In times of economic boom, cases of mortgage fraud and professional negligence are often covered up by rising house prices, as mortgage lenders are able to recoup the value of the secured property following repossession. However, economic recession brings with it an increase in the number of mortgage fraud and/or professional negligence claims made by lenders, most commonly against solicitors and valuers.
The recession of the early 1990's generated a significant body of case law, providing useful guidance on how the Courts will deal with professional negligence claims against solicitors and valuers.
Although our perception is that, in this downturn, more of our caseload is concerned with fraud than in the last one, there is a similar effect to that experienced in the early 1990's. More often than not the proceeds of sale from repossessed properties are insufficient to discharge the loan and cover the lender's costs. As a result, lenders are scrutinising their shortfall accounts looking for grounds for claims in negligence against the professionals that it engaged to act for it at the time the loan was made. If grounds exist, the lender will jump to recover any shortfall from those professionals or their insurers, whose pockets will be deeper than those of the defaulting, often insolvent, borrower.
Solicitor Negligence
Claims against solicitors may relate to a solicitor's failure to draw a lender's attention to particular issues relating to the title, the purchase price, or the borrower which, if the lender had known about them, would have caused the lender to withdraw the mortgage offer or reduce the amount of the advance. So far as the purchase price is concerned, in the case of new build properties and particularly flats, it often turns out that a headline purchase price has been inflated and substantial incentives have been given to the borrower, of which the lender is not made aware. A negligence claim will also arise from a solicitor's failure to register a lender's legal charge at HM Land Registry, leaving the mortgage lender unsecured.
Valuer Negligence
Claims against valuers will, unsurprisingly, normally relate to the accuracy of the valuation of the property. Lenders will usually instruct an independent retrospective valuation to assess whether the valuation figure falls within an acceptable margin (although the so-called 'bracket' is likely to be given further consideration by the Courts in the next wave of valuer claims) or, alternatively, whether the valuer has negligently over-valued the property.
Mortgage Fraud
When reviewing their loan books for potential professional negligence claims, lenders are exposing significant levels of mortgage fraud, particularly in the buy to let sector and often involving collusion between solicitors, valuers and brokers. Mortgage fraud can take many forms but can include transactions with sub-sales or cash-back arrangements or the misrepresentation of the purchase price in the transfer/contract. Chelsea Building Society, for example, recently announced that it had identified around £41 million worth of mortgage fraud on its books, relating primarily to lending between 2006 and 2008 in the "buy to let" sector. Chelsea is not the only lender to have been affected in this way and many lenders may not yet be aware of the extent of their exposure, as fraud and negligence can often stay undetected until the lender investigates the original transaction in detail following repossession and the sale of the property. There may well be many mortgage accounts with a fraudulent background which will not be exposed unless or until the borrower defaults and the property is repossessed leaving a shortfall. In a rising market the fraud might never have been detected.
Contributory Negligence and Failure to Mitigate
All those lenders still in business have now significantly tightened up their lending criteria and focused on lower-risk borrowers and lower loan to value ratios. Lenders must recognise potential defences when assessing the merits of any negligence claims they have. In particular, lending policies on self-certified loans, non-status loans and high loan to value ratios, which were prevalent in the mortgage sector in recent years, may be considered imprudent and open to findings of contributory negligence. In these cases the courts are likely to award a percentage discount on any professional negligence claim to reflect the imprudence of the lending policy. Clearly, if the lenders also failed to ensure their own criteria were met eg. by failing to complete full credit checks, then further discounts might also apply. Lenders need to be aware of these issues, as a finding of contributory negligence can significantly reduce the amount recovered from a defendant. Defendants' insurers will also seek to minimise their liability by alleging failure to mitigate wherever there is evidence that the lender failed to repossess timeously or failed to achieve a reasonable price on sale.
Conclusion
There is every indication that the level of professional negligence/fraud claims will surpass by far the levels seen in the early 1990's. In particular, fraud seems more prevalent than in the last recession. Although there is an established body of caselaw giving guidance on claims against valuers and surveyors, it is likely that areas such as contributory negligence and the valuation 'bracket' will be given further judicial consideration in future cases. However, current litigation trends suggest that more and more cases will be settled by parties pre-action, under the Professional Negligence Pre-Action Protocol, thus avoiding the time and expense involved in Court proceedings.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
