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In my opinion: What exactly is a missold mortgage?

A mortgage can sometimes be recommended inappropriately for debt consolidation and give grounds for a claim

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This is the second part of an article looking at the actual make up of claims and what you can expect to see if you are unlucky enough to receive a letter of claim on behalf of your customers.

Last week I looked at interest-only mortgage complaints, specific advice and consideration, interest-only as a defence for affordability, sub-prime mortgages and lending into retirement.

This week I am looking at complaints that a recommendation was inappropriate for debt consolidation, capital raising, extending the term, affordability, arrears and right-to-buy mortgages.

As I mentioned last week, there are many breaches that constitute a missold mortgage but the fundamental question that a claimant needs to consider, is whether they were treated fairly by their adviser or lender.

Please also remember that advisors are not only liable for complaints from Mortgage Conduct of Business day onwards. 

The jurisdiction of the Financial Ombudsman Service for many advisors began in December 2001 if they were regulated for investment business.

Despite no mandatory FSA mortgage regulation, FOS jurisdiction means that missold mortgage claims can still be escalated to the FOS who will apply their own “fair and reasonable test”.

First and foremost it is probably helpful to repeat the underlying principle that mortgage advice given to consumers must comply with the statutory principles of treating customers fairly as set out by the Financial Conduct Authority.

This aims to help customers fully understand the features, benefits, risks and costs of the financial products they buy. It also aims to minimise the sale of unsuitable products by encouraging best practice before, during and after the sale.

Inappropriate debt consolidation

If a client had debts at the time that the mortgage was applied for and were advised to consolidate these debts into the mortgage, they should have been advised of the additional costs that could be incurred as a result of extending the repayment period.

FOS jurisdiction for many advisers began in 2001 if they were regulated for investment business

Where appropriate the implication of securing previously unsecured debt should have been clearly set out as this would put the client’s property at risk if there were to fall into financial difficulties.

There are certain occasions were consolidating debts could have been the right advice such as for credit card debt which was on a very high interest rate but generally for the majority of unsecured debt it would not be good advice to consolidate.

If the client was already in financial difficulties it could have been more appropriate for them to negotiate an arrangement with their creditors rather than increasing their mortgage and increasing the risk of losing their home.

Capital raising

If a client wished to raise capital it was the responsibility of the broker or lender to make it clear to the client that by borrowing this money using the equity in their home, they would be reducing the value of their home and that, as the debt would more than likely be paid back over a longer period of time than a personal loan, this would mean that the money raised would have cost more to borrow than a personal loan.

Substantial claims for tangible and consequential loss are possible in this area.

Compensation for clients who have raised capital by adding it to their mortgage would expect compensation to cover the extra interest liability paid and due to be paid over the term of the mortgage including statutory interest.

Extending or unsuitable term

Another area of potential claim is If the term of a mortgage had been extended or not set up correctly to start with and was not clearly explained to the client that by having a longer term (even though their monthly payments would be less) the interest liability would increase as the mortgage was being paid back over a longer period.

Affordability, a most important factor when considering best advice

It has always been the responsibility of brokers and lenders to assess whether a mortgage is affordable for a client and this would be done by making sure that all the proper checks were carried out relating to the clients income and financial situation.

There are many instances when clearly a client could not afford the mortgage they were provided with.

Examples of this are where clients were allowed by the lender to borrow high income multiples or where they already had a high amount of debt which, with their monthly payments meant they could not sustain the total they were paying each month from the income they received.

This could be considered to be irresponsible lending for the lender to approve a mortgage that was not affordable; also potential negligent advice from the broker.

Arrears or repossession

If as a result of a client being provided with a mortgage that they could not afford, they have fallen into difficulties including but not limited to arrears or repossession then it is likely they will be compensated by putting them back into the position they would have been in had the mortgage not been taken out.

This might include any bank charges they have incurred or in the case of repossession any loss that has been incurred due to losing their home for example continuing debt due to house being sold off below market value by lender.

The recent case of Emptage Emptage v Financial Services Compensation Scheme Ltd [2013] EWCA Civ 729 (18 June 2013) has highlighted the responsibility of the FSCS to take all steps to ensure proper compensation is awarded.

Self-cert mortgages with evidence of income available

There are instances where borrowers were advised to self-certify their incomes even though they had proof of income readily available. Often they may have been employed.

This was sometimes encouraged by a broker to fast track their application to make the brokers’ job easier.

Generally self-cert products had a higher interest or reversion rate so the client would have been disadvantaged rather than having been placed on a mainstream product.

Also as a result of decrease in house prices, clients in some cases are trapped with self-cert products on high rates as mortgage prisoners.

Clients who could have provided their incomes and should have been placed on a mainstream product could be compensated by being put back into the position they would have been in if they had not been placed on a self-cert mortgage.

This would mean a refund of all fees associated with a self-cert product and additional interest paid including statutory interest on both of these amounts.

If there is any evidence that borrowers declared the correct income but were poorly advised by their broker, often due to negligence or greed then this would indeed be prima facie evidence of mis-selling

Right to Buy mortgages

There are likely to be these plus additional issues raised by claimants in respect of Right to Buy cases where mortgagors are considered to be vulnerable and worthy therefore of enhanced diligence in dealing with their individual circumstances.

Summing up

So with any legal action there are likely to be common heads of claim which I have attempted to list and briefly set out above.

Of course any legal case will turn on the specifics of the case, what is said by the claimants, what records are kept and produced by the defendant and ultimately who the Court believes as the most credible witness if the case were to get to trial.

In the next article, we will examine what records and information will be needed to robustly defend any such actions and therefore what you may wish to consider before any claim hits your desk.

