HIPs

HIPS and the Housing Act

March 2006

Executive summary

• HIPs are suddenly a reality. Already pre-sale pack trials are under way with consumers and estate agencies and initial feedback is proving positive.
• Yet how many lenders have carried out a proper appraisal of their legal obligations under the Housing Act which covers HIPs? And how many have actually thought through how they are going to manage HIPs?
• You will need to know in advance which of your title deed packets contain unregistered deeds, as opposed to Land or Charge Certificates, and have the systems in place to forward them quickly.
• Your HIPs provider will be seeking to generate a complete pack in just days - will you have the systems in place to ensure your mortgage offer keeps pace?With the Government’s commitment to a start date of 1 June 2007 for the compulsory introduction of Home Information Packs, and the current development of their regulations, HIPs are suddenly a reality. Already pre-sale pack trials are under way with consumers and estate agencies and initial feedback is proving positive.

This means that voluntary HIPs will be up and running well ahead of the compulsory implementation next year, or even the proposed ‘dry run’ later this year, because of consumer demand and the drive by forward thinking organisations.

Yet how many lenders have carried out a proper appraisal of their legal obligations under the Housing Act which covers HIPs? And how many have actually thought through how they are going to manage HIPs, or what strategy they need to develop to maximise the business opportunities HIPs could bring?

The answer to both questions is - surprisingly few.

Maybe this is because there is already so much legislation and regulation for everyone in the mortgage industry to deal with, but it is clear that only a minority have yet to give this dramatic change the senior attention it needs. Those who have are now ahead of the game, testing their systems towards a strategic vision and competitive advantage, some elements of which are outlined separately here under ‘HIPs - Business Opportunities for the Mortgage Industry’.

However, before having the vision it is vital to appreciate the legal obligations and potential impact the Act has on you as a lender. The consultation on the regulations for HIPs has now closed, but we can expect there to be little change in the contents of a Home Information Pack. Those contents are now well documented, however some of them raise issues which need to be carefully considered for wider reasons.

Searches

The requirement to provide pre-contract searches in HIPs creates a number of legal concerns. Firstly, the type and number of searches required - only a Local Authority search and a set of drainage enquiries - may not be enough to satisfy either your legal representatives, or the buyer. In the majority of cases additional searches may be needed (for example, a Coal Authority search), so just complying with the Act and providing a least cost HIP could create problems and delays.

We believe that all searches relevant to the property should be included at the outset to save time and cover all liabilities. Similarly, the regulations allow personal searches, or those from personal search companies, to be included in the HIP. So if you are a lender who does not yet accept personal searches you will need to reconsider your policy if you are to avoid possible conflict with customers.

Expiry Dates

Under the draft regulations official entries, Home Condition Reports (HCRs) and searches must not be more than three months old before the first point of marketing. All other documents may be completed or dated earlier, but the most recent versions must be in the pack. Any updates made to documents in the HIP must be logged in the Index, and any superseded documents removed; except for any earlier HCRs produced in the last 12 months. If a property is taken off the market for more than 28 days an updated HIP will be required.

Our experience from some 300,000 transactions a year is that very few fail as a result of negative information thrown up by searches, but understandably most lenders currently require searches and valuations to be no older than three months at exchange of contracts, and six months at completion.

So will it be your policy to agree to searches older than six months at completion, or to allow the buyer to extend the life of a search through an insurance guarantee?

Providing title documents

The speed you provide title documents to HIP providers will be critical to the production of HIPs. Packs will need to contain evidence of title, so for unregistered land HIP providers will require sight of the deed packets held by you. The longer it takes to forward packets of unregistered title deeds, the longer it will take for the HIP to be produced, and the longer the seller will have to wait to market the property.

This is not exactly good CRM, so you will need to know in advance which of your title deed packets contain unregistered deeds, as opposed to Land or Charge Certificates, and have the systems in place to forward them quickly.

While the numbers of unregistered parcels of land are reducing every day, and the Government is seeking total registration of land at HM Land Registry by 2014, it is likely you still hold many packets containing such valuable documents as:

• Planning permissions
• Building Control documents
• Development agreements
• NHBC certificates etc.

And it will not be just the need for speed in supplying these documents. The numbers of deeds requested are likely to rise as they will be required before marketing - not just when a sale has actually been agreed as is currently the case - so they will be needed for speculative sales as well. Does your Deeds Department have the systems in place to manage this?

Review of CML Part 2

Together with a review of Part 1 of the CML Lender’s Handbook, you will have to review your individual Part 2 responses. From the draft regulations we know that changes are likely to be required in the following areas:

• Searches
• Valuations
• Instructions concerning the HCR.

