Miljøprojekt, 923 – Afhjælpning af barrierer for belåning og salg af forurenede og muligt forurenede grunde

Removal of Barriers to Loans on and Sale of Contaminated and Possibly Contaminated Sites

Summary and conclusions

Obtaining loans on contaminated sites is not impossible

In step with the mapping of contaminated and possibly contaminated sites conducted by Danish counties, the number of house owners whose applications for loans from mortgage credit institutes are rejected increases, presuming that their property might be contaminated. Uncertainty and lack of dialogue often present the greatest barriers for obtaining mortgage loans on contaminated sites. However, also lack of knowledge about the health impacts of contamination, lack of knowledge about authority requirements that house owners are facing, as well as lack of time schedules concerning authority initiatives, are among the main reasons for the reluctance of mortgage credit institutes to grant loans on contaminated or possibly contaminated properties. Thus, dialogue between the parties involved, clear information about loan regulations combined with distinct information on the impact of contamination for house owners, possibilities for action and time schedules for authority initiatives, are important elements in the attempt to pave the way for more loans to house owners.

Contaminated sites are special

In cooperation with a number of players from the private property market, the Information Centre on Contaminated Sites and the Danish Environmental Protection Agency have prepared a memo on the current barriers for borrowing, purchase and sale of contaminated and possibly contaminated housing sites.

Owners of houses situated on contaminated sites are facing a number of different problems in connection with borrowing and trading of their property. Awareness of possible contamination of housing sites is increasing, as a result of comprehensive press coverage in the newspapers, in the radio and on TV, and none of the professional players on the property market can claim to be unaware of this problem. As a consequence of this growing awareness, trading and raising loans on these properties are impeded or have to be abandoned altogether.

The objective of this project has therefore been to help house owners who are in the process of buying, selling or applying for loans on houses situated on registered sites. In order to achieve this goal, a monitoring group has tried to disclose what mortgage credit institutes and real estate brokers, a.o., need in order to gain confidence in the value of the house/lot. The group comprised participants from both private and public organisations/institutions, cf. fact box 1. The idea was that in their daily work this group should apply and spread the results for the benefit of house owners facing problems when applying for loans on contaminated or possibly contaminates sites.

Method

Compiling the number of loan applications that are rejected on grounds of contamination or possible contamination on the lot is not possible. An evaluation of the Loss of Value Scheme ( making it possible, against payment of a small amount, for house owners to speed up a public clean-up effort) conducted by the Danish Environmental Protection Agency revealed that it is extremely difficult to present statistical evidence of loss of value imposed in connection with trade of contaminated and previously contaminated lots/property. Conventional statistical studies of the correlation between cause and effect do not seem to be applicable in this case.

It was therefore decided to carry out the project as a dialogue between the various parties involved, supplemented by interviews and a final discussion of issues, problems and suggested solutions.

After an introductory meeting at which the parties presented their proposals for problems as well as solutions, the Information Centre on Contaminated Sites conducted a number of interviews with representatives from the Association of Danish Mortgage Banks, Realkredit Danmark, Nordea Kredit, the National Association of House Owners, the Danish Petroleum Industries Association for Remediation of Retail Sites, the Danish Association of Real Estate Brokers and the Danish Bar and Law Society. The Information Centre on Contaminated Sites then compiled the interviews and presented the issues in a memo submitted to all participants of the monitoring group.

During this process the aim was not to achieve consensus, but to introduce and present different points of view. The viewpoints and suggested solutions presented in the memo (prepared by the Information Centre on Contaminated Sites) do not necessarily represent the opinion of all members of the monitoring group.

Uncertainty is the key problem

The interviews made it possible to divide the barriers into smaller sets of problems, e.g. low volume of transactions, problems related to loans, and structural barriers. Across all sets of problems, the uncertainty involved stands out as a common theme. Any kind of uncertainty provokes reluctance to assume risks by all parties involved and will invariably result in lack of loan options.

Low volume of transactions

In the interviews it was repeatedly mentioned that the of sales is a decisive pivot point in connection with trade of property, value assessment and granting of credit. A low volume of sales implies reduced prices and may ultimately result in rejection of applications for loans. When asked how significant the contamination is in terms of marketability, the responses, without failure, were that the volumes of sales of contaminated sites is below average, which entails price cuttings.

The low volume of transactions may be explained by the complex interaction between economy, perceived health risks and uncertainty. Expectations for sales rates are particularly relevant when mortgage credit institutes are assessing the loan options in connection with purchase and sale and additional loans. The interviewed persons have different views on the causes of problems related to obtaining loans.

