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Please Sir, may I have an order?

Gavin Dowell of Glenisters assesses the current judicial approach to mortgage possession litigation as lenders continue to show forbearance

As the full impact of the credit crunch and the recession which followed became apparent during late 2008 and throughout 2009, one of the topics which emerged and rapidly developed was that of forbearance.

 

Amidst the hysteria which followed the collapse of Lehman Brothers in the US and the nationalisation of banks in the UK, there were fears that unprecedented numbers of properties could be taken into possession, leaving the same number of families homeless and imposing an intolerable burden on local authorities already desperately short of available housing.       

 

With the Financial Services Authority’s Treating Customers Fairly requirements already in place, the Government then introduced the Mortgage Possession Action Pre Action Protocol, which created a requirement whereby lenders would have to prove they had considered all other options before seeking to repossess a property. Subsequent initiatives saw the introduction of the Mortgage Rescue Scheme and Homeowners Mortgage Support Scheme.

 

Very quickly, there appeared to be a realisation and acceptance across the mortgage lending sector that these turbulent times required a different approach to arrears, collections and possessions.

 

This change in approach appeared to be driven at a macro level by a broad acceptance amongst lenders that their interests would best be served by a return to some level of economic stability, the prospects for which would not be enhanced by huge swathes of families being rendered homeless. At a micro level, there seemed to be a genuine desire to assist individuals and families whose change in circumstances were in many cases entirely beyond their control, coupled with the pragmatic understanding that there was little point in having a stock of repossessed properties which were worth less than the debt secured on those properties.     

 

As the banking and finance industries were assailed from all sides there may also have been a sense that lenders were reaping what they had sown and were now paying the price for years of “irresponsible” lending; although, one could not help but notice, there was little or no mention of “irresponsible” borrowing.                

 

Forbearance initiatives

No industry gathering was complete without a session devoted to forbearance initiatives.

That those initiatives were having a real impact was evident from a significant reduction in the number of first stage possession hearings and also from a significant increase in the number of cases being adjourned prior to first hearing with lenders showing a willingness to give borrowers an opportunity to prove that an arrangement could be adhered to without seeking the back up of a suspended possession order.

 

There will however always be cases where a lender’s concerns about an account are such that they choose to seek, and are entitled to seek, the protection of a possession order and indeed to subsequently enforce that order and take the property into possession.     

 

It is in relation to the judicial approach to those cases that lenders may have ended 2009 feeling somewhat hard done by.

 

Judges discretion

There has always been an unspoken acknowledgement and indeed acceptance by lenders that Judges will push their discretion to its limit and perhaps beyond when dealing with possession cases. In recent months, however, lenders have been faced with increasing numbers of decisions which are not simply disappointing but which appear to be entirely outside of the court’s discretion.

 

It is no exaggeration to suggest that if a small proportion of those decisions which could legitimately be appealed were in fact appealed then the civil courts would struggle to cope. The fact that appeals are actually so infrequent owes as much to the fact that lenders are concerned to avoid acquiring a reputation for being difficult or aggressive as to more practical concerns about the delay and costs involved.        

 

A short diversion into legal territory may assist at this point; let us remind ourselves that a mortgagee is entitled to possession as of right, “before the ink is dry on the mortgage unless by a term expressly or necessarily implied in the contract he has contracted himself out of that right”.

 

That being the case the entirety of the courts discretion is, as set out in Section 36 of the Administration of Justice Act 1970 as amended which permits the court to suspend a possession order or adjourn the claim for possession if (and only if) it is satisfied that the borrower is likely to repay any sums due within a reasonable time, excluding any accelerated payment.

 

Court decisions of concern to lenders

There are, however, large numbers of decisions in respect of which lenders could be forgiven for thinking that some broader, nebulous and entirely undefined discretion is being applied. The type of decision which lenders are entitled to be concerned about fall broadly into three categories:

 

1. Serial and inappropriate adjournments – there appears to be an increasing tendency for Judges to grant adjournments on what might be called a “wait and see” basis, where the borrower plainly does not satisfy the S36 test here and now but just might satisfy that test after one, two or more adjournments.

 

To take the Mortgage Rescue Scheme as an example, that scheme is simply a method by which a borrower may be able to satisfy the S36 test and “pay any sums due”. The mere mention of an application under that scheme does not provide the court with sufficient evidence to grant an adjournment, particularly given that the number of successful applications under the scheme is said to be wholly insignificant. If a borrower does not satisfy the S36 test then the lender is entitled to an order; it is of course open to a Judge to assist a borrower by making the order effective in 56 or 70 days. What a Judge is not permitted to do, if acting within his discretion, is to case manage a borrower’s situation from one adjournment to the next.   

