In this case the valuation was found not to be negligent – so far so vanilla - but the judge then went on to make a couple of interesting observations that add a flake and fruit sauce to the judgment. These findings weren’t strictly necessary given the finding on liability, but a defence to the effect that the loan was securitised and therefore the lender could not claim was roundly rejected. That could have been helpful to the lender, as was his finding that a 90% LTV self-certified loan was not in itself imprudent, but then by way of extra embellishment he applied 60% contributory negligence to the lender’s own actions. Maybe the sauce was not so sweet for lenders.
GMAC (and its securitisation vehicle RMAC) v Countrywide
GMAC lent £166,500 in August 2004 on a residential remortgage secured by a two-bedroom property valued at £185,000, a 90% LTV. The loan defaulted in 2007 and, after repossession, the net recovery was just £118,103.20. The lender claimed against the valuer for a negligent overvaluation, but after hearing a valuation expert for each party, the judge in Leeds District Registry found that the true value as at July 2004 was £175,000. Applying a margin of error of up to 8% the judge found that the valuation was too high, but not negligently high. The claim therefore failed.
The judgment could have ended there, but the judge dealt comprehensively with the arguments raised by the parties. Perhaps he wanted to offer the lending and valuing community at large more value out of the costly proceedings and court time expended arguing over a claim valued at just £31,000 (the difference between the claimant’s assessment of the true value of the property and the purportedly negligent value).
Securitisation defence
The judge dealt with the defence raised by Countrywide that, because GMAC had assigned the loan to its securitisation vehicle (the second claimant in the action) it had no right to claim any loss. The securitisation vehicle, it was said, had no loss because the residual loss rested with GMAC. The judge said that because the sale of loans to the securitisation vehicle had never in fact completed the right to claim had not been assigned.
Whilst the exact defences raised on any securitisation will depend on the precise terms of the arrangement, the judge made it clear that technical defences of this type are unwelcome. He said “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 the losses for which a negligent valuer would otherwise have been liable became irrecoverable.”
Contributory negligence
The application form submitted by the borrower contained a number of issues that, with the benefit of hindsight and a fine tooth comb, the defendant highlighted. Not all of the application form questions were answered, notably those asking about credit history, and some were answered incorrectly; the original purchase price was overstated by more than £27,000; the borrower’s telephone number was a curiously written mobile number; the application was for residential whereas it was in truth a buy to let and a long way from the borrower’s substantial successful property business. None of these points were followed up in the application process.
Whilst these sloppy aspects no doubt counted against the lender, the key areas for which the lender was criticised were:
- Failure to make further enquiry when standard credit checks disclosed undeclared liabilities and showed that certain of the borrower’s debts were understated. This should have given rise to concern about the borrower’s honesty.
- Failure to enquire further over the borrower’s income, which was self-assessed at £200k pa for each of the two preceding years. This was inconsistent with information known to the lender from other loan applications, yet the lender failed to notice. An oral reference was also accepted from the borrower’s accountant over the phone. The lender’s own procedures and the issues with the application form all added to an obvious need to make more enquiries.
In view of these failures the lender would have faced 60% contributory negligence had it succeeded in its claim. The loss recoverable on the claimant’s case would have been in the order of £26,000 since the contribution is applied to the total loss, rather than discounted from the recoverable loss.
Conversely, after hearing two lending experts, the court found that a self-certified 90% loan was not in itself negligent, which offers some better news for lenders. Given that this is a point of principle, rather than turning on the facts of the case, it is a very useful indication and one that lenders should be pleased to hear.
Did the ice cream taste good after all of that?
For more information contact
Susan Hopcraft.