New Entrants

Already a number of non law firms are setting themselves up as HIP providers, but what will be the legal status of these companies for you and your customers? Will you, and they, be happy if these new entrants are not properly regulated? It is worth remembering that at the moment only regulated law firms have the ability to provide you with the enforceable undertakings and protection you and your customers need when, for example, releasing title deeds.

Risks from existing law firms

The HIP provider is most likely to see through the final element of conveyancing. There are currently only a handful of businesses with the capability, technology, experience and systems to produce HIPs, and nearly all of them already have their own law firms or panel management models. So many independent law firms who rely on conveyancing will face difficulties - with an increased risk of corners being cut, monies blurred and even services failing altogether.

Having 5,000 plus firms to represent you and only ‘striking them off’ when you have a poor experience is not really an option in the new HIPs environment. You will need to consider if you have the right legal panel management in place to balance local representation with centralised quality control, and the resources to meet the HIPs and conveyancing needs of yourselves and your customers.

Valuation

The aim of the Act is that the HCR should be an objective statement of the condition of the property which can be relied upon by buyer, seller and lender. While there is no obligation to include a valuation in the pack, under the legislation you will be entitled to depend on the HCR to confirm condition related information, and therefore arrive at a valuation. However, if you intend to use the HCR to obtain a valuation without a full inspection, for example by using an Automated Valuation Model (AVM) or a qualified surveyor at a desk or drive by, then it will be vital that all the data required for valuation is also in the HCR.

Conflicts of Interest

That a Home Inspector (HI) will have responsibilities to the buyer, seller and lender does raise issues regarding conflicts of interest. Although the Government believes that an HCR should be seen as a document of unbiased fact, our research indicates that the perceptions of others may differ.

How protected will you and your customers feel relying on an HCR from a large estate agency chain on the property it is selling, and will you be prepared to rely upon that same agency for a valuation? Are you - and more importantly are your customers - going to be happy getting a valuation on a property from the same HI who carried out the HCR for the seller? However, having an independent HI who can also provide a valuation could meet those concerns and save the cost of a separate instruction to a separate surveyor. In addition when things go wrong - and many of us well remember the early 90s - it will be important to demonstrate the independence and best practice of your valuations to meet any claims.

Speed of mortgage offer

One of the government’s stated aims in introducing HIPs is to reduce property transaction times. As a seller will be unable to market their property until the HIP is prepared, they will be seeking swift pack assembly, as well as swift conveyancing as soon as the sale has been agreed. However, we have found that the average time to produce a mortgage offer is 10 working days - that is two whole weeks for a consumer - and often it is a lot longer.

In the new HIPs environment lenders will find that speed of mortgage offer will be as important to sellers, buyers and financial advisers as interest rates and conditions. Your HIPs provider will be seeking to generate a complete pack in just days - will you have the systems in place to ensure your mortgage offer keeps pace?

Challenges

As we can see, the introduction of HIPs will create a number of challenges to your:

• Own processes and instructions

• Relationships with customers, current legal practices and new entrants

• Valuations

• Business strategy for the future.

Just how much impact these have on your organisation will be decided by your vision, the capabilities of your partner in HIPs provision, and the speed and willingness with which you embrace change! Andy Knee is managing director of LMS. The Housing Act, and particularly its introduction of HIPs, raises a number of business issues and opportunities, as well as legal ones.

Although the legal responsibility for the contents of a HIP will lie with the person marketing the property (normally the estate agent), in reality many consumers will consider getting their pack provided by a non estate agency organisation as it will give them the freedom to move from one agent to another when they want.

Lenders, packagers and brokers are ideally placed to pick up this business, with a number of benefits.

First and foremost is that whoever provides a home seller with their HIP is then ideally placed to sell them the mortgage on their next home - a crucial issue, especially for brokers who will not want to find themselves out in the cold on new mortgage business.

Secondly, whoever supplies the HIP is also ideally placed to offer additional property services like conveyancing which enhance the offer to customers and can generate useful extra revenue over and above the commission earned on the HIP itself.

Thirdly, a HIP service can be used strategically - both as CRM with current customers, and as a marketing tool to gain new customers - for not only mortgage business but also other financial services.

• How long will it be before we see the first ‘HIPs Free’ offer on the market?
• However, to maximise these opportunities it will be essential to have an independent HIP supplier who:
• Has the experience, expertise, technology and robust systems to managehigh volumes accurately and consistently
• Has a proven track record in working successfully with lenders and brokers
• Provides a flexible and bespoke service to suit each organisation, rather than a ‘one service fits all’ approach
• Can provide HIPs at high speed and low cost
• Fully understands the legal elements of HIPs, and
• Has the resources, professionalism and quality controls to deliver and uphold your reputation.

In the coming race to use HIPs to take market share there is far too much at stake to gamble on the wrong horse.