Sweeteners knock new-build lenders and risk negative equity

brit1234

Here is an article similar to the Panorama program how building companies are scamming lenders and keeping new build prices high despite the credit crunch and property falls.

Sweeteners knock new-build lenders and risk negative equity

Published: 17:12 Monday 04 February 2008

By: Iain Martin , Reporter

Lenders’ confidence in new-builds is being undermined by sweeteners paid by developers to buyers to make sales in a tough market, the Council of Mortgage Lenders says.

The practice might see a developer give £10,000 in cash or other gifts to a buyer to entice a sale, which in effect reduces the value of a property to, say £190,000 from £200,000. But the buyer may still get a mortgage for £200,000 which impacts on the lender who has to raise the extra cash.

Buyers risk being left with a mortgage worth more than the property’s value: negative equity. Lenders increase their risk of loss and exposure to fraud.

The CML has called for pan-industry action to restore faith in new-build property which would include working with developers, amending the Lenders’ Handbook, the RICS Red Book and mortgage application forms.

The value of new-build property is a ‘riddle’ and the ‘crux of the problem is a lack of transparency’ on incentives paid by developers to buyers, according to the CML.
Cash, holidays, white goods and stamp duty payments are being used to ‘keep sales up’ of certain types of property which have saturated a slowing market, according to Matt Smith, senior policy adviser for the CML.Smith said lenders, valuers and conveyancers had been aware of ‘artificially enhanced’ valuations for some time.

Smith added some lenders stopped lending on new-build apartments while others had reduced loan-to-value ratios on offer. This was a ‘sign of the market allowing for the additional risk of new build property’, according to Smith.

The CML’s report, Making the Price of New Homes Clearer, called for: ‘full disclosure of incentives offered’; improving the flow of information to the valuer and identifying third party interests in the property'.

In some cases borrowers make a profit on the deal or are left with a significantly reduced deposits but this leaves the lender with a greater risk of loss than planned.

Melanie Bien, director of media relations at Savills Private Finance, said sweeteners were commonplace but there was growing awareness they had to be disclosed.
‘Transparency is the key. Sweeteners do not matter as long as people are aware of them and they are factored into the valuation. People are much more aware these things need to be disclosed now.’

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MiserlyMartin

So now the CML try and save face! They sat back for 3 years doing nothing and even promoting the boom with all their press releases. Doesn't fool me, they are as much to blame as anyone in all this.

wymondham

you reap what you sow comes to mind here

brit1234

Hopefully this will be high lighted more and more till the government get tought. However the government have made so much on this through stamp duty and capital gains.:mad: