Lender claims have perhaps been the one area that has, over time, caused the most damage to insurers. The first round of claims came in the 1990’s and, some comment, was the catalyst to the cessation of the Solicitors Indemnity Fund in 2000. Many millions of pounds were paid out to lenders by both the legal and the surveying professions at the time with new case law being made. As well as some basic errors/failure to follow lender instructions, mortgage fraud also played a significant part. When the boomtime tide went out, all manner of disasters were left bare.
Many hoped never to see the like again. In terms of the types of frauds that took place, they often tended to be around exaggerated income on self-certified mortgages, multiple purchases, loans taken out by family members, sub-sales and back-to-back transactions. The working theory being that so long as property prices went up, ‘no problemo’. Of course, they did rise, but then the cliff came into sight (as it always seems to) and prices fell off.
We then saw a benign period from 2000 to 2009, where (relatively speaking) times were good, house prices rose again and lenders again helped fuel the boom – at one stage 125% loans were available (Northern Rock). By 2009, the financial crisis had taken off and we returned to some dark days. Back came the lender claims and the losses from these claims caused (or contributed to) many insurers to scale back/recalibrate their market profile, retreat from the market or (in some extreme cases) go out of business. Again, in Round 2 as in Round 1 we saw fraud play another significant role, with imposter fraud (aka Dreamvar) stealing the headlines.
At the same time, the banking industry was put under the microscope and what came out has not been pretty – LIBOR scandal, derivative trading and the Reading 6 (a £245m fraud involving HBOS – this led to a £45.5m fine being levied on the Bank). The Reading/HBOS debacle continues to rumble on with press reports just last weekend that the compensation to victims could be in the region of £500m.
In 2009, the government was not prepared to force the banks to split their retail and investment divisions but that all changed in 2015.
Since then, whilst by no means a boomtime when it comes to house price increases, steady growth has been seen across many areas of the country. A sustained period of low interest rates have also helped prop up the market. All is good, surely. Well, no. One could argue that we are facing a critical period, and the current trend in lending criteria should be a concern for insurers. 95% loans are commonplace, and 100% loans have also seen a comeback (since 2015) but often with a requirement for a guarantor. A recent offering is the Family Springboard Mortgage from Barclays where a ‘helper’ can fund the 10% deposit and where the mortgage term can be for 35 years.
Also, deregulation of banks was seen as a fundamental cause for the last financial crash, and yet the current mood music is a call by business and banks for less regulation, primarily to provide a ‘post-Brexit edge’.
Is this all OK?
Yes, if you are a borrower and cannot afford more than a 5% or 10% deposit. Also, yes if you are looking to downsize any time soon and benefit from a rising market. However, history does very much appear to be repeating itself here, and if you were to put money on a future trend, then I would suggest Round 3 for lender claims would be a pretty safe bet. The trick is to know when the bubble has started to leak, not when it will burst.
As things stand, incredibly low interest rates support the view that any market crash is unlikely to be any time soon. However, the sensitivity in the economy is not to be understated. The high street is already showing signs of serious decline, online retailers are likely to face greater taxation, inflation is on the rise, Brexit remains a constant source of concern and anxiety for many businesses, natural disasters, and most recently events in the Middle East mean the stability of the world / other economies is put in further doubt.
If there were to be an increase in the base rate (at the time of writing 0.75%) together with one or two other negative events, the words ‘negative equity’ will again become commonplace. If people have to pay higher interest on mortgages, they spend less within the economy. If that happens for a sustained period, redundancies follow and potentially a sharp recession could loom. House prices will then approach that cliff (again).
Insurers for the legal profession will no doubt be monitoring all of these factors (and taking a glance at history) when making underwriting decisions.
What will future claims look like?
Whilst fraud is always likely to feature, it is hoped that increased awareness, better procedures and greater vigilance by the legal profession and by banks means that it will have a lesser role than we have seen in the past. That said, like rats, fraudsters always find a way to adapt to new environments.
The more likely source of claims will be from basic errors, often caused by the continued ‘pile them high/sell them cheap’ conveyancing marketplace. It remains a mystery to me that people are prepared to pay more for an X-Box than for the most expensive purchase of their lifetime.
What else can be done?
The main change that I have personally advocated for years is to have separate representation for lender and purchaser, to build in an extra layer of security for the transaction. I have been practicing for over 25 years and have never understood why this is seen as anything other than a good idea.
The additional cost per transaction could be as low as £500 plus VAT but the additional safeguards that would come with this would be entirely beneficial to lenders, law firms and their clients. However, resistance to change remains and the Council for Mortgage Lenders prefers joint representation (primarily on cost grounds).