Type in “mis-sold mortgages” on a Google search and you will discover literally hundreds of internet businesses vying for the opportunity to pursue a claim to the Financial Services Authority (FSA). If you thought PPI was big, you ain’t seen nothing yet; with millions already having been put aside to meet the thousands of potential claims that arise from possible mis-selling of mortgages during the boom years of 2004 to 2009.
Steven Woolf is frequently instructed to advise on such claims and also assists both those seeking compensation and those trying to avoid having to pay out huge sums. His experience and expertise is proving very beneficial to both the poachers and gamekeepers of this fast growing litigation area.
What is a mis-sold mortgage?
As will be appreciated when matters come within the remit of the FSA, things get complicated. Taking it down to its bare bones, a mis-sold mortgage is a mortgage that has been entered into by a borrower in circumstances where either a better deal was available or where actually no consideration has been given to the suitability or affordability of the mortgage.
For example, a prospective borrower is looking for funding to assist in the purchase of a house. Both applicants are employed and can obtain confirmation from their employer as to their salary. However, rather than obtaining that confirmation, a broker suggests they go for a self-certification mortgage. At first blush a self-certification mortgage is a good idea as it avoids any involvement of one’s boss, but it’s not such a good idea where the interest rates on the proposed mortgage are higher by virtue of it being a self-certification mortgage, than they would be if the employer had provided proof of income.
Take another example: A borrower on a fixed income is 50 years of age and would be looking to retire within 15 years. What happens at 65? How are the monthly payments to be met? Worse still, the mortgage that was sold was interest only and no vehicle has been put in place to repay the capital at the end of the term. Even if that borrower could fund the monthly payments between 65 and 75 years of age, how will the loan be paid back, other than by the sale of the house? In such a scenario the 75 year old borrower could well find themselves homeless at the most vulnerable time of their life.
Why recommend a bad mortgage product?
Unfortunately the answer to that is pure greed. In the boom times, when mortgagees were falling over themselves to lend money, the commission a broker could recover depended upon the overall cost to the borrower over the length of the term.
Taking the first example above, because the interest rates that applied to self-certified mortgages were greater than for other mortgages, the total to be paid over the course of the term was higher. The consequence of that was that the commission received by the broker was also higher.
As for the second type: the unaffordable and unsuitable mortgage. The stark reality is that brokers failed to have any regard to the ability of the borrower to pay. It was often not on their agendas at all, and if it was something they considered when discussing the mechanics of the mortgage, it fell well below the £ signs in their own eyes.
What brokers were desperate to do was to secure the lending. From a broker’s point of view, securing the loan for the applicant meant commission and the fundamental question that a broker regulated by the FSA should have asked was whether the applicant borrower could actually afford the loan was a distant second in a list of priorities.
Mis-selling by brokers was not the end of the matter as the lenders themselves turned a blind eye to affordability; after all securing an interest only loan meant huge interest payments without any perceived risk if the borrower defaulted as repossession would follow, and the lent sum would be easily recovered. After all house prices only go up - don’t they?
What can be done?
Happily and of course this is why the sudden interest by the money reclaim businesses, there is recourse for those innocent and manipulated borrowers – Section 150 of the Financial Services Markets Act 2000 (FSMA). FSMA was introduced in order to provide a simple and straightforward means to those private persons who have been badly treated in breach of FSA Rules to get compensation. In short, Section 150 of the FSMA sets out the circumstances in which persons who suffer loss as a result of a breach of an FSA rule, by an authorised person, can exercise a right of action for damages for those losses. Provided the conditions specified in Section 150 of the FSMA are met, persons are allowed to recover losses simply by showing that there has been a breach of an FSA rule causing them to suffer loss.
Such a claim under statute is considerably simpler than commencing a claim in reliance upon establishing evidence of a breach leading to common law negligence.
The potential claim
As inferred at the outset, the sums recovered under PPI could in the fullness of time be viewed as pigeon feed when compared to the pay-outs to be made under mis-sold mortgage claims. The reason for this is obvious when one takes a working example:
A prospective borrower is seeking to borrow £50,000. He is offered a self certified, interest only mortgage with a 2 year fixed rate of 6.99% followed by 284 payments at the variable rate, which at the time of the application was at 9.5%. The payments based on 6.99% and 9.5% would be initially £330 and £450 per month. However at the same time that this mortgage was being actively promoted by the broker, another lender is offering a fixed initial interest rate at 2.79% for 2 years with a reversionary rate after the fixed term expired of 6.84%. The fixed monthly payment under that mortgage product would have been £100, with the reversionary rate in the region of £250-£300.
The losses based on the figures above are huge. During the period of the fixed term alone, compensation would exceed £5,000 and as for the period once the fixed rate has expired; each month the borrower under the example given will have been paying in the region of £150-£200 more per month than they should have been, had the more suitable and more affordable mortgage product been offered.
The FSA Guidance on the recovery of monies in circumstances of mis-selling is clear; it provides for the consumer to be put back into the position that he or she would have been if the mis-selling had not occurred. It follows that where a borrower has suffered financial loss by virtue of being mis-sold a mortgage, a substantial claim for compensation can be made out for past losses before one even gets to think about the fact that most mortgages taken out between 2004 and2009, have many years to run with the repayments continuing at mis-sold interest rates.
What should be done?
There are a huge number of internet companies prepared to take on a client on a no win no fee basis. The initial enquiry process is quick and if the case appears to have the classic features of a mis-sold mortgage such as being (I) interest only; (2) running past retirement age; (3) being self-certified; and (4) from a sub-prime lender, then a full Independent Mortgage Audit will be undertaken to assess which if any of the FSA Rules were breached, and whether those breaches caused the losses that the Audit report identifies under the Redress section.
Once the Report is concluded approaches to the brokers are likely to be met with varying degrees of success, as many of the Independent Financial Advisers of 5 to 10 years ago are no longer trading, however their insurers should still be. However, in the event that the broker can not be traced, claims against the lenders remain possible and the sweeping up liability of the FSA will ensure that if there is a claim, there will be a ready source of cash.
Between January 2011 and July 2012 a staggering £5.9 billion had been paid out in respect of mis-sold PPI claims and £512 million was paid out in July 2012 alone. We can speculate all day long as to what figures we will be discussing in 18-24 months in respect of mis-sold mortgage claims, but one thing is for sure: It’s going to be a bumpy ride for the insurers, lenders and the FSA.