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  • Ben 24th July 2013 at 10:00 am

    So is Eddie’s claim management company running dry on it’s PPI claims book and needs some other spurious avenue to try and line it’s pockets with??????

  • Sugar 23rd July 2013 at 10:50 pm

    Pretty sure you will find on many of these cases, legal fees were built into the mortgage advance. However I have no doubt GSW would have never agreed to take these fees from the mortgage advance on a self-cert, sub prime mortgage.

  • David 23rd July 2013 at 11:32 am

    Great news about all these claims management firms being struck off by the MoJ. Is your claims management firm one of them Eddie? If you want to stay onside with the majority of the readers here then stick to conveyancing and stop trying to frighten us all with stories of poor borrowers who didn’t understand what they were doing all those years ago. Also, be under no illusion that we didn’t keep records then because the vast majority of us did and we’ll fight you every step of the way and show that these claimants knew exactly what they were doing. So don’t think that you’ll be on to a winner like you were with Bank PPI and whiplash claims. Most Brokers would rather fold up their business’s than pay out on spurious mortgage claims. The MoJ at last seems to have grasped the mood of the vast majority of the British public who have a distinct distaste for the compensation culture that this country has become infamous for and for the people that drive it.

  • chris gardner 23rd July 2013 at 10:07 am

    Anonymous | 17 Jul 2013 4:32 pm

    “why has their been so little coverage of the charmaine emptage case since the appeal court judges gave their ruling? is it because the government are trying to cover it up incase a ppi claims bonanza happens with mortgage claims?”

    Probably because it has no significant impact on the wider market. This is simply not a PPI style issue or mortgage misspelling. READ THE JUDGEMENT. It is not about mortgage advice its about the advisor telling to invest the capital raised in Spanish property.

  • anon 22nd July 2013 at 2:43 pm

    http://www.telegraph.co.uk/finance/personalfinance/9602717/Woman-ruined-by-Spanish-property-price-collapse-wins-landmark-compensation-ruling.html

    This is exactly why I always put in my recommendation letters (whether BTL, commercial or full regulated) ‘I have provided you with no advice as to whether your should buy a property/the property you are purchasing’ and why I wouls never tell anyone to buy any property – too risky!

  • Liz 22nd July 2013 at 2:37 pm

    I don’t agree with one of the points as a blanket statement – sometimes people are better off consolidating an unsecured loan into their mortgage even if this is over a longer term as by making arrangements to pay with creditors this can very often have a negative impact on a person’s credit history meaning their mortgage payments for the future will be much higher. For example:

    Someone has a mortgage of say £100,000 over 20 years with an interest rate of 4% = £605. 98 PM repayment
    And a personal loan of £10,000 on a rate of 10% with a term of 5 years = £212.47
    they are finding meeting their payments difficult and so could remortgage the loan into the mortgage over 20 years for £666.58 (or could remortgage the loan in with their mortgage for £184.17 over 5 years on the loan part plus the existing payment of £605.98 = £790.15). But if they don’t do one of those two things when they come to remortgage (as most people do every few years) and because of getting an IVA or making arrangements with creditors (where for example they pay say half of the loan payments = £106.24), they can’t get a prime mortgage any more and end up paying 5.75% taking their mortgage payments of £100,000 up to £702.08 plus their loan repayments (which will be payable for longer, eg 10 years if paying half of the payments) = £808.32.

    Common sense says that they can more easily afford to consolidate into the mortgage getting a lower rate on the loan and to overpay to the mortgage.

    Even if they aren’t struggling with their payments consolidating into the mortgage to get a lower rate on the loan over 5 years on that part makes sense (providing it doesn’t put them into a higher LTV bracket).

    Love the way the rules are made up but don’t really apply common sense and what people actually want which is often lower payments and not to mess up their credit history with arrears, which are how many arrangements to pay are reported to credit reference agencies, and IVAs really upset a credit file and stay on there for a long time!! And that is without mentioning the impact on future credit for non-mortgage related things they may want in the future such as a hire purchase agreement, store card or mobile phone contract!

  • Peter Turner 22nd July 2013 at 1:53 pm

    I believe the comment on FOS jurisdiction is incorrect because I have seen it refuse to consider a complaint relating to PHI from 2003 against a firm that was under FOS jurisdiction at that time.

    Under the transional regulations, FOS has jurisdiction over a firm that subscribed to the Mortgage Code at the time of the sale and subsequently came under FOS jurisdiction.

    That means for some firms there will be no liability for pre 31 October 2004 sales. For others it could go back to the summer of 1998.

    That said, debt consolidation is very risky. It will frequently involve borrowers who lack financial discipline, move unsecured debt to secured, make the liabilities one partner joint and several with the other and, in the long term increase costs.

    Woe betide the adviser who has not got all that covered.

    First thing to record that you have told a client looking to consolidate debt – “You don’t borrow money, you hire it. The rent is called ‘interest’ and you keep paying it until you give the money back”.

  • Fat Mortgage Bloke 21st July 2013 at 5:44 am

    It is a ill -wind that blows nobody any good though,is it not Eddie??

  • Ben 20th July 2013 at 11:52 am

    With your claims management company running out of PPI claims i bet you can’t wait to see these spurious claims to start landing on your desk so you can try and line your pockets from our industry. Any advisor worth their salt would have a letter of suitability that their clients would have read, understood and signed, how they think they can now claim they were mis-sold is a joke. Good luck Eddie

  • Lucy McKenna 20th July 2013 at 9:56 am

    Please can I have the link to last weeks article on mis selling of interest only mortgages. Many thanks

  • peter wood 17th July 2013 at 4:32 pm

    why has their been so little coverage of the charmaine emptage case since the appeal court judges gave their ruling? is it because the government are trying to cover it up incase a ppi claims bonanza happens with mortgage claims?