Mortgage Shortfall – Was the Valuer Negligent?

The combined effect of the credit crunch and the slump in the property market since 2007 has seen a number of borrowers defaulting on their mortgage payments and shortfalls from subsequent sales have become increasingly common. This has raised a debate as to whether the lender or a negligent valuer would be responsible for such losses.

In the cases of Blemain Finance Limited –v- E.Surv Limited (2012) and Webb Resolutions Limited –v- E.Surv Limited (2012), which were heard before Christmas, the Court found against the valuers. In the recent judgement given by His Honour Judge Langam in another case brought by Walker Morris on behalf of Redstone Mortgages Limited against Countrywide Surveyors Limited the position was reiterated.

The Redstone –v- Countrywide case concerned a valuation provided to support the remortgage of a residential property in Cardiff that was unwritten by a company, which was subsequently sold to Redstone. The Judge concluded that the valuation report, which the lender relied on, overstated the property value by £25,000, which was approximately 14% of the value.

The Judge felt that the underwriting could have been better but the lender’s approach needed to be set in context. At the time that the loan was made in April 2007 there was a plentiful supply of finance in the market and property prices were rising. Therefore, borrowers with less-than-perfect credit history could find funds available on the assumption that the security would continue to increase the value. In hindsight, those assumptions were ill-founded but the degree of caution to be exerted by the lender needs to be viewed with those market conditions in mind. The Judge concluded that, under the circumstances, the lender was prudent.

The surveyor’s initial view had been that the property was worth nearer to £190,000 than £200,000. However, he increased his valuation on the basis that it was an acceptable practice to value at the agreed sale price provided it was within 5% of his valuation assessment. This, according to the valuer, is standard industry practice to enable lenders to proceed with applications where, otherwise, the valuation would have been too low to support the advance.

The surveyor had referred to Countrywide’s own database when selecting comparables. The Judge felt that care should have been taken to find comparables from other sources. This would reduce the risk of relying on other potentially inflated valuations.

In this case the ratio was 90% Loan to Value (LTV) and the surveyor was informed of this as part of the initial instructions given to him. Redstone argued a valuer should have regard to high LTV ratios and exercise great caution where there is a high ratio before revising his opinion upwards.

The Judge concluded that the valuer’s role was to value the property for the purposes of the intended transaction and not to frame his valuation so as to facilitate the transaction as the valuer did in this case. Countrywide’s valuation was therefore held to be negligent.

Countrywide sought to rely on the partial defences of contributory negligence and failure to mitigate as it felt that the lender did not make proper underwriting checks and was irresponsible in taking information on a self-certification mortgage application at face value. The Judge noted that the borrower had been meeting his mortgage and credit card payments in the period leading up to the application and adequately met the mortgage’s criteria. On that basis, he felt that there was no contributory negligence and gave no reduction in damages.

The facts of this case are not uncommon. However, the judgement provides valuable guidance for lenders seeking to bring, and surveyors seeking to defend, negligent valuation claims. Most of the valuer defences post the 2007 property collapse have been predicated on the surveyors alleging that the lenders were imprudent in underwriting and failed to mitigate their losses, particularly in the context of self-certification mortgages or high loan-to-value ratios. However, in the Redstone judgment it was made clear by the Court that, even in 90% LTV cases and, where lenders failed to verify self-certification information, the state of the market at the time of the mortgage and the common practice of the lending industry can afford lenders a welcome shield against such allegations. It might be said that this reasoning could amount to bad practice as it affords banks a defence merely because behaviour was common practice in boom time.

The case provides valuable guidance for surveyors on how the judiciary is likely to assess negligence in respect of a valuer’s methodology. Valuers conducting mortgage valuations in future would be well advised to be as stringent and discerning as possible in the selection of the comparables on which they rely, particularly in terms of location and salient features, and to steer away from a reliance on comparables from their own database. They should also avoid rounding up any valuations to facilitate transactions for the lender.