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England and Wales High Court (Chancery Division) Decisions |
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You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> Paratus AMC Ltd & Anor v Countrywide Surveyors Ltd [2011] EWHC 3307 (Ch) (14 December 2011) URL: http://www.bailii.org/ew/cases/EWHC/Ch/2011/3307.html Cite as: [2011] EWHC 3307 (Ch) |
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CHANCERY DIVISION
LEEDS DISTRICT REGISTRY
Oxford Row Leeds LS1 3BG |
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B e f o r e :
sitting as a Judge of the High Court
____________________
| (1) PARATUS AMC LIMITED | ||
| (2) RMAC 2005 NS1 PLC | Claimants | |
| -and- | ||
| COUNTRYWIDE SURVEYORS LIMITED | Defendant |
____________________
Hearing dates: 19th, 20th, 21st and 22nd September 2011
____________________
Crown Copyright ©
H.H. Judge Keyser Q.C. :
Introduction
The Basic Facts
The Issues
(1) What was the value of the Property in July 2004?(2) Was the valuation of the Property negligent?
(3) Has either GMAC or RMAC suffered recoverable loss?
(4) Should the award of damages be reduced on account of contributory negligence?
I have not had to consider a further issue that at one stage seemed likely to arise, namely whether Countrywide owed a duty of care to RMAC, because on behalf of the claimants the claim was advanced solely on the basis that Countrywide had been in breach of a duty of care owed to GMAC.
First Issue: Valuation
Mr Hornsby's Opinion
Mr Walker's Opinion
Cross-Examination
(1) At the outset of his cross-examination, Mr Hornsby appeared to accept that the information on Mr Foster's list of properties was reasonably reliable and that Mr Foster would have been justified in looking no further than the comparables mentioned on that list. But the tenor of his further evidence was that additional enquiries should also have been made with estate agents and possibly the developer.(2) He accepted that the five comparables used by Mr Foster and set out in tabular form on page four of Mr Hornsby's report showed no correlation between size and price. In answer to direct questioning he accepted that those comparables constituted strong and direct evidence against his contention that the correct approach to valuation would have been to take an average price pm² and apply it to the Property. However, he said that there were no features of the Property that would make it more valuable than those comparables. He also accepted that the fact that flats with different floor areas had been sold to the Borrower for approximately the same price tended to contradict his contention as to the appropriate method of valuation.
(3) He accepted that there were many factors that had a greater effect on value than did floor area. However, he said that floor area remained a relevant consideration. The tenor of his evidence was that the application of a price pm² to the floor area was an important secondary method of valuation, provided that it were used in conjunction with the primary method of examining comparables. He accepted that most valuers, having no direct knowledge of properties on the particular development, would be reliant on information they could obtain from estate agents and that this information would not generally include floor areas. In response to the objection that this undermined his reliance on the importance of floor areas, Mr Hornsby said that a valuer should make a direct approach to the developer for information as to floor areas.
(4) Mr Hornsby was asked about two properties shown on Mr Foster's list as, respectively, "Flat 12 Hospita" and "Flat 42 Hospita". The list showed that each of those flats had two bedrooms and one bathroom and a floor area of 65m² and had been sold for £185,000 in July 2004. Mr Hornsby accepted that, if those properties were flats on the development at Fulford Place, Hospital Fields Road, they would be good comparables. In cross-examination he accepted that they were likely to be on the Fulford Place development. But in re-examination he said that he was not sure whether that was correct; Mr Foster's list showed that the properties had been built in 2004, which might indicate that they were on a different development nearby.
(5) Mr Hornsby maintained that Plot 4, Lendal House, remained the best comparable. He accepted that it would be wrong to place too much reliance on a single comparable.
