A rising property market, such as has prevailed in the UK for a considerable period, can mask a number of ills. In particular, mortgage fraud is less likely to cause problems (if it comes to light at all) in a rising market, where a lender can recoup the value of the secured property. Once the value of properties starts to fall, however, it is more likely there will be insufficient equity in the property to recover the sum advanced and related charges. This is when short-changed lenders begin to scrutinise the work undertaken by professional intermediaries.
Mortgage fraud occurs where an individual obtains a loan by means of a false or exaggerated application, often by a fictitious borrower, and then defaults on the loan. The tell-tale signs or ‘badges’ of mortgage fraud include sub-sales, for which there is no apparent explanation, proceeds remitted to someone other than the vendor, deposits said to have been paid directly to the vendor and misrepresentation of the price in the contract. These can all be mechanisms to disguise the fraudulent nature of the underlying transactions. While the much talked-about crash may not happen, it pays to be prepared and this is an appropriate time to review some of the lessons learned from the previous round of claims, and consider what has changed in the mean time.
Leading cases
The broad principle established by the leading cases arising out of the last crash is that the losses for which a professional adviser can be liable where a lender has lost money due to negligence on the part of that adviser are confined to those attributable to that adviser’s breach. Additional losses caused by a falling property market since the loan, are not losses for which such professionals should be held accountable.
This led, in South Australian Asset Management Company (SAAMCO) v York Montague [1997], to the concept of the ‘cap’ on damages which could be recovered by a lender from a valuer, being the amount of the negligent overvaluation. The rationale for this was that it is not part of a valuer’s duty to advise on future movements in the property market, nor to act as guarantor of the lender’s investment decision. The leading cases also established that a lender’s damages could be reduced by a finding of contributory negligence in appropriate circumstances.
Post-SAAMCO
Perhaps unsurprisingly, there has been no decision since SAAMCO that a valuer has advised as to the course of action a lender should take, rather than merely providing information. However, there have been several reported cases dealing with other issues which will be of interest to professionals and their insurers if the anticipated claims materialise, including:
- Platform Home Loans v Oyston [2000], where a lender’s contributory negligence for, inter alia, failing to obtain the borrower’s answer to a key question was assessed at 20%, which was applied to the whole of its loss, not just the capped loss.
- In Ball v Banner [2000], Justice Hart considered the correct approach to the apportionment of responsibility between professionals, deciding that when one is liable for all the damage suffered, that does not prevent them claiming contribution from another who may only be liable for some of the damage, up to the limit of the SAAMCO cap. Accordingly, if each defendant caused a lender to make a £1m loan and are equally responsible, they were the negligent overvaluation only £250,000, the valuer’s contribution would be capped at that level, rather than £500,000, 50% of the claim.
- In Aneco Reinsurance Underwriting v Johnson Higgins [2001], the House of Lords had to decide whether, on the facts, the case fell within the ‘scope of the duty’ principle applied in SAAMCO or whether the brokers had undertaken a duty to advise the company as to what course of action they should take, the potential losses being $11m (£5.4m) or $35m (£17.3m) respectively. The majority held it would be unrealistic to suggest that, in providing ‘information’ on the availability of insurance, a broker was not reporting on the assessment by the market of the risks inherent in what the reinsurer planned to do. Accordingly, the full loss suffered by reinsurers was recoverable from the broker.
- An interesting issue relating to claims in deceit arose in Nationwide Building Society v Dunlop Haywards [2007], where summary judgment was obtained against valuers. Dunlop argued that one of Nationwide’s employees was aware of facts putting him on notice that leases which formed a large part of the basis of the valuations were suspicious and could not be taken at face value, which was relevant to the issue of inducement. The judge disagreed this was damaging to Nationwide’s case, saying that even if the employee was found guilty of fraud, it would not constitute a defence to a claim in deceit that a claimant could have discovered the truth but failed to do so due to their carelessness.
- Standard Life v Oak Dedicated [2008] concerns aggregation. Standard Life brought proceedings against its insurers and brokers in relation to the mis-selling of mortgage endowment policies. The policy wording referred to an excess of “£25m each and every claim and/or claimant”, which was held to mean the excess applied to every individual claimant’s mis-selling claim against Standard Life, each of which was relatively small. Accordingly, rather than aggregating the claims, Standard Life had to treat each as an individual claim and the excess was never exceeded, leaving insurers liability-free. This may be seen as a lucky escape for insurers (as opposed to the brokers) but highlights the importance of the wording of the excess clause.
The current position
What are the key changes since the early 1990s? Have we really been here before? As regards solicitors’ indemnity insurance, the main difference is that this is no longer obtained via the Solicitors Indemnity Fund, but on the open market. There is, therefore, a wider, more fragmented insurance market. The primary result will be that the cost of future claims will not, as previously, be spread across the whole profession. On the face of it, this is likely to be good news for City firms but bad news for small conveyancers. However, early indicators are that mortgage fraud is no longer targeting residential properties alone but has expanded into higher value commercial property, increasing potential losses to lenders, hence the size of their claims. It could also mean more City firms are affected this time. Interestingly, this could test the effectiveness of the limitation clauses many have since incorporated into their retainers.
Most of the last round of lender claims took place before the introduction of the Civil Procedure Rules, which have generally increased the front costs of litigation, and the pre-action protocol for professional negligence, which encourages openness between litigants and aims to prevent 'trial by ambush'. Consequently, lenders will need to have formulated their claims against the professionals fully before beginning substantive correspondence. Additionally, a pre-action protocol for mortgage repossession claims is currently under consultation, so lenders may have further procedural matters to address before being able to launch their claims.
Looking ahead
As happened before the last crash, there has been a lengthy boom in the property market, leading to fierce competition among lenders for market share. In such a market, it would be easy for corners to be cut and lenders’ own guidelines to be disregarded. In a rising market, there are many more people desperate to board the property ladder and self-certification mortgages have re-emerged. The perception is that credit has been offered in some sectors with scant regard for borrower suitability in the long term. This may or may not reflect the true picture, and it remains to be seen whether the anticipated claims against solicitors and valuers will be subject to material reductions for contributory negligence. The Financial Services Authority’s review of subprime lending, published last July, found many instances of lenders not following their own guidelines.
Lenders will need to be sure they are in a position to cast the first stone before commencing proceedings against solicitors or valuers. Where lenders’ guidelines have been tightened following the last crash, there will arguably be greater scope for those more restrictive guidelines to be breached. Computerised records, such as checklists for recording dealings with borrowers, as well as evidence of regulatory compliance, are likely to be a fertile area for disclosure requests from those defending solicitors or valuers.
One thing is certain: solicitors and valuers will remain in the firing line if there is a sustained downturn in the property market. Lenders will look to recoup what could be very substantial losses from those with the means to cover them but can expect to meet a robust defence from those acting for insurers.
Linsey MacDonald is an associate in the financial services litigation team and Catherine May a partner in the professional negligence team at Reed Smith Richards Butler.