Lee Stafford of Sprecher Grier Halberstam LLP looks at how lenders can work with their legal firm to bring successful professional negligence cases against solicitors and valuers
Will a recession lead to a rise in the number of claims being pursued by lenders against third parties, including their former solicitors and valuers? If it will, what steps can lenders take to help their solicitors identify strong claims and ultimately secure good commercial recoveries?
Economists have reported that the United Kingdom is now entering into its worst recession since 1947. New figures released by the Office of National Statistics show that the UK’s economy shrank by 1.5 per cent in the final three months of 2008.
This recession will have several unfortunate, yet inevitable consequences including increased unemployment, a fall in housing prices, a decrease in mortgage lending and a rise in mortgage repossessions.
According to figures released by the Nationwide and Halifax, between 1995 and 2000, house prices in the UK rose by 60 per cent and reached their peak in the first half of 2007.
Since late 2007 and throughout 2008, as the global banking crisis took hold, house prices have fallen dramatically. Nationwide has reported that house prices crashed by 15.9 per cent in 2008 but has refused to predict where they will end up at the end of this year. However, some economists and experts have suggested that house prices will end this year between 15 per cent and 20 per cent lower than they started.
The housing market has clearly gone through yet another boom and bust cycle, with house prices still to hit rock bottom.
The government is trying to get lenders to start lending again but the Council of Mortgage Lenders (CML) has recently reported that gross mortgage lending reached an estimated £12.6 billion in December 2008, down 11 per cent from £14.2 billion in November 2008 and 47 per cent from £23.8 billion in December 2007. This is the lowest monthly figure since April 2001.
Further, economists have predicted that in 2009 net lending will become negative for the first time since records began in 1964. This means that borrowers will repay more existing debts than they borrow in new mortgages, with the net repayment estimated to reach £25 billion.
Repossessions
Lenders are, of course, being encouraged by the government, the Financial Services Authority and the CML to work together with borrowers who are in financial difficulties so as to try and find ways to keep borrowers in their homes. However, despite this encouragement it is inevitable that because of rising unemployment figures and the recession in general, many borrowers will simply not be able to get themselves out of trouble. Accordingly, the CML estimates that the number of repossessions will jump by 67 per cent on 2008’s figure of about 45,000, taking the total to a level not seen since the depths of Britain’s last recession in 1991, when 75,500 lost their homes.
If the CML’s forecast proves to be correct, the number of homes being repossessed in 2009 will have gone up nine-fold in just five years, as the bursting of the housing bubble and the impending recession combine to cause misery for thousands of families.
If the number of repossessions increases as predicted, then lenders will be selling repossessed properties in a much maligned and depressed property market, which in turn will leave them facing huge losses to try and recoup.
An on-going recession, increasing unemployment levels and a virtual stop to all future lending will most probably mean that shortfall recovery claims against borrowers are pointless, despite the 12-year limitation period available for such claims (members of the CML voluntarily agreed from 11 February 2000 to begin all recovery action for a shortfall loss within six years of the sale of a repossessed property).
Many lenders are no longer able to lend in the current financial climate and so they cannot balance out their current substantial losses with new business and income, which in turn means they do not have the luxury of choosing to wait 12 years so as to give their borrowers time in which to get back on their feet. Accordingly, lenders will be forced to consider alternative routes of recovery now and because borrowers without jobs, money or new homes will have nothing to offer their former lenders in the near future. What next for the lenders who need to make recoveries sooner rather than later?
New instructions
If borrowers cannot afford to repay the shortfall and losses and are not worth pursuing, lenders will instead consider the performance of their former solicitors and valuers, the mortgage brokers, the mortgage intermediaries and the accountants, all of whom would have had a part to play in their borrowers’ mortgage applications and the lenders’ final decisions to lend monies.
Over the last two years, our firm has noticed a huge increase in the number of new instructions it has received from its lender clients to investigate potential claims against solicitors and valuers, and this increase in instructions looks set to continue throughout 2009.
The identification of claims is never likely to be a problem. Claims against solicitors can be assessed by way of reviewing their file of papers. Potential claims against valuers can be proved by obtaining an expert’s retrospective valuation report.
However, a potentially good claim based on the failings or (in)actions of the solicitors or valuers may be commercially unviable if the lenders’ own failings and (in)actions, are also, at least partly, to blame for the losses they have suffered.
1990s case law
We have, of course, been here before after the fall in the UK housing market in the early 1990s. However, while many people might look at the situation we are currently in and say that lenders have clearly learnt nothing from the case law which arose out of the hundreds of claims lenders pursued against solicitors and valuers during the mid to late 1990s, it is my opinion that insurers did learn some harsh lessons last time around and so will be doubly determined to put up a much tougher fight this time around.