(6) He regarded the sale of 8 Fulford Place in April 2004, on which Mr Walker relied, as providing an unsafe comparable, because there was evidence of a connection between the vendor (the Borrower) and the purchaser. The purchaser is shown on the Land Register as Susan Janet Morton, of 23 Fairview Close, Tonbridge, Kent, TN9 2UU. A company search in respect of Arkad Securities Limited ("Arkad") shows that on 15th June 2004 one Susan Morton, of 1 Park Court, Park Road, Tunbridge Wells, Kent, TN4 9JN, was appointed as secretary of Arkad in place of one Veronica Stockton of Buckhurst Hill, Essex. The director of Arkad was one David Stockton, whose address was Flat 1, 28 London Road, Southborough, Tunbridge Wells, Kent, TN4 9JN. Arkad's annual return filed on 4th January 2005 makes it clear that David Stockton is the Borrower and that Susan Morton is the purchaser of 8 Fulford Place and shows that at the date of the return they were the sole shareholders in Arkad. Subsequently the Borrower and Susan Morton had similar connections in respect of other companies, both in the United Kingdom and in the United States. The documents also show that in December 2006 the Borrower purchased a property called "Cobwebs" in East Sussex, which Susan Morton had previously shown as her address on information provided to Companies House. Mr Hornsby's opinion was that this evidence, though all post-dating April 2004, disclosed a sufficient connection between the Borrower and Susan Morton to render unsafe any assumption that the sale of 8 Fulford Place in April 2004 had been an arm's length transaction at market value. It was put to him that Susan Morton's purchase had been funded by means of a mortgage, so that it was probable that the purchase price would have been supported by a mortgage valuation report. Mr Hornsby said that that meant nothing.
(7) Although he considered it probable that the Borrower had received some incentive to purchase several flats from the developer, Mr Hornsby thought it was unlikely that the incentive was in the form of a reduced purchase price, because that would have tended to affect the selling prices of other properties on the development. He accepted that a reduced price might be given to a purchaser "off plan", before the development had commenced; he did not know whether that was so in the Borrower's case.
(8) Mr Hornsby said that a reasonably competent valuer should make enquiries by telephone of estate agents who are offering properties for sale in the same block as the subject property, because such enquiries would give a picture of the current state of the market.
(9) He accepted that the data from HM Land Registry indicating that the average sale prices of flats had increased by 13% between November 2003 and July 2004 constituted a more complete and reliable resource than the information that had led him to posit a figure of 10% for the relevant increase. He also accepted that, in a rising market, it was possible that the relative scarcity on the market of properties in Fulford Place in July 2004 as compared with November 2003 would have resulted in an increase greater than the generally prevailing rate; he could not say whether that was likely or not.
(10) He accepted that, as the development had only recently been completed, sellers in the summer of 2004 were probably fairly canny investors who saw the opportunity to realise large profits.
(1) He said that, in compiling and using his schedule of comparables, he had not taken into account matters such as relative floor areas, aspects, and amenities in respect of lifts and en-suite bathrooms. In respect of many of the properties on his schedule he had no information about such matters, and a valuer in 2004 would not normally have access to such information in respect of comparable properties. Nor were such details of great relevance to valuation. Much of the market for flats such as the Property was for buy-to-let, and floor area was not determinative of rental income in such properties. An en-suite bathroom was an advantage but, again, was of less significance for a buy-to-let purchaser, who might very well not even inspect a property before purchasing. In the case of a second-floor flat, the absence of a lift was not significant. A pleasing aspect or view might be more significant than details of layout or specification. It was advantageous to face west rather than east or north; the Property was west-facing, whereas others in the development were east- or north-facing. (On this development, east-facing properties faced the road.) In general, although a valuer would take into account any of these various matters of which he had knowledge, such information would be merely part of the general picture informing the exercise of the judgment but would not lead either to arithmetical calculations or directly to enhancements or discounts of value because of the presence or absence of specific amenities or features. In particular, residential property values showed no correlation to floor areas, and valuers of residential properties would rarely have access to information on floor areas.(2) Mr Walker accepted that it was proper for valuers to consider the asking prices for properties on the market but said that such asking prices did not constitute the best evidence on which to base a valuation. His view was that it would normally suffice to base a valuation upon the information obtained from the inspection, information about recent sales of comparable properties and, where the subject property had been sold recently, its sale price.
(3) He considered that, when looking at comparables, the purchase price of a new property should be treated with caution because incentives might have been given to the purchaser. He disagreed with Mr Hornsby's view that the Borrower was unlikely to have received a reduction in the purchase price of the Property and the five other flats in November 2003; in his view, as the information regarding sale price would be confidential and would not appear for public inspection on the Land Register, there would have been no concern that an incentive for a bulk purchase would have lowered the price of the remaining properties.
