CML News & Views
| Published: 4th July 2007 09:13 |
HIP Displacement: Technology And Home-Buying
- The government's attempts to reform home-buying through the introduction of home information packs (HIPs) have been dogged by difficulty and delay. Ministers have failed to present a convincing case for the proposals to professionals working in the property industry or to consumers. But technological developments are creating new opportunities to speed up and improve home-buying - through measures like electronic conveyancing.
- Alongside electronic conveyancing, the Land Registry is planning to develop the chain matrix, which is currently being trialled in three towns. The matrix will allow conveyancers, lenders, estate agents and home-buyers and sellers to use a website to monitor the progress of housing transactions.
- The matrix will help identify bottlenecks in the chain and causes of delay. As the system develops, and buyers and sellers become more familiar with its potential, consumer demand is likely to create pressure to speed up the transaction process and make it more efficient.
- Lenders broadly welcome electronic conveyancing and the Land Registry's plans for a phased introduction of the matrix. But we do not believe that conveyancers should control lenders' access to the matrix.
- Lenders will use it to complete a variety of business functions, many of which are largely clerical and do not need to be undertaken by legally qualified staff. Access to the matrix must reflect the way lenders operate their businesses in practice.
- Lenders also provide most of the funding for property purchases, and will need complete confidence in any system for transferring money electronically. But electronic conveyancing and the matrix do offer real potential to improve home-buying efficiency, unlike the imposition of HIPs on consumers.
A painful process...
For more than a decade now, the government has been struggling to implement proposals to make homebuying more efficient and less stressful for consumers. Its attempts to achieve this through the introduction of home information packs (HIPs) have been dogged by delays and difficulties, and it has failed to present a convincing case for its plans either to consumers or to professionals working in the property industry, including lenders. But there are alternatives to imposing legislation directly on consumers. Technological developments are creating new opportunities to speed up and improve the home-buying process. We believe that this has the potential to deliver a better and more efficient service to buyers and sellers of property, as long as lenders' concerns are addressed as plans are developed and implemented.
The government's scaled-back plans for HIPs are due to be implemented in less than a month from now, on 1 August. But the development of HIPs has been a long and painful process, rooted originally in a 1997 manifesto commitment to make those who break their bargains pay the costs inflicted on others "particularly legal and survey costs."
The rationale for HIPs was that by providing as much information as possible before a property was marketed, delays would be avoided because it would not be necessary to commission searches and other documents later in the process. Providing as much information as possible up front, and reducing the time taken to complete the transaction, would reduce the likelihood of a sale collapsing following an initial agreement between buyer and seller. And if a buyer was gazumped, or a seller withdrew from the agreement, the buyer would not have borne the cost of commissioning documents needed for the sale.
Changing direction
Implementation of the plans has been flawed. Lenders and other professionals working in the property industry have raised a series of concerns about the proposals, and how rigorously they have been tested by the government. Only belatedly did the government accept the assertion expressed consistently and clearly by lenders that they would not be able to rely solely on the home condition report (HCR) contained in the pack for valuing property. Having accepted this argument - and announced that HCRs would no longer therefore be a compulsory part of HIPs - ministers have subsequently been focusing on HIPs not as a means of improving home-buying and selling but as a vehicle for improving the environmental performance of property through the delivery of energy performance certificates. But now the introduction of HIPs has been delayed again, and they will initially be required only for properties with four or more bedrooms.
The cumulative effect of this is that HIPs will now do very little to speed up or improve the home-buying process. But while there has been a prolonged debate about the implementation of HIPs and what the packs should contain, we have continued to argue that there are a number of other ways in which the housing market can be encouraged to work more efficiently. An example of this is the introduction of electronic conveyancing, and we have been urging the government to do more to encourage this.
The Land Registration Act 2002 provided the legal framework for creating and transferring interests in land electronically. The Land Registry has been given responsibility for developing a system under which it will be possible to execute formal documents electronically via a secure communications network. Execution and registration of documents will be simultaneous, with conveyancers initiating the process.
New sources of information
As part of this process, the Land Registry plans to introduce a "chain matrix," which will allow conveyancers, lenders, estate agents and home-buyers and sellers to use a dedicated website to view the progress of property transactions in chains. It will make the system far more transparent, so that the consumer can easily identify bottlenecks in the chain and causes of delay. The system will incorporate a messaging service to alert parties at significant points in the transaction process. As the service develops, and buyers and sellers become more aware of the potential to register documents and to track the progress of property transactions electronically, consumer demand is likely to create pressure to speed up the transaction process and make it work more efficiently.
