Michael Gove this week revealed the government’s latest plan to unlock a part of the housing market frozen due to concerns over fire safety. But we may be waiting for some time to see real change from lenders
“It’s distressing. We are first-time homeowners and to be saddled with unsellable and therefore worthless properties is very upsetting,” Ola Zaid told the BBC this week.
Nearly five years on from the blaze at Grenfell Tower that killed 72 people, the issues around the safety of tower blocks – including which blocks need fixing and who should pay – continue to rumble on.
Thousands of homeowners, like Ms Zaid, remain effectively trapped in a position where they cannot get their flats valued and therefore sold or mortgaged.
Michael Gove this week announced the long-awaited withdrawal of the government’s Consolidated Advice Note (CAN). This has been seen as the driving force behind lenders requiring external wall fire assessments – recorded through External Wall Systems (EWS1) forms – on medium-rise blocks of flats before issuing mortgages. It meant many occupiers were unable to sell.
Instead the housing secretary announced new, proportionate guidance for assessors, developed by the British Standards Institution (BSI) which he hopes will reduce the EWS1 blockage.
“Lenders to whom I have spoken have given our proposals a fair wind so far, but obviously engagement needs to continue,” Gove said.
But what happens now? After speaking to several of the largest mortgage lenders and being briefed by experts, here is a sense of where we may be heading.
The story so far
Before we get into that, however, it may be useful to re-cap what has happened over the past few years.
Following Grenfell, there was a dawning realisation that many flats in tower blocks could have unknown fire-risks or remediation costs. “There was concern that flats in high-rise blocks wouldn’t represent good security and that owners could be liable for remediation costs.”, a House of Commons library paper said.
Sales of flats plummeted as valuers and lenders concluded that flats could not be valued without further investigation. The government’s advice note 14, which advised owners to check “general fire precautions” and ensure that external wall systems were “safe” was seen as not particularly helpful.
This note, described by one sector figure as “binary”, led the Royal Institution of Chartered Surveyors (RICS) to establish a cross-industry working group to develop a standardised process for valuing tower blocks. The EWS1 process, unveiled in December 2019, was described by the RICS as an “industry-wide valuation process which will help people buy and sell homes and re-mortgage in buildings above 18 metres”.
The forms would be used to collect a wider range of information than the previous advice note.
Trouble emerged within weeks, however, when the government, keen to alleviate concerns over problems with the selling of flats, published its CAN, which was widely interepreted as recommending the use of EWS1 on all residential blocks.
It later revised this to stress that the forms should only be used on those blocks with cladding, but concerns persisted that lenders were asking for the forms too widely. A shortage of assessors was also seen to hamper the process.
The latter prompted the government to pour £700,000 into a fund for the RICS to train more assessors from January last year.
Keen to appear to have the problem under control, then housing secretary Robert Jenrick announced last July that EWS1 forms should no longer be required on blocks below 18m in height.
Lenders however, bound by regulatory duties and anxious not to lend to people who may later incur a huge cladding bill, said they needed more information before changing their approach.
Specifically, several of the largest lenders said at the time that they would wait for changes to the RICS guidance and the government’s promised removal of the CAN before altering their lending practices.
The scale of the problem
Data published this week by the DLUHC showed that, between July and September last year, lenders required an ESW1 form on 8% of mortgage valuations for flats. This was down from 9% the previous year.
These figures were based on data from seven mortgage lenders taking in 109,000 valuations overall.
However, the problem is overwhelming on larger tower blocks. Three mortgage lenders provided a breakdown in block height for 54,000 valuations and found that 52% of valuations for flats in buildings seven storeys or higher required an EWS1 form in July to September and April to June.
Mid-rise blocks – those with four to six storeys, required a form in 23% of valuations in July to September and 18% of valuations in April to June. Whereas just 2% of valuations of low-rise blocks (between one and four storeys) were affected.
It is also worth noting that the figures do not take into account homeowners being deterred from putting their homes on the market because they strongly suspect they would have to go through the ESW1 process.
This was pointed out this week by several cladding campaigners, responding to DLUHC minister Lord Greenhalgh on social media:
8% is a *huge* underestimate. I work for a bank and so many sellers withdraw from the mortgage process before they get to the valuation stage because they know their B2 EWS1 will prevent the mortgage being approved. This is a much bigger issue than just 8% #EWS1#claddingscandal— Cladding (@Cladder38093490) January 12, 2022
Does this not drastically understate things mainly because leaseholders talk to each other? As soon as we know one flat in our building needs an EWS1, none of the others get put up for sale because we know what will happen! #BuildingSafetyCrisis #EndOurCladdingScandal— Ali Ross (@RealAliRoss) January 12, 2022
However the RICS announced in December that it was not going to change its valuation guidance, saying it should stay in place to “safeguard the public interest”. It made the observation that costs should not be passed on unwittingly to purchasers.