(4) Mr Walker explained that he had used the sale price of 8 Fulford Place in April 2004 as a means whereby to check his initial judgment that a value of about £175,000 was appropriate. In the absence of any evidence that the sale was not at market value, he regarded it as providing useful information; any connection between the vendor and the purchaser was as likely to lead to a lower as to a higher price and there was evidence of neither. Mr Walker speculated that Mr Foster had been told by the Borrower about the recent sale of 8 Fulford Place. There is no evidence of that, although I can see why Mr Walker speculated as he did. There is some evidence that Mr Foster was given oral information on site by the Borrower or someone acting for him: Mr Foster's field sheet for the inspection (trial bundle, pp. 671ff) contains some printed information, such as the "purchase price/estimated value" of the Property, but it also has manuscript notes, probably compiled on site, which include the statement: "Paid £168k 8 months ago"; that reads like a report of what the Borrower told Mr Foster. Mr Foster's letter of instruction (trial bundle, p.855) shows that he was to contact the Borrower for access, and the field sheet records that it was the "owner" who gave Mr Foster access to the Property for the purposes of the inspection.
(5) Mr Walker regarded the flats shown as "Flat 12 Hospita" and "Flat 42 Hospita" on Mr Foster's list as relevant comparables; they were of similar size and specification to the Property and were on the development.
Discussion
Second Issue: Negligence
"As soon as it is shown that the impugned valuation falls outside the bracket … the plaintiff will by that stage have discharged an evidential burden. It will be for the defendant to show that, notwithstanding that the valuation is outside the range within which careful and competent valuers may reasonably differ, he nonetheless exercised the degree of care and skill which was appropriate in the circumstances."
The defendant did not contend that, if I held that Mr Foster's valuation fell outside the acceptable range of values, there were any factors that could nevertheless justify a conclusion that the valuation had not been negligent.
"It seems to me that, as a matter of general principle, the position to be taken from the authorities is as follows:
(a) For a standard residential property, the margin of error may be as low as plus or minus 5%;
(b) For a valuation of a one-off property, the margin of error will usually be plus or minus 10%;
(c) If there are exceptional features of the property in question, the margin of error could be plus or minus 15%, or even higher in an appropriate case."
Third Issue: Loss and Damage
The Consequences of the Securitisation
(1) I agree with Countrywide that there had been no substantial loss prior to the execution of the Mortgage Sale Agreement. For the claimants, Mr Harry submitted that there had been such loss, because GMAC had made an advance that it would not otherwise have made. However, on the evidence before me I would find that loss was suffered, such as might be capable of giving rise to a cause of action in tort, only in the summer of 2007, when the Borrower defaulted on his repayments: see Nykredit Mortgage Bank Plc v Edward Erdman Group Ltd (No. 2) [1997] 1 WLR 1627, per Lord Hoffmann at 1639. That was more than two years after the execution of the Mortgage Sale Agreement.(2) On the other hand, there has been no legal assignment of the cause of action against Countrywide. Clause 2.1 of the Mortgage Sale Agreement contained an agreement by GMAC to sell and by RMAC to purchase the mortgage pool. Clause 2.2 contained an agreement that any sale pursuant to clause 2.1 should include a sale of GMAC's causes of action against any person in respect of a mortgage valuation. The evidence before me shows that there has never been a completion of the sale of the mortgages. The defendant's reliance on the particulars of claim or the pre-action correspondence as constituting notice of assignment, such as to effect a legal assignment under section 136 of the Law of Property Act 1925, is misplaced. Although legal proceedings cannot themselves constitute sufficient notice for the purpose of those proceedings (Compania Colombiana de Seguros v Pacific Steam Navigation Co [1965] 1 Q.B. 101, 129), the pre-action correspondence was itself in terms that could have constituted sufficient notice of an equitable assignment: see the letter dated 10th July 2010 from Eversheds LLP. However, the scheme of the Mortgage Sale Agreement, and of clause 2 in particular, shows that no absolute assignment was to take place until completion of the sale of the mortgages. The fact that the Mortgage Sale Agreement also regulated the position as between GMAC and RMAC in the intervening period is not itself in point, because the test for an absolute assignment is whether "the assignor [has] unconditionally transferred to the assignee for the time being the sole right to the debt in question as against the debtor": see Chitty on Contracts (13th edition) at para 19-012, per Professor Andrew Burrows (emphasis in original).