A prototype of the chain matrix was launched in March this year, and is being tested in Bristol, Portsmouth and Fareham. The main purpose of the prototype is to assess the usability of the service, identify any software bugs and to begin to assess the impact of electronic conveyancing on the Land Registry and other stakeholders. The aim is to complete 500 chains during a six-month pilot of the process, and 100 chains had been entered during the first month. The three locations for the prototype were chosen because they had:
- a high percentage of registered land, with freehold dealings of whole being the predominant type of transaction;
- a mix of urban and rural land; and
- a range of different types of residential conveyancing practices.
The Land Registry believes that the chain matrix will undergo considerable transformation as the prototype is tested. The prototype is the first of five steps in the phased launch of electronic conveyancing and will be followed by:
- the launch of other basic components of an enhanced chain matrix, building on the lessons learned in the first phase;
- a third phase, incorporating a new facility to control the timing and act of exchange or completion, but with money being handled separately;
- a fourth stage incorporating the electronic transfer of funds, which will allow the matrix to effect exchange and completion and pass money down the chain as required; and
- a fifth stage bringing all the remaining functions into the system and allowing access to the do-ityourself conveyancer, as required by the 2002 Act.
We broadly welcome the Land Registry's plans for a phased introduction of an electronic system. We believe that it offers lenders many opportunities to streamline processes and business practices, and can be used to provide a better service for consumers. It is particularly helpful that the Land Registry plans to consult regularly as the project is rolled out. But we do have some concerns about some of the plans, in particular the proposals that conveyancers should act as gatekeepers to the system and that a network access agreement should be supervised by a "qualified person."
We believe that lenders should have direct access to the matrix and the system. We do understand the need for some information in the matrix to remain confidential. But if the confidential parts can be hidden from lenders where access is granted by the buyer's conveyancer, why can this not be achieved if the lender has direct access?
The current proposals rely on the conveyancer to post information. But we cannot see why lenders should not be able to do this in relation to the mortgage if they wish to do so. Given the transparency of the matrix, lenders would be concerned for their reputation should conveyancers fail to reflect their position properly.
Appropriate safeguards should be built into the system to protect the confidentiality of clients, with lenders allowed direct access to the matrix themselves.
Access - and funding
It should not be forgotten that it is the lender that instructs the conveyancer and, in many cases, is also the provider of most of the funding. While we believe that the majority of conveyancers would act responsibly, the instructing lender would still depend on the conveyancer to give authority in every case. What is the lender to do if the conveyancer does not grant access or is slow in doing so? Potentially, that would be a source of disruption and delay in a system that is supposed to improve the service for consumers. The likelihood is that a conveyancer that does not grant access is more likely to require close monitoring. The chain matrix cannot achieve its goal of providing transparency while this situation remains.
Lenders will use the system to complete a variety of business functions, including obtaining searches and official copies, monitoring the progress of transactions, transmitting and receiving funds, and filing discharges with the Land Registry. Much of this work is essentially clerical, and does not need to be supervised by a
"qualified person." Some lenders may not even employ such people. Others operate from Scotland and have staff qualified under Scottish law.
We are also concerned about the proposal that lenders would be obliged to take up services as and when they are provided by the Land Registry. We understand that the Land Registry intends to test all its processes fully and robustly before introducing changes. But we believe lenders would be particularly reluctant to agree to sign up to any system for the electronic transfer of funds unless they had complete confidence in it, including the terms of access. Most of the funding passing through the system will come from lenders, and they would not want to commit to it in advance without being certain that it would deliver what was needed. However, we do believe that, once systems are up and running and acceptable to all stakeholders, electronic conveyancing should become compulsory.
Conclusions
Plans to improve the process of buying and selling homes by imposing HIPs on consumers have been poorly conceived and executed, and the proposed introduction of electronic conveyancing has real potential to ensure that property transactions are completed more efficiently. Electronic conveyancing would speed up the process, and the chain matrix would reduce stress for consumers by providing more information about the progress of transactions and identifying the causes of any delays. We believe that, as buyers and sellers become more aware of the potential of the chain matrix and the information it could provide, there will be growing pressure to remove bottlenecks and speed up home-buying.
But while lenders generally support the introduction of electronic conveyancing and the chain matrix, they do have some concerns. It is not appropriate for conveyancers to control lenders' access to the matrix. The matrix must reflect the way that lenders operate their businesses in practice. Many of the staff from lending organisations that will need to work with the matrix will be performing clerical functions and do not need to be legally qualified. Lenders will also want to have complete confidence in any system for transferring funds electronically, before signing up to it. Finally, lenders will need enough time to prepare fully for the introduction of the new system.
Housing a "national priority," Brown says
Building more homes is a "national priority" and the budget for social housing is to be increased by 50%,
Gordon Brown has said.