Ministers did not see it this way, with the Department for Levelling Up, Housing & Communities (DLUHC) saying that the RICS should work “harder” to protect leaseholders.
Following the row, Gove this week managed to threaten legislation to order independent governance reviews of the RICS while at the same time saying that negotiations with the body were now on a “positive footing.”
The government finally removed its CAN, while on Wednesday the BSI published PAS9980 – guidance intended to provide a more proportionate system for assessing external walls.
While the RICS has not changed its valuation guidance, it has not ruled out doing so in the future. It has also called for a proportionate approach and ensured that its training for assessors contains content from PAS9980.
So now the CAN has gone and amid “positive” discussions with the RICS (let’s ignore Gove’s legislation threat for now), what is to stop changes to lending practices?
What happens now?
Over the coming days and weeks lenders and valuers will be poring over the mammoth, 174-page PAS9980 guidance.
It is worth pointing out that PAS9980 is technically not a replacement for EWS1, although that is how it has been described by Gove and others and – in a roundabout way – it will be. Or at least ministers hope that it will be.
The PAS9980 sets out a method to conduct and record fire-risk appraisals of external walls, through a five-step risk assessment process to assist in the identification of risk factors. The BSI said: “Not all buildings will require an appraisal and, of those that do, not all will require intrusive inspection. “
The PAS also gives recommendations for the competence of professionals completing such appraisals.
The BSI added: “Where homeowners and building owners are faced with external wall construction which does not meet the expected standards, PAS9980 provides a methodology for assessing the level of safety. It also identifies the proportionate steps that could be taken to better safeguard residents while seeking not to expose them to undue financial burdens.”
Ultimately PAS9980 appears to provide a more proportionate way of assessing risk, although ultimately lenders rely on their valuers and, without updated RICS guidance, the impact may be blunted in the short term.
The RICS has indicated it is open to changing its guidance, saying in its response to Gove’s speech that it “will consider its impact on valuation practice carefully with stakeholders”.
This requirement [for EWS1 forms] will reduce once the relevant parts of the Fire Safety Act are implemented and building owners have started to perform all the relevant safety checks
The more important significance of PAS9980, which is backed by the DLUHC and the Home Office, is that it is primarily designed to support upcoming changes to the Regulatory Reform (Fire Safety Order) through the Fire Safety Act. The DLUHC was not able to say when this will order will take effect but, given the act itself is on the statute book and the PAS9980 is now published, it is not expected to be far off.
The change to the FSO effectively means that for any building with two or more sets of domestic premises, those in control of the premises as the responsible person for fire safety need to undertake assessments of external walls, including cladding systems. The act references the requirement for the responsible person to apply “risk-based guidance”.
Lenders do not yet know for sure whether PAS9980 will be given the force of law under this order although, given the government’s backing for it, this seems likely.
If it is, the changes to the fire order and the legal backing for PAS9980 should give more comfort for lenders and valuers that fire risks have been accounted for by building owners.
A spokesperson for Nationwide said: “This requirement [for EWS1 forms] will reduce once the relevant parts of the Fire Safety Act are implemented and building owners have started to perform all the relevant safety checks as part of the fire risk assessment.”
He added that the removal of the CAN and publishing of PAS9980 was welcomed by the building society and is the next step on this journey.
The money is key
While much of the media focus has been on EWS1 forms and government guidance, ultimately the main thing lenders will want to know is that borrowers will not be saddled with large, unexpected bills, such as a demand to pay for cladding remediation. Satisfying themselves on this point is a primary regulatory requirement (see box)
LENDERS’ REGULATORY RESPONSIBILITIES
Lenders must ensure that
- A mortgage is below the market valuation of the property.
- The property is safe and habitable.
- Any property that they lend on is re-sellable.
- The mortgage is affordable for the borrower.
- When assessing affordability, lenders must take into account all relevant factors, including any likely changes to the borrower’s expenditure.
For this reason, Gove’s other key announcement on Monday, that leaseholders will not have to pay towards cladding remediation costs on buildings between 11m and 18m in height, will be of huge interest to mortgage lenders.
However it is unclear at this stage what happens if Gove’s plan to persuade developers to contribute to a £4bn fund to cover the work comes unstuck. Will the government step in to fund the work? Will there be a period of delay and uncertainty, extending the misery of those in unsellable properties?
Then there is the question of blocks under 11m.
Paul Broadhead, head of mortgage and housing policy at the BSA, said: “Questions do remain, for example who will pay if cladding does need to be removed from a building under 11m? But the statement gives us greater confidence that these issues will be tackled by the government.”