(3) The relevant parts of the scheme of the Mortgage Sale Agreement are, very broadly, as follows. The assignment of the causes of action is to take place upon completion of the sale of the mortgages: clause 2.2. Completion is to take place either simultaneously with the issue of the notes by RMAC or at such later time or date as is agreed: clause 5.1. The assignment is to include all causes of action that accrue after, or the existence of which is discovered after, the date of the Mortgage Sale Agreement; it does not include any causes of action that were known to exist as at that date: clause 2.2 (a) (iv). Until completion, GMAC was obliged to lend its name to, and take such other steps as RMAC might reasonably require in relation to, any legal proceedings in respect of the mortgage loans and their related mortgages: clause 6.6. Whether or not clause 6.6 was broad enough to cover proceedings against a valuer, the effect of clause 2.2 was that any right of action within the scope of the prospective assignment was at all material times held at law by GMAC for RMAC beneficially; it was never capable of being exigible for GMAC's benefit. This fact does not affect the scope or quantum of the cause of action. It simply means that either GMAC must in due course assign to RMAC its fully valuable cause of action or it must account to RMAC for the proceeds of the cause of action if it sues in its own name.
(4) Although the foregoing is in my judgment sufficient to dispose of Countrywide's argument, I would if need be make two further points. First, even on its own terms the argument would wrongly locate the loss for present purposes. On the assumption of breach of duty, what has happened is that the person entitled to the benefit of the mortgage pool has received less value than it ought to have received. The fact that the finance scheme relating to the mortgage pool has the effect of spreading that loss, imposing it on one party more than on another party according to an order of priorities, does not affect the incidence of the basic loss but is a consequence of contracts involving third parties. It appears from the evidence that the loss has ended up being borne by GMAC, in the sense that GMAC has received less from the cascade of the income-stream under the mortgage pool. In different circumstances, perhaps involving larger losses, those out of pocket might have included a class of noteholder. The fact that the consequence of the loss legally attributable to the cause of action against the valuer is a diminished return for a third party does not mean, as Countrywide's argument would suggest, that there is no recoverable loss. And the fact that the person who ultimately suffers is the Residual Holder does not alter the case.
(5) Second, although the point in issue in the present case is rather different from that which concerned the Court of Appeal in Offer-Hoar v Larkstore Ltd [2006] EWCA Civ 1079, [2006] 1 WLR 2926, assistance is to be obtained from the judgments in that case. Having referred to a number of authorities, Rix LJ said:
[85] Underlying all these cases can be heard the drumbeat of a constant theme, which could possibly be described as ubi ius ibi remedium, the maxim that where there is a right there is a remedy; but it could also be said that the courts are anxious to see, if possible, that where a real loss has been caused by a real breach of contract, then there should if at all possible be a real remedy which directs recovery from the defendant towards the party which has suffered the loss. In the case of property development, where it is readily contemplated that a party which prepares the development will transfer the fruits of his work to one or more partners or successors, there is a particular need for some such solution.[86] The courts have to work with the analytical tools which are to hand. But the essence of the matter is that the general principles which have been developed to ensure that claims are confined to victims (the rule that a party may only claim in respect of his own loss; the rule in favour of privity of contract) and that a wrongdoer should not be made to pay compensation which goes beyond his breach (the rule that an assignee may not recover more than his assignor could have recovered), rules which as far as they go are necessary and fundamental to good order and fairness in the litigation of claims, are not, if at all possible, to be allowed to become instruments of maladjustment and injustice. Thus the exception developed long ago in the carriage of goods context to allow a contracting party to recover damages against a carrier on behalf of another party to whom the goods in question are subsequently transferred has been brought into use in a modern situation where there is an equal need to find a solution which matches the commercial situation, and where no other solution had been found to be at hand.The argument advanced by Countrywide gets its foot inside the door, if at all, only by seeking to exploit what it takes to be the consequence of a strict application of technical rules concerning assignment to a widely used financing technique that itself results from the imaginative use of several legal tools and concepts. 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. If I had seen more merit than I do in Countrywide's argument, I would nonetheless not have acceded to it, as to do so would lead to both injustice and commercial inconvenience.