Case law from the 1990s is likely to make the issues of contributory negligence and a failure to mitigate losses extremely important issues which must be considered by a lender’s solicitor from the very outset of any potential claim. All claims will turn on their own merits but issues such as excessive loan-to-value (LTV) ratios, non-status lending, self-certification loans, delays to the repossession or sale processes and sales at an undervalue are all potential problems which lenders must address and consider with their solicitors as early as possible.
Of course, in relation to lender’s claims against solicitors for breach of fiduciary duty, following on from Blackburne J’s judgment in Nationwide Building Society v Balmer Radmore (a firm) [1999] P.N.L.R. 606, a solicitor who is found to be in breach of a fiduciary duty cannot claim that his client (the lender) was contributorily negligent, where the breach involved a deliberate act or omission on the part of the solicitor. Also, in cases where lenders are only seeking to recover their “capped” loss, deductions for contributory negligence can only be made from a lender’s actual loss and not the “capped” loss.
Lender’s contributory negligence
However, despite these possible ways of avoiding a lender’s losses from being reduced on the basis of the lender’s contributory negligence, a lender’s solicitor should still always investigate the lender’s lending practices and processes on each and every claim so that it can provide its clients with both case specific and also general advice on the prudency and implementation of their lending policies.
With regard to contributory negligence, regardless of how some people may wish to interpret the case law from the 1990s, there is no general rule than in all cases where there is a LTV ratio of more than 75 per cent the lender in question will be held by the Court to have been negligent. If lenders can justify their decisions to allow higher LTV ratios and also show that they had lending policies processes in place properly to assess their risks based on other factors, such as the creditworthiness of the applicants and consideration of the current property market at the time of the applications, then it is possible that any reduction to their recoverable losses on the basis of contributory negligence will be minimal.
Conversely, lenders involved in non-status lending, whereby the creditworthiness of the applicants is not so thoroughly investigated and scrutinised will have to prove that their risks have been properly balanced out by way of lower LTV ratios and much more stringent checks as to the value of the security on offer in order to limit any possible reductions for contributory negligence.
With regard to potential allegations of a failure to mitigate losses, lenders will no doubt have to show that their repossession and sale processes prevented delays and assured that properties were sold for the best prices achievable.
Lenders providing information
So, what can lenders do to ensure that firms like ours are able to:
To combat allegations of imprudent lending practices or processes, lenders should provide their solicitors with their lending policies, product guides, a full underwriting file, including details of any credit or affordability scoring which have been used as part of the underwriting process (even where an automated underwriting system may have been employed), all mortgage application documents and all (incoming/outgoing) correspondence and telephone attendance notes relating to the underwriting and pre-completion stages of the application process.
Lenders should also be willing to provide their solicitors with evidence relating to the rationale and reasoning behind all lending policy decisions and changes. For example, lenders should be prepared to explain to their solicitors why they considered an LTV of 85 per cent for a particular product to be prudent or why they were prepared to lend monies to an applicant with CCJs. If credit or affordability scoring has been used then the lenders should be prepared to explain how these scoring systems worked and why they were used.
Lenders must also be prepared to evidence the implementation of and compliance with all of their policies throughout the application process, which will include but not be limited to the provision of evidence of staff training and supervision. Lenders will also need to make sure that their solicitors have access to witnesses who were involved in the policy decision making process and the implementation of those policies during the underwriting and completion stages of the application process.
To combat allegations of failure to mitigate losses, lenders should be prepared to provide their solicitors with documentary and witness evidence relating to the lenders’ repossession and sale processes, methodology and strategies, including, where relevant, copies of any service level agreements that the lenders may have had in place with its agents or solicitors. Full copies of the lender’s solicitor’s repossession litigation and repossession sale files should also be provided, as well as complete copies of any managing agent’s files and papers. The lender’s or its managing agent’s papers should always include copies of all post possession valuations and all advice provided to the lender about the projected sale price of the property and/or means of sale, i.e. on the open market or via an auction. Lenders will also need to make witnesses available to their solicitors who have been involved with the repossession and sale processes.
The recession and case law from the 1990s are both factors which are bound to see insurers putting lenders to the sword. Achieving good commercial settlements is only going to be possible if lenders are prepared and able to provide their solicitors with all of the information, documentation and evidence I have referred to above from the outset.
Given the indifferent publicity some of the lending decisions from the last six years or so have attracted – for example, Northern Rock’s ‘Together’ product, which allowed applicants to borrow up to 125 per cent of the value of their homes using a mixture of personal loan and traditional mortgage – all lenders are going to be under immense pressure from insurers to justify all of the lending decisions they have made. Therefore, surely it is in the best interests of every lender properly to assess its potential risk on each and every claim as early as possible so that any potential skeletons can be left in the closet forever.
Lee Stafford is an associate in the commercial litigation department at Sprecher Grier Halberstam LLP
Date: 2nd, March, 2009
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