The recent press coverage of suspected mortgage fraud is a reminder that the widespread mortgage fraud uncovered in the 1980s and 1990s is still with us and thriving. However, the bad news for valuers and insurers is that the mortgage stories making the news may only be the tip of the iceberg.
The popularity of buy to let mortgages has partly been responsible for the substantial increase in the amount of mortgage lending in recent years. However, the slow down in the property market and the increase in the number of repossessions (discussed in the Autumn 2005 edition of the PPLB) has exposed an increasing number of cases where properties have been deliberately overvalued in order to circumvent the more restrictive lending criteria of buy to let mortgages, leaving lenders at risk of suffering losses when borrowers default.
The traditional badges of mortgage fraud, such as sub-sales, direct deposits and unreported reductions, frequently seen in the property crash of the late 1980s and early 1990s, are once again making a reappearance, and it is not just claims directly from lenders that valuers need to be aware of. Often the first port of call for valuers is the solicitors who were instructed to act on their behalf, and once those claims have been settled, solicitors will turn their attention to the valuers for a contribution.
The spectre of involvement of a professional in an alleged mortgage fraud will necessitate a careful look at the terms of the insurance policy. When potential fraud is involved, a number of interesting issues will arise.
A claim based on fraud can also have a significant impact on the way damages are assessed. The case law arising out of the property crash from the late 1980s and early 1990s should be the first port of call when looking at issues of breach, causation and quantum.
Where a claim is brought against a valuer, and there is a suspicion of fraud or dishonesty on behalf of the borrower, it is important to establish whether the valuer has played a key role in the fraud or whether he has become involved, unwittingly, in a fraud by other parties. The distinction is important as it will potentially have an effect upon the way damages are assessed. The case law on assessing dishonesty, recently clarified by the Privy Council in Barlow Clowes International Ltd (in liquidation) v Eurotrust International Ltd (2005) will assist here.
If the position has been one of possible negligence it will be open to insurers to argue that the valuation is within the permissible margin of error, or "bracket", and therefore not negligent. Arguments might also be available to limit losses through the application of the SAAMCO "cap", and contributory negligence (these issues were considered in more detail in the Autumn 2005 PPLB).
However, where the valuer has played a key part in the fraud or dishonesty, attempts at limiting the losses to the SAAMCO "cap" may not be permitted, which means that the valuer may be liable for the lender’s actual loss.
Also, it will not be possible for a valuer to argue contributory negligence, following Alliance & Leicester v Edgestop Ltd (1993). In that case, the court held that in an action based on deceit (in which a valuer had deliberately inflated the purchase price), there could be no discount for contributory negligence on the part of the lender. The principle in Edgestop was more recently upheld by the House of Lords in Standard Chartered Bank v Pakistan National Shipping Corp (2003).
Potentially, the lender will also benefit from a more advantageous limitation period, as time will only start to run from the time when the lender discovers the fraud, or could with reasonable diligence have discovered it.
Whilst a claim based on fraud will have significant financial consequences for valuers and insurers, fraud will always be much harder to establish than negligence. This is underlined by the decision in BNP Mortgages Limited v Goadsby & Harding Limited (1993) where in spite of evidence being adduced to support the lender’s contention that excessively high valuations have been provided fraudulently, the trial judge considered, having heard the valuer’s evidence under cross examination, that the valuer, whilst showing unusual negligence, had no intention of acting dishonestly.
Furthermore, even if fraud or dishonesty is established, innocent partners should still consider the possibility of recovery from the fraudulent partners or employees and other third parties through assignment or subrogated rights.
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.