(6) Accordingly, if I had accepted GMAC's case on valuation and negligence, I would have awarded it substantial damages.
Fourth Issue: Contributory Negligence
"Where any person suffers damage as the result partly of his own fault and partly of the fault of any other person or persons, a claim in respect of that damage shall not be defeated by reason of the fault of the person suffering the damage, but the damages recoverable in respect thereof shall be reduced to such extent as the court thinks just and equitable having regard to the claimant's share in the responsibility for the damage …"
"Contributory negligence does not involve breach of a duty owed by the plaintiff to the defendant, but the failure by the plaintiff to use reasonable care to protect its own interests": Banque Bruxelles Lambert S.A. v Eagle Star Insurance Co Ltd [1994] 2 E.G.L.R. 108, per Phillips J at 136. The defence will only be made out if it is established that the claimant's negligence was a cause of the loss: ibid. at 137. In assessing the causal effect of a claimant's negligence, the court is entitled to use broad common sense: The Volute [1922] 1 A.C. 129, 144.
(1) Although the Instructions to Applicants at the top of the form asked applicants to answer "ALL" questions, a number of questions had not been answered. Thus in section C the nature of the applicant's business was not stated, though the name and address were given as "Stockton Security Investor and Landlord, 29 Harley Street, London". In section D the question regarding the purpose of the loan applied for had not been completed. In section F, "Credit History", two questions had been answered but the remaining three, dealing respectively with prior refusals of mortgage applications, judgment debts and bankruptcy, had not been answered. In section G the Borrower had not answered the question as to who would occupy the Property.(2) The preliminary details showed that the type of mortgage being applied for was a residential mortgage, not an investment (or buy-to-let) mortgage. This was noteworthy, because the applicant purported to have what appeared to be a substantial property business based in London and gave his current address as a property in Tunbridge Wells.
(3) In section C, the applicant's income for each of the last two trading years was stated to be £200,000. A question that asked, "Please give name and address of your accountant to whom we can write for confirmation of your income and status", had been answered, "self-assessment".
(4) Despite the stated income, the telephone number shown for the applicant was a mobile telephone number, though it was shown slightly curiously with the first five digits inside brackets, as though they were an area code.
(5) In section D, the original date of the purchase and original purchase price were shown respectively as 2nd September 2003 and £166,500.
(6) In section E, the Borrower disclosed two financial commitments. The first was for £22,000 in respect of a car, with monthly payments of £480. The second was for £22,000 in respect of "home", with monthly payments of £511.
(7) In Section H the Borrower stated that the outstanding mortgage on his current home was £600,000, with monthly repayments of £1,200. Section I asked for particulars of other mortgage commitments relating to investment properties. The answer was left blank. As a matter of form, the question at Section I did not necessarily require an answer, because there might be no such commitments. In fact, in this case there were such commitments and the question should have been answered.
Among the other matters adverted to in evidence are an evident misstatement of the applicant's National Insurance number and a mistake as to the floor that the Property was on (1st, rather than 2nd). It was said that these matters showed a lack of concern for accuracy and even a disregard for truthfulness; the mistake as to the floor was also said, more plausibly, to indicate a lack of knowledge of the Property that was surprising in one who purported to intend to reside there. But in view of the other available information and appropriate lines of enquiry relating to the Borrower's financial position and to the Property, these matters do not seem to me to be important in themselves.
