Greenwoods Solicitors

Calm before the storm, or just a weak front?

Professional liability and E&O underwriters have been expecting (and indeed, have been warned by others to expect) a thunder cloud and a blast of claims flowing from the mountain of repossessions that were said to be imminent after the start of the most recent recession.  Nobody who lived through the round of lender litigation in the mid 1990s would relish a repeat of this unpleasant experience. 

There have been, we are sure, many articles warning of gathering storm clouds over the past two years. Now is perhaps the time to look at the situation from a new perspective.

Lenders made their business decisions to develop and sell self-certification mortgage products.  Borrowers would say that they earned £x and the lender would give them £y. Apparently, from 2007 through to early 2010, almost half of new mortgages were granted without verification of the ability to service that loan. Remarkable business in remarkable times some may say.

While the mortgage market may well yet ban such products, the providers’ more relaxed approach to lending could have a long term effect for professionals and those who insure them. Or will it?

One key difference now is that repossessions are less than half of what they were in the 1990s. The Mortgage Rescue Scheme has helped only about 980 homes since January 2009. In stark contrast in the first 9 months of 2010, 28,400 homes were repossessed.

Another factor is the remarkably low cost of money for those who already have mortgages and those who can obtain finance from lenders (as distinct from the very tricky position first time buyers are in.  Unless they happen to have deposits of 30 or 40 per cent of the purchase price – hard when the average property is now 4.5 times income). Conversely, loan to value ratios eased in October 2010 with first time buyers borrowing 80 per cent of value, up from 76 per cent in September 2010.

Mortgages have therefore been fundamentally easier to service (so long as one has not found oneself without an income).

Sale and rent back deals now enable borrowers to clear debts but keep a roof over their families’ heads as tenants. This may be part of the increased understanding that lenders now have with their customers (and their desire not to see the property market collapse through the floor and damage their overall book of security).  It may also be because judges have apparently been told that repossession should no longer be their first route to satisfy a lender.

The downside, easily spotted in that apparent generosity and compassion from the courts, is that one then stores up the inevitable.  Consider the impact if the Bank of England raises the base rate to deal with the higher than expected inflation figures revealed in December 2010, in contrast to the pay restraint in the private sector and the insecurity in the public sector.

Gross mortgage lending was down 9 per cent in October 2010 compared with October 2009. The  Council of Mortgage Lenders described the market as ” subdued”. 

There were 46,000 loans in October 2010 (October 2009 was boosted by accelerated transactions to take advantage of the Stamp Duty holiday).

Interestingly, first time buyers are taking repayment rather than interest only products. Only 7 per cent went for interest only in October 2010, compared with 30 per cent in October 2007.

An age of apparent prudence (a word the previous occupier of No 10 used to use) may now be here, combined with austerity measures taken by families either voluntarily or due to circumstances in which they found themselves – sometimes with no time to plan – which may well defer the influx of claims.

It is however reputed that some lenders are investing time and money in asking law firms  to assist them in identifying transactions that the lender decided to enter into. This may lead to allegations against professionals (but presumably, with no admissions or concessions of breach and contributory negligence by the lender).

Sooner or later, a claim will be made which would need a judgment on whether or not the lender was responsible for the predicament in which it finds itself.

The long range forecast is therefore that this storm will come. Whether it results in a vast number of new claims depends on how prudent the lenders consider their business was in recent years.

For more information, please contact  Simon Thomas of the Professional Indemnity Group.