In the 1990s and then from 2007/8, insurers for the legal sector were hit with multiple claims by lending institutions. The first wave was (arguably) single-handedly responsible for bringing down the Solicitors Indemnity Fund (a mutual). The second wave led to some insurers exiting the market, and others taking a significant hit on their margins.
There were a multitude of issues that caused the claims to arise, and some preventative steps have reduced the potential for this to re-occur. However, and critically, two things remain constant. First, the conveyancing process remains a ‘low cost/high risk’ work area and one which is commonly not handled by qualified lawyers. The reason being due to the fee that can be charged. That needs resolving, and the recent rise in insurance premiums may well kick-start a change. Second, it remains the case that a borrower's/purchaser’s solicitors still act for both borrower/purchaser and lender. The failure for there to be systemic change within the profession around this second point is one that is difficult to comprehend.
Before continuing, a really important piece of history to remember is Gordon Brown’s pronouncement in 2009 (following the 2007 sub-prime debacle and the financial crash that followed) that he wanted to see an end to 100% mortgages and, indeed, wanted to see ‘prudent and careful lending by banks’.
Whilst claims continue to arise from cyber-fraud/imposters, with monies being sent to incorrect accounts, the prevalence of ‘lender claims’ arising from traditional negligence have subsided since they last peaked in about 2010 – 2012. That is good news. There has been a curb on repossessions during the pandemic but the risk of a deep recession and rising interest rates could well change that.
So, with all our knowledge from the past, the future should look bright and insurers should be able to underwrite with some confidence that we will not see a third wave of claims.
However, recent events are cause for concern. The housing market has been a key focus of Government policy as a means to get the country back on its feet. The stamp duty exclusion provisions being the main headline in recent months. Three other developments potentially raise the bar:
- Lenders are now ‘fighting’ for market share and the 95% mortgage is back, and with gusto – this leaves little Loan to Value ‘margin for error’ and it would not take much for the loan to exceed the property value and negative equity to arise. Mortgage rates remain historically low but that is unlikely to be the case in the medium term.
- The Government’s new mortgage guarantee scheme. The Government document expressly states that the scheme: “is designed to increase the appetite of mortgage lenders for high loan-to-value lending…”. Put simply, the lender is given the option to purchase a guarantee on the top slice of the mortgage. So, the lender is covered for losses down to the 80% of the purchase value, save that the lender takes a 5% share of losses above the 80% threshold (as such, it still has some skin in the game).
- And finally, consideration is being given to a new form of ‘shared ownership’ where you have a variety of different owners, each of whom hold a share in the residential property which can be ‘traded’. The Land Registry are currently considering this concept, known as ‘Tokenism’. This adds a layer of complexity that the housing market has not seen before. The concept involves the use of blockchain and smart contract technology to ‘open up’ how properties are owned, with the creation of digital ‘tokens’. So, the owner decides how many tokens are to be issued and the offer price. The market is then created and investors could then simply buy a ‘token’ and trade it thereafter.
In my view, these attempts to stimulate the housing market are unlikely to reduce the prospect of claims. If anything they echo history repeating itself.
Rather than recognise that the UK housing market is over-priced and take steps to control price inflation, the Government and lenders are fuelling the flames (again). Some will recall the existence of Mortgage Indemnity Guarantees (an insurance product that lenders often take out to protect themselves against losses above 75%) and so it is not entirely clear why the Government needs to step in with its scheme. If it is because the market is not there for MIG’s, then that speaks volumes.
As for Tokenism, this may well move from proof of concept stage to reality. The fundamental problem with the idea is that, at its heart, it treats residential property as a daily trade-able asset. Whilst this may prove to be a more attractive solution to funding old age than equity release schemes, it is a concept to be highly wary of for most other sections of the population.
Fundamentally, the problem with all these ideas is that they do not have the consumer’s best interests in mind. They have tend to focus more on sophisticated opportunities for others to make money, which reminds me of the sub-prime debacle.