(1) No steps were taken in respect of the unanswered questions, nor was any enquiry raised in respect of the provision of a mobile telephone number for an apparently substantial business or the apparent oddity of a residential mortgage in respect of a small flat that was far distant from the seat of the applicant's successful property business.(2) Discrepancies in respect of the Borrower's income went unnoticed or, if anyone noticed them, no action was taken in respect of them. As I have said, the application form showed the Borrower's income for each of the last two preceding years as £200,000. The evidence of Mr Mike Foskett, one of GMAC's Senior Investigation Officers, is that in the course of a previous mortgage application in March 2003 the Borrower's income had been verified at £149,000. There is no evidence as to how that verification had been carried out. A document on GMAC's system records that the Borrower had a declared income of £85,000 and a verified shortfall in income of £52,857, indicating that the loan being applied for required an income of £137,857. Mr Foskett said that this document probably related to the proposed re-mortgage in July 2004, not to the earlier mortgage application in March 2003, and represented the figure entered onto the system by the broker when seeking a decision in principle before the submission of a formal application. If that is so, as I accept on a balance of probabilities that it is, it is worthy of note; for it indicates the likelihood that the Borrower had initially stated his income as £85,000 and then, when it appeared insufficient, had re-stated it as £200,000. At all events, GMAC's documents recorded three different figures for the Borrower's income, and the final figure was a round figure that was the same for consecutive years.
(3) No significant checks were carried out in respect of the Borrower's income. Section 9.4 of GMAC's Automated Lending Policy for residential funding required that, in the case of an application for a non-conforming loan with a LTV greater than 85%, a self-employed applicant should be required to provide twenty-four months' accounts. Prima facie this applied in the case of the Borrower, as the LTV exceeded 85% and his application was for a non-conforming, or "sub-prime", loan, namely one that would not satisfy the requirements of mainstream mortgage lenders. However, Mr Foskett said that this was qualified by section 10.1 of the Policy, which provided:
"'A' & 'Non-Conforming' Loans
Only high-risk cases will be selected for full verification checks (unless Self-Certified or Self-Declared loans). All other cases will only require Telephone Checks to be made, see below."
Section 10.1.3.2 dealt with self-employed applicants:
"No documentary evidence of income is required (i.e. accounts/accountant's certificate). The Processor must telephone the accountant to confirm that the applicant has been self-employed for a minimum of 12 months, having independently verified the telephone number with BT Phone Disk/Directory Enquiries."
Mr Foskett said that the Borrower's application was not a "high-risk" case; the Borrower's good credit-rating and the low ratios of loan to income and of debt repayments to total debts meant that neither the discrepancies regarding his income nor the incomplete disclosure of his financial commitments (below) made it a high-risk case. Therefore, he said, the only required check was the verification of the fact of self-employment in accordance with section 10.1.3.2 of the Policy. In fact, by a letter dated 29th July 2004 GMAC asked the broker for the Borrower's "latest tax assessment". On 3rd August 2004 the broker replied:
"Further to my conversation with your call centre, requesting the latest tax return form to be sent in, we would ask that you please go for an accountant's reference.
"The address is as follows: [there then follows the name and address of an accountant]"
GMAC acceded to that request and its records show that a telephone call was made to the named accountant, "who confirmed that the applicant has been trading for over 1 year". Mr Foskett said that the request for the latest tax assessment would have been made by the Assetwise system for no other reason than that the application form did not provide details of the Borrower's accountant; it was not the result of concern that the income needed to be verified. Therefore it had been appropriate to accept instead an oral reference from the accountant.
(4) GMAC's letter of 29th July 2004 also noted that the Borrower was not proposing to repay the mortgage on his existing property in Kent and asked for confirmation that, if the mortgage were a "let-to-buy" mortgage, the monthly rental income was at least 125% of the interest-only monthly payment. On 2nd August 2004 the Borrower replied:
"I am writing to confirm that this is a let to Buy application form and that my existing mortgage will not be repaid. I can confirm that the monthly rental is in excess of 125% of the monthly payment."
(5) The Assetwise system identified significant undisclosed debts and financial commitments. As mentioned above, the Borrower had disclosed a mortgage of £600,000 and two loans totalling £44,000. The Experian Overview Form stated that in respect of thirty-one active or settled transactions there was an outstanding balance of £1,312,808. More detail was provided in other Experian forms. The debt in respect of the car was £27,889, rather than the disclosed sum of £22,000, and the monthly repayments were £447, rather than £480. The balance on the bank loan was £25,895, rather than the disclosed sum of £22,000, and the monthly repayments were £589, rather than £511. Another form showed that the outstanding balance on the Borrower's mortgage was £636,249, rather than the £600,000 he had stated, and that the monthly repayment was not £1,200 but £2,048. The Experian forms showed that the Borrower had several undisclosed credit card debts in a total sum of approximately £32,000 and that he had liabilities under five other mortgages, each for (in round figures) £117,000 or £118,000.