Interviewed by the BBC, the new prime minister indicated that the planning system would come under fresh scrutiny. "We have got to look at whether the arrangements that govern the building of housing, both to rent and to buy, are going to get us the results that we need," he said.
He accepted that the private sector would build "the biggest share" of new homes, and gave no details of the timescale over which he planned to increase the budget for social housing by 50%. But he said: "The new challenge is affordable housing and it is one that we will address immediately."
The new prime minister confirmed that Yvette Cooper will continue as housing minister. From now on, however, she will attend Cabinet meetings - reflecting the higher priority the government intends to give to housing. "I think you will find that the debate about housing is becoming far broader than it was a few years ago," the prime minister said.
Study looks at lenders and the internet
A new benchmark study is being launched to look at how lenders and intermediaries use internet technology to speed up the mortgage process. It will focus on how intermediaries use technology, and identify the lenders they believe provide the best online facilities for submitting loan applications.
One area the study will look at is the extent to which lenders are able to provide instant decisions on mortgage applications. The study will show how this has improved over the last year, what developments are planned for the future and how lenders are integrating these services into the systems of their distributors.
We are supporting the study - which has been launched by Frank Eve Consulting - because we believe that information technology, used well, can provide real benefits to the consumer and lenders alike. All lenders are striving to improve their service to intermediaries and the efficiency of processing mortgage transactions. Commentators will be interested to see what impact recent technological development has had on the dynamic UK mortgage market.
Frank Eve said that the ability to offer real-time decision-making had become a "key differentiator" between lenders. "This year's study will show the best practices that separate the leading lenders from the rest," he said.
The study will be undertaken during August and September, with the main results due to be announced in November.
- Gross lending in May totalled £30.6 billion, 5% higher than in the same month last year, our data showed. But year-on-year growth was not as high as in the first four months of the year, when gross lending was between 12% and 15% higher than a year earlier.
- The Office of Fair Trading has launched a market study into house-building. It will look at whether land suitable for development is getting planning permission, how quickly homes are built once permission has been granted, and how satisfied consumers are with new homes.
- House prices grew by 1.1% in June, Nationwide Building Society said. The stronger than expected monthly price increase took Nationwide's annual measure of house price inflation up to 11.1%, from 10.3%.
Strongly, research shows Offset mortgages growing
Offset mortgage lending has been growing rapidly, partly fuelled by growth in the number of self-employed people, research we published recently shows.
The research indicates that the value of offset mortgages - loans that combine a borrowers' mortgage and savings in a single account, so that one ‘offsets' the other - grew by 49% in the year to March. That compared with growth of 15% for non-offset lending over the same period. In 2006, 170,000 offset mortgages, worth £29.3 billion, were taken out - equivalent to 7% of all new lending.
Offset mortgages offer a number of potential benefits to borrowers including:
- lower total mortgage interest payments and a shorter term for the loan, as interest is charged against a reduced balance;
- flexibility to make over- or under-payments, take payment holidays and sometimes to draw down previous capital repayments;
- tax efficiency, with savings balances earning a rate of interest similar to the mortgage rate, but with no income tax payable;
- the ability to use savings balances as a cushion against interest rate rises or fluctuating income.
The flexibility of offset mortgages has clear attractions for self-employed people, given the potential for their earnings to vary from one month to another. And the number of self-employed people has grown by 11% in the last nine years, according to a labour force survey carried out by National Statistics.
Increasing numbers of offset mortgages are sold through intermediaries, our research shows. By the end of last year, intermediaries accounted for 60% of sales, compared with 45% in April 2005. And as well as providing flexibility for customers, offset mortgages can be attractive to lenders. With borrowers holding both their mortgage and savings with the same firm, offset products may help lenders to retain customers.
People with offset mortgages tend to be older than other borrowers (with an average age of 41, compared to 38) and have higher gross incomes (an average of £49,000, compared to £38,000). They also buy more expensive properties and take out larger mortgages. But because of their stronger financial position, they have a lower average loan-to-value ratio and income multiple. So despite the fact that offset mortgages are slightly more expensive - with an average rate that is 0.12% higher than other products - debt servicing costs, as a proportion of income, are lower than for other borrowers.
The number of lenders offering offset mortgages has increased five-fold in the last six years, providing greater choice for consumers. And the marketing efforts of larger lenders have raised consumer awareness and improved understanding of offset mortgages, making it easier for other firms subsequently to enter the market.
The result has been that there are now some 250 offset products for consumers to choose from. Going forward, continued innovation by lenders will help further increase consumer awareness and expand the market potential for offset mortgages.