This view was echoed by Virgin Money UK. A spokesperson said: “There needs to be further discussion on buildings below 11m and we will continue to work with the government and other bodies as they seek to resolve the situation.”
As we have seen, the flat valuation saga is hideously complicated, with many moving parts and multitude regulatory and safety concerns.
As Jenrick found out in the summer, it is certainly not a simple case of a minister announcing something and lenders immediately changing their practices.
The government’s withdrawal of CAN, the RICS’s desire for a proportionate approach, forthcoming legislation and a potential solution to the cladding remediation funding problem should combine over time to gradually resolve the issue. The resolution is a “journey, not an event” as one lending expert said.
But how much comfort that is to those still stuck in potentially unsafe, unsaleable properties in the short term is questionable.
WHAT LENDERS ARE SAYING THIS WEEK
”We welcome the announcement from the government in respect of building safety and cladding, and the plans set out for ensuring that leaseholders in buildings above 11m will not have to pay remediation costs.
”This is a positive step, although we need to understand the government’s thinking on buildings below 11m which require cladding removal and remediation.
“We look forward to continuing to work with the government as it seeks to resolve the issue of building safety and dangerous cladding on buildings, supporting both borrowers and lenders in the process.
“As part of their regulatory lending responsibilities, lenders will continue to request EWS1 forms in a small number of cases, and government understands the need for this. EWS1 forms benefit potential buyers, ensuring they are not hit with unexpected or unaffordable cladding remediation bills”
Building Society Association
”Today’s announcement is a positive step in the resolution of this long-running and complex issue of building safety, which is taking its toll on flat owners across the country. We particularly welcome the confirmation from government that leaseholders will not have to pay for cladding remediation in buildings above 11m, with the costs falling on the developers that built these properties.
“Questions do remain, for example who will pay if cladding does need to be removed from a building under 11m? But today’s statement gives us greater confidence that these issues will be tackled by the government.
“Lenders have and will continue to take a proportionate approach to the use of the EWS1, which the data shows is not required for 92% of mortgage valuations on flats.”
Virgin Money UK
‘As a responsible lender and member of UK Finance, we welcome the latest announcement from the government in respect of building safety and cladding. We acknowledge that there needs to be further discussions on buildings below 11m and will continue to work with the government and other bodies as they seek to resolve the situation.”
“We look forward to understanding the full impact of the proposed changes, and how the new proposals will support homeowners and renters impacted by the cladding crisis.”
Santander’s approach to EWS1:
”Since July 2020, Santander’s approach has been that, where a valuer requires additional information on cladding, and in the absence of an EWS1 form, we can instead ask the building management to answer a series of questions on the building and its construction.
”This approach does not insist on an EWS1 and helps homebuyers progress mortgage applications, avoiding lengthy delays in obtaining the certificate. We hope to see the updated guidance reduce the number of requests for further information on cladding made by valuers before providing a mortgage valuation.
”Cladding does not impact an existing mortgage customer’s ability to complete a product transfer with us and move to a new mortgage rate when they are not taking on any additional borrowing, or changing the mortgage term.”
A Nationwide spokesperson said: “The government’s announcement to extend funding to properties over 11m is another positive move which we hope brings some relief and reassurance to people worried about the safety of their homes.
We will continue to work with government to understand the details of this latest move and any future proposals on this ongoing issue, particularly in relation to buildings under 11m.
“Nationwide has continued to lend on affected properties throughout, provided there is certainty about what remediation work is needed, who is responsible for the costs and that interim safety measures are in place. This is because, as a responsible lender, we must protect all of our borrowers by ensuring that the properties we are lending on are safe for those that reside in them and that they are not exposed to unexpected remediation costs.”
On the Consolidated Advice Note:
”The society will only request an EWS1 form on buildings up to 18m when there are significant concerns over remediation costs and human safety. This is based upon our experience. In the limited circumstances we request EWS1 forms on low-rise buildings, fire engineers are finding defects that need remediation.
”This requirement will reduce once the relevant parts of the Fire Safety Act are implemented and building owners have started to perform all the relevant safety checks as part of the fire risk assessment. The removal of the consolidated advice note and publishing of PAS9980 is welcomed by the society and is the next step on this journey.
”Nationwide already takes a risk-based approach and has also minimised the number of requests for EWS1 forms on buildings under 18m. By way of context, we request such forms on less than 0.5% of total applications and, of that small number, the majority require some form of remediation.”
Yorkshire Building Society
“Our policy on valuations has not changed – we will continue to rely upon our valuers to decide when they feel an EWS1 form would be appropriate, so that they can avoid asking for them unnecessarily, while also not passing responsibility for any significant fire risks on to potential purchasers who might not be aware of the full extent of the risks.
“We will continue to work with UK Finance, The Building Societies Associationand RICS on issues around cladding and fire safety.”