"The establishment of the customer's ability to repay the loan is not only a requirement of the lender's own policy but is a fundamental aspect of effective underwriting and a regulatory requirement. In my opinion, the Claimant failed to adequately assess the applicant's ability to repay the loan by not establishing the exact nature of the applicant's occupation and therefore was not in a position to fully consider the plausibility of the declared income."
Further, non-disclosure of substantial debts, running into thousands of pounds, was a serious matter from an underwriting perspective and would have materially affected the decision whether or not to lend; an explanation should have been sought. The failure to require answers to those questions left unanswered on the application form was a breach of GMAC's own lending policy and was not in accordance with the practice of a reasonably competent lender. This failure was material, because an inability to provide the necessary information might have alerted GMAC to problems with the Borrower. Similarly, a prudent lender would have made enquiries as to the reason for the discrepancy between the disclosed mortgage payments and the actual mortgage payments on the Borrower's current home. Regarding self-certified lending on an LTV of 90%, a significant minority of lenders at the time would make such a loan on account of competitive pressure in the market and the attempts that were made to increase market share. Although Mr Pitt clearly thought such loans unattractive from an underwriting point of view, he expressly declined to express the view that the very practice of making them was constitutive of incompetence or imprudence.
Contributory Negligence: Discussion and Conclusions
"Any examination and review of a non-conforming mortgage loan has to be conducted in the context of this type of lending (and not measured by the standards of prime mortgage lending). For many years the centralised lender model worked well and created profits for lenders and significant benefits for consumers. In my opinion, it is not appropriate to look at non-conforming loans and try to judge them by the standards of other banking services (such as prime mortgages) as the business models are different…Non-conforming lenders adopted policies that did not require confirmation of most of the details and factors that concerned prime lenders. However, the few main issues that were crucial to non-conforming lenders needed to be properly investigated and verified. Where even the basic matters were not confirmed and found to be satisfactory, then lenders incurred losses."
(1) It failed to make enquiry or investigation in respect of the debts that had not been disclosed. I do not accept the arguments put forward by Mr Foskett and Mr Bloomfield to justify this failure. The practice of placing total reliance on the Experian checks meant that GMAC was either unaware of or unconcerned by the significant discrepancies between what those checks showed and what the Borrower had disclosed. Those discrepancies, both taken by themselves and in conjunction with other matters such as the issues concerning the Borrower's income, raised a significant question as to the Borrower's honesty. To answer, as Mr Bloomfield effectively does, that honesty is of no concern to a lender provided there is a sound credit history is to have insufficient regard to the obvious risk that dishonest statements of one's means, for the purpose of procuring greater financial accommodation than would be forthcoming if one told the truth, will lead to borrowers over-extending themselves and defaulting on their excessive liabilities.(2) It failed to make enquiry or investigation into the Borrower's income. Despite what I have said about GMAC's business model, I do not consider that GMAC was reasonably entitled to proceed with such a high-LTV transaction in the manner it did. First, I am not persuaded that GMAC is correct to have thought that its own policies required only an informal telephone check to confirm the fact of twelve months' self-employment. Section 9.4 of its Lending Policy would have required 24 months' accounts. Section 10.1, which states that only high-risk cases will be selected for full verification checks, adds the qualification: "(unless Self-Certified or Self-Declared loans)". Although GMAC treated the application as being neither self-certified nor self-declared, it was in substance one or the other, as the only information regarding the Borrower's income was his own assertion in the application form. Second, and in any event, the discrepancies regarding the Borrower's stated income and regarding his liabilities, as set out above, made it obviously imprudent to make no further enquiries regarding his income. The other points arising out of the application, as mentioned above, though minor in themselves, would reasonably have confirmed the need for proper enquiry into the Borrower's financial position.
Conclusion
