20/12/2012 was an important day for mortgage lenders in the UK with the handing down of two favourable decisions by Mr Justice Coulson in the Technology and Construction Court, against e.surv Limited (“e.surv”). The case brought against e.surv by Blemain is discussed separately.
This case concerned the accuracy of two valuations by e.surv provided to support residential loans by GMAC to a Mr Ali in the first instance, and Mr Bradley in the second. GMAC had assigned their loans against e.surv to Webb Resolutions. The impact of this judgment is far-reaching; many of the issues apply to all professional negligence claims against valuers by mortgage lenders.
The Judge concluded in relation to both valuations that they were negligently wrong. On Ali, there was no reduction for contributory negligence. In relation to the Bradley valuation, GMAC were found to have contributed to their losses by 50%. Both loans were self-certified with high loan to value (“LTV”) ratios; 85% on Ali and 95% on Bradley. Crucially, the Judge found 85% LTV not to be negligent in the market at the time.
In general terms, the Court will look at what was happening elsewhere in the lending market at the time of the loans. If the Claimant was doing what its competitors were doing, negligence can only be established if there is some evidence of irrationality, or if the lending was illogical. The Judge held that Courts are not well suited to assess business models of entire sectors.
Facts of the Ali Case
The subject property was a 2 bedroomed flat in a new development, Masshouse Plaza, in Birmingham. It was valued by e.surv on 28 November 2006 at £227,995, which, the valuer knew, was the asking price. The property was still under construction and no inspection was performed. This was not brought to GMAC’s attention.
Ali applied to GMAC for a loan in the sum of £193,500, to purchase the property. £34,495, being the balance of the purchase price of £227,995, was being paid out of savings. Ali had originally sought a conventional mortgage but had been given a credit rating of 4, which was a fail. He therefore sought a self-certified mortgage, which was a sub-prime product and consequently more expensive.
Facts of the Bradley Case
The subject property was a 4 bedroomed detached house with a railway line running behind it, an empty plot alongside and a council estate nearby, in Whitstable, Kent. It was valued by E.surv on 10 July 2007 at £295,000. The valuer was aware that Bradley wanted to remortgage and was looking for a loan of £280,000 based on an estimated value of £295,000. The purpose of the loan was said to be debt consolidation. Although it was not said to be an application for a self-certified mortgage, it was treated as such, because no evidence of income was sought or provided.
The loans were made by GMAC. The Court held that the standard by which contributory negligence is judged is that of a reasonably competent centralised lender. The burden of proof is on the defendant, being the party who makes the allegations.
On the facts of the Ali loan, Coulson J found it impossible to say that the decision to lend to him at 85% LTV was irrational, illogical or negligent. Despite evidence to indicate that Ali was credit-impaired (he had, after all, failed the original application for a standard product), Ali’s financial position, as revealed by a credit search and GMAC’s lending computer programme, was not such that further investigations were required and did not mean that the loan should not have been made. Coulson J accepted that defaults and CCJs were an ordinary feature of the sub-prime market. In addition, the Judge noted that it was acceptable for lenders such as GMAC to rely on intermediaries to collate the mortgage applications. The judge concluded that all the defendant’s allegations of contributory negligence failed.
The issues which persuaded Coulson J to make a 50% reduction in the Bradley case were the relatively extreme facts of the case. Bradley was remortgaging for debt consolidation when he plainly had a large amount of existing debt, particularly on credit cards. The Judge concluded that in those particular circumstances, an equity cushion of 5% was not enough.
The Judge discussed the FSA report in 2011 and noted that whatever it may now say, the FSA did not prevent self-certified mortgages at the time, they were commonplace and so it is against that background that contributory negligence has to be judged.
Coulson J considered the authorities and held that the right approach to valuation is to focus on the result, not the methodology. That said, the Court is required to undertake a balancing exercise between the parties’ respective blameworthiness when considering allegations of contributory negligence and in undertaking that exercise, questions as to how the valuations were carried out could (and in the Bradley case did) become material. In Bradley, Coulson J found the parties to have been equally to blame, hence the 50% reduction.
Coulson J examined the recent cases on margin of error. His earlier decision in K/S Lincoln and Others 2010 still holds good, and so the margin of error is 5% for a residential property, 10% for a unique, one-off property and if there are exceptional features, the margin could be 15% or higher but this is to be applied to complex commercial valuations, not residential.
Coulson J found the valuers’ performance in relation to both the Ali and Bradley cases wanting. He heavily criticised the valuers in both cases for starting at the asking/estimated price and working back in an effort to justify those figures.
The valuer was criticised in the Ali case for producing his valuation without inspecting the Property and relying entirely on the developer’s sales team for information. The valuer on the Ali property was negligently wrong to make no enquiries of the sales team regarding incentives, despite RICS guidelines, and also to rely on comparables from the Quest system which were not necessarily based on the actual sale/purchase prices. Coulson J put a valuation on the property of £204,658, over £23,000 less than the original valuation. Even though the property was unusual as it has a very large terrace, was the first in the block to sell and was not complete, the Judge found that the appropriate margin of error was 5%.
The valuer in the Bradley case was heavily criticised for adding his own 5% margin of tolerance; he actually thought the value was £285,000 but increased the valuation by 5% to £295,000. The original valuer also failed to take into account the adverse factors that affected the property, namely the railway line and proximity to the council estate.
On an analysis of all the evidence, Coulson J put a valuation on the Bradley property of £260,000, which was £35,000 less than the original valuation. He found that the appropriate margin of error was 5% even though this was a 4 bedroomed detached house in a street of mixed properties ( a block of flats next door), comparables were not easy to find and the property had some unusual features in its location.
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