As the current raft of professional negligence claims against valuers continues, a recent High Court decision has considered a number of important issues relevant to such claims, including the permissible margin of error, the impact of securitisation and contributory negligence.
In July 2004, Mr Stockton made an application to GMAC RFC Limited (“GMAC”), now Paratus AMC Ltd, for a ten-year interest-only loan of £166,500, to be secured over a first floor two bedroomed flat. Countrywide Surveyors Limited (“Countrywide”), were instructed by GMAC to provide a valuation of the flat for loan and security purposes. Countrywide gave an open market value of £185,000, in reliance upon which GMAC advanced the net figure of £166,430 in September 2004, representing a 90% LTV.
In March 2005, as part of the “RMAC 2005-NS1” securitisation, GMAC sold the beneficial interest in the loan, as part of a package of loans, to a special purpose vehicle, RMAC 2005 NS1 Plc, (“RMAC”). GMAC retained legal title to the loan, and accordingly, remained the mortgagee.
Mr Stockton defaulted on his loan in 2007 and GMAC obtained possession of the flat in May 2008. The flat was sold in September 2008 for £123,500, with GMAC receiving £118,103.20 in net sale proceeds.
Both GMAC and RMAC brought proceedings against Countrywide, claiming that it had overvalued the flat and that the correct value in July 2004 was £154,000.
In his judgment, His Honour Judge Keyser QC considered a number of questions:
1. What was the correct value of the flat at the time of the original valuation?
2. Did Countrywide’s valuation fall outside the acceptable range of values and was it negligent?
3. Did the securitisation prevent GMAC from pursuing a claim?
4. Was there contributory negligence on the part of GMAC?
Following consideration of expert evidence adduced by both GMAC and Countrywide, the Court held that the value of the flat at the time of the original valuation was £175,000. The Court dismissed the valuation approach of GMAC’s valuation expert (whose valuation method was based primarily on a price per square metre to the floor area of the property) in favour of Countrywide’s expert’s approach (who used comparable evidence, obtained from the Land Registry, of completed sales prior to the valuation date). Interestingly, in considering the correct valuation approach to be taken, the judge said that he was not concerned with what information was or was not available to the original valuer at the time, but was concerned only with what the evidence before the judge shows to have been the true value of the property. He went on to comment that the possibility of developers incentives being available to purchasers should lead to caution by the valuer in the use of purchase prices of new property as comparable evidence.
The acceptable range of values
In determining what the acceptable range of values was for the subject property, the judge had regard to the comments of Coulson J in K/S Lincoln v CB Richard Ellis Hotels (2010) who concluded, following a review of all the case law on this point, that for a standard residential property the margin of error may be as low as plus or minus 5%, for a one-off property the margin of error will usually be plus or minus 10% and if there are exceptional features of the property in question, the margin of error could be plus or minus 15%, or even higher in appropriate cases. On the facts, His Honour Judge Keyser QC held that an acceptable margin of error in this instance was 8% (GMAC having argued for 4% and Countrywide having argued for 12%), equating to an acceptable range of values (or a “bracket”) of between £160,000 and £190,000. The Court held that although the original valuation of £185,000 was too high, it fell within the bracket, and was therefore not negligent. The Court dismissed GMAC’s claim.
Despite dismissing the claim, due to the extensive evidence presented to the Court it went on to gives its views on issues concerning securitisation and contributory negligence.
The impact of securitisation
Following the securitisation, GMAC sat at the bottom of the capital structure and was entitled to any residual income from the securitised loans after payment to all the other investors in the securitisation. As a result, even though GMAC had sold the loan to RMAC, GMAC (in its capacity as the party at the base of the securitisation structure) was ultimately the party who had suffered the loss in this case. Countrywide raised a technical argument that GMAC had assigned its rights to RMAC and could not therefore bring its claim. In dismissing this argument, the judge stated that “it would in my judgment be a sorry state of affairs if an unexceptional form of securitisation such as was employed in the present case meant that losses for which a negligent valuer would otherwise have been liable became irrecoverable”.
Although the judge dismissed GMAC’s claim and the issues of whether there had been any contributory negligence on the part of GMAC were therefore irrelevant, the judge felt compelled to give his views on the contributory negligence arguments raised by the defendant and held that GMAC had failed to investigate both Mr Stockton’s income and his undisclosed liabilities. On the evidence presented, the judge concluded that GMAC had, in breach of its own lending criteria, failed to adequately assess the borrower’s covenant to repay; as a result, had the Court found that Countrywide had been negligent, a reduction of 60% of GMAC’s entire loss would have been applied. However, the judge made a number of interesting comments regarding sub-prime and high LTV lending. He dismissed the notion that high LTV lending was imprudent and that GMAC’s business model of 90% LTV loans on a self-certified basis was negligent. He did however comment that if GMAC was going to make an advance with a high LTV, it needed to ensure that it had properly investigated and verified the matters of central importance. He also concurred with GMAC’s expert’s contention that an examination of a “sub-prime” loan had to be conducted in the context of this type of lending and it was not appropriate to measure the lender’s conduct by the standards of prime mortgage lending.
Although there is nothing ground breaking in the Court’s decision in this case, it does provide some useful guidance on a range of different issues. In particular, it emphasises the importance of ensuring that an expert valuer adopts the correct valuation methodology in its retrospective valuation and it raises concerns for valuers who may have carried out their valuations unarmed by all the facts. Although the decision emphasises the importance of a lender complying with its own policies and procedures, it reaffirms the notion that high LTV lending and “sub-prime” lending is not imprudent. Finally, the Court’s comments on securitisation are welcome for lenders and should dissuade defendants from attempting to avoid liability on the basis that a loan has been securitised.
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