocketing, if a house is overvalued the market catches up quickly enough anyway. With the market stagnating, the problem quickly becomes apparent," commented Andrew Smith of RICS.

He warned that if surveyors are colluding with developers to produce false valuations, RICS will investigate. "But we can't stop developers offering the cash deals and fairly large discounts that they currently are," he said.