Loans – and related problems

It is a common view that mortgage credit institutes are relatively unwilling to grant loans and are routinely rejecting loan applications for contaminated sites. It is implied that mortgage credit institutes themselves are contributing to the low volume of transactions.

The mortgage credit institutes obviously do not share this view, but maintain that they must comply with legislation applicable to Danish mortgage credit institutes. This includes requirements stating that all cases must be subjected to specific assessment, and that this requirement is met. Moreover, the loan regulations determine that the price of the house must be evaluated on the basis of the market situation, including the rate of transactions and expectations for the development within the housing market.

A special cause of concern, which is shared by the National Association of House Owners, is that a reduction of prices and lower volume of transactions will succeed the past increase in house prices. A declining market will supposedly impact the small segments in particular, such as contaminated sites, and this may entail over-mortgaging of a range of houses.

However, the clear, significant message provided by mortgage credit institutes is that contaminated sites are not automatically rejected. They are given individual treatment and will in some cases be able to obtain loans.

At the same time, mortgage credit institutes emphasise a number of structural factors within casework conducted by counties, which contribute to setting up barriers against raising of loans as well as sales.

Structural conditions

The interviewed persons pointed out a number of structural problems. In their view, the registration of sites is too limited in terms of specifications etc., which results in uniform treatment and assessment of large and small cases alike. This makes it difficult to distinguish between significant and not significant cases of contamination. The time used for casework is perceived as extensive, but the primary cause for uncertainty is lack of specification of time schedules given by authorities. Authority resolutions are perceived as unclear, and it appears to be questionable whether authorities can order present and future owners to pay the costs of possible clean-up, regardless of their innocence in relation to the presence of the contamination (objective responsibility). Finally, the interviewed persons mentioned uncertainty with regard to future developments within the legislative area – will the concept of objective responsibility possibly be introduced?

The method chosen in connection with preparation of the memo did not leave an opportunity for authorities or the Danish Environmental Protection Agency to provide explanations in relation to the structural problems pointed out in the interviews. This may be considered a weakness of this method. On the other hand, however, the conditions pointed out are not unfamiliar and do not call for defence or explanation as such. The interesting question is whether solutions capable of breaking down the barriers mentioned in the interviews can be found?

Proposed solutionBased on discussions conducted in the monitoring group as well as smaller work groups, the Information Centre on Contaminated Sites has compiled a number of proposed solutions.

One proposal suggests that in their information material/guidelines for loan applications, mortgage credit institutions should emphasise that all applications are treated individually. It should be made very clear that no property is automaticcally rejected, but that contamination – like other special conditions – may result in rejection of an application for a loan or an offer for a reduced loan. Finally, it should appear from the material that the loan applicant may further his/her application by providing information about the contamination himself/herself, but that this does not necessarily result in a concrete loan offer.

As mapping of knowledge level V1 presents a special problem, it is proposed that the authorities prepare information material for the owners as to what they can do themselves in order to obtain information from various archives, etc. and how to make use of the "24-month rule" or conduct their own investigations in agreement with the county.

Another proposal suggests that the authorities attempt to make the registration letters and the house declarations more accurate and meaningful to owners and other interested parties, including mortgage credit institutes. It could be clarified e.g. that remaining contamination would only affect any future removal of soil.

Another source of uncertainty is the role that authorities play with regard to requirements laid down for house owners now and in future. In the memo the Danish Environmental Protection Agency states very clearly that under normal circumstances there is no house owner responsibility – on the contrary, it is a matter of contaminant responsibility – and nothing indicates that this rule will be changed in future.

It is now up to the participating parties to convert the knowledge they have gained by participating in the monitoring group for the benefit of the house owners involved. A new meeting has been scheduled for the monitoring group in June 2003, at which experience gained as well as new issues and problems may be discussed.

Fact box 1

The participants of the project monitoring group were selected with a view to covering all interested parties in the private property marked.

The private parties were represented by the following:

Association of Danish Mortgage Banks
Realkredit Danmark
BRFkredit
Nykredit
Nordea Kredit
National Association of House Owners
Danish Association of Real Estate Brokers
The Danish Bar and Law Society
The Danish Petroleum Industries' Association for Remediation of Retail Sites

The public parties were represented by the following:

City of Copenhagen
Danish Regions
Danish Environmental Protection Agency
Information Centre on Contaminated Sites

The following participated as observers in the project:

National Association of Local Authorities in Denmark
Customs and Tax Administration
Frederiksberg Municipality