In the 1960s and 1970s, when mortgage lending was undertaken mainly by traditional Building Societies (and Mortgage Finance Gazette was the Building Societies Gazette, for which I wrote a regular monthly column) the maximum loan was normally limited to 75% or 80% of valuation.

However first-time buyers or others with only a small deposit could obtain a higher advance up to 90% or 95% with the aid of a mortgage guarantee policy underwritten by an insurance company.

The mortgage guarantee premium was generally added to the advance. In effect the insurance company shouldered the top slice of any risk in the event of default.

Mortgage guarantee insurance was good business for the insurers. Inflation and steadily rising house prices accompanied by a fairly low level of repossessions meant that they rarely had to pay out on any claims.  It is many years since this type of insurance was popular or available.

High percentage advances are now available from a variety of lenders including mainstream banks and building societies and in the absence of insurance the additional risk is factored into their lending policies in the form of higher interest rates and a more stringent application of credit checks.

Valuation risk

As a consequence of Covid-19 and the increasing use of Automated Valuation Models (AVMs) there is now a reduced demand for surveyor’s valuations.

Traditional surveyor valuations involving a full inspection of the house or flat including such matters as inspecting in lofts and testing for damp are increasingly uncommon with much mortgage lending based on computer-based AVMs, drive past inspections or desk top appraisals.

The current need for social distancing makes these traditional surveys increasingly difficult to arrange and carry out.

When a mortgage lender obtains a professional surveyor’s valuation the surveyor has a duty of care and if the property is subsequently repossessed and the lender makes a loss the surveyor – who will be insured – can be sued if the valuation was found to have been prepared negligently.

If the valuation is provided using an AVM, drive past or desk top appraisal the scope for suing whoever provided the valuation is far more limited. All litigation of this type is time consuming and expensive with the outcome uncertain.

Guaranteed valuations

Could there be a better way for mortgage lenders to cover valuation risk?

There may be an opportunity here for some form of mortgage guarantee insurance. Not in the form used in the 1960s or 1970s but in the form of a guaranteed valuation.

In exchange for a premium the insurance company would provide a certificate of value applicable at the time of valuation. In the event of repossession and a crystalised loss the policy would pay out compensation equivalent to what would have been obtained by suing the surveyor but without the costs and uncertainties of litigation.

We have the systems in place to do this using AVMs and the extensive databases held by the major surveying practices. In the current highly competitive mortgage market the ability to access accurate dependable mortgage valuations quickly is vital.

The insurance would not cover those matters that a surveyor would not be liable for such as a fall in the market, a physical deterioration in the property or some change in in the surroundings. But it would place the lenders in the same position as if they had obtained a full professional surveyor’s valuation.

The expertise exists for such a scheme to be a successful addition to the range of property valuation procedures currently available.

Peter Glover is a chartered surveyor and author of ‘Building Surveys’ and ‘Buying a House or Flat’