              

2. Multiple application cases – every lender will have a rump of cases where possession orders have been in place for years but where borrowers habitually apply to suspend the execution of the warrant and are given further opportunities in circumstances where, on any assessment, that borrowers credibility is exhausted. In such cases, as the arrears increase, there is an erosion of equity to the point where the lender may be facing a shortfall if and when the property is taken into possession.

 

3. “Defended” cases – if a borrower attends court and raises a concern about certain charges which have been debited to the account or claims to have made a payment which has not been credited, that is not a “defence” to a claim for possession but all too often such assertions are given the status of a formal or semi formal defence leading to delays and additional expense before the matter can be resolved.

 

Collective remedies

So what can lenders do, individually and collectively to remedy this situation?     

 

On a collective basis, it seems that industry bodies such as the Council of Mortgage Lenders and the Building Societies Association have been determined to demonstrate the extent to which their members have embraced forbearance; whilst that is entirely laudable is it incumbent on those bodies to also seek to foster closer links with the judiciary and to try to raise and debate these issues? Specifically:-  

 

• Has there been a shift in attitude on the part of the judiciary and if so, what has produced this change?
• Has the judiciary come under explicit or implicit pressure to ensure that the numbers of properties going into possession is kept under control? If so, does this threaten judicial independence?   
• The judiciary must be made aware that the industry has embraced the letter and spirit of the protocol and TCF and forbearance initiatives. That being the case, when proceedings are issued it is because the lender has a genuine and reasonable belief that they are at risk and require the protection of a possession order.
• The lending industry remains a key part of the broader economy and must be treated as such. To take an extreme example, if a small centralised lender is repeatedly stymied in its attempts to make collections and realise assets it may fail, this will leave its employees without employment and unable to meet their own mortgage repayments.

 

Individual steps

Individually, and on a hearing by hearing basis, lenders can also take steps to give themselves the best opportunity of a reasonable outcome:

 

• Choice and instruction of advocate – the quality and conduct of advocates has itself come under the spotlight in recent months. That may be a topic for an entirely separate discussion but for these purposes let us proceed on the basis that there are good, bad and indifferent advocates. Lenders must, however, ensure they have some mechanism by which they can assess the performance of their advocates and ensure that those advocates are aware that their performance is being assessed. If an advocate is aware that their client may call for a transcript in respect of any given hearing, purely as a means of assessing their performance, it may encourage advocates to give each individual hearing full and proper attention.
• Information is power – lenders and their solicitors must ensure that advocates have all relevant information available to them. What contact has there been with the borrower and with external agencies? If a borrower has requested that an account be converted to interest only, when was this made, has it been assessed and what decision was made? If the lender is aware that an application has been made for DSS mortgage assistance, when was it made and when did the lender provide the necessary information to the DSS? An information vacuum can easily lead to an otherwise avoidable adjournment.                     
• Plan ahead – when an eviction date is approaching in a case with a history of last minute applications, simply waiting to see if an application is made is inadequate. In advance of the eviction date, the matter must be assessed. What has the borrower said at previous applications?  What promises have been made but not fulfilled?  Is the borrower contradicting himself from hearing to hearing?  Are the internal processes of the lender's solicitors sufficient to enable such a case to be identified, assessed and the necessary action taken? If not, why not?    
• In circumstances where the borrower has not made an application prior to the eviction date but has a history of making last minute walk-in applications, an advocate should be instructed to attend at court on a wait and see basis. If the borrower walks in ten minutes before the eviction, the advocate is ready to proceed and the lender’s solicitor is not left on the back foot trying to organise a telephone hearing (which the Judge may refuse in any event) or making submissions by letter.
• Where an application has been dismissed, the advocate’s job is not finished. The advocate should remain at court until the property is in possession. This avoids being caught out in the event that the borrower seeks to appeal the decision. 
• Appeals – if an appeal is the right option, commercially and legally, then take that option. Lenders cannot deny themselves access to the judicial process for fear of acquiring a reputation as a difficult lender.
• Can lenders carry the forbearance-based approach through to the litigation process – assisted voluntary sales, backed up with a possession order for example? The FSA’s approach appears to be that because litigation is to be a last resort, then by definition once that litigation process starts there should be no need for further direct contact between lender and borrower. This approach cannot be right as it ignores the natural ostrich tendency of many borrowers. Only when a hearing or even an eviction date is looming do some borrowers remove their head from the sand and begin dialogue.                      

 

With interest rates expected to rise during 2010, the number of accounts falling into arrears is likely to increase. Whilst lenders will no doubt continue to embrace and refine their forbearance tools they should also perhaps take a moment to ensure that best practice is in place in relation to those cases where unfortunately the tipping point has come.

 

Gavin Dowell is a partner at Glenisters Solicitors  

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