Specialist finance can outshine institutional lenders – Mortgage Finance Gazette
This, however, is no longer the case – and our experience is that the reverse is most definitely true.
Recently, Brightstone Law, on behalf of a second charge lender, took on a major high street brand over their practice, process and competence when implementing a voluntary sales arrangement with a debtor, with flagrant disregard for the interests of the second charge lender.
Remarkably, the bank, by reason of its own not fit for purpose policy, which was poorly thought out and poorly executed, accepted a loss to themselves running into six figures, and caused the second charge holder to suffer a complete shortfall.
Lenders often work with debtors in default, where disposal of the property is inevitable, to achieve the best possible results. A sale by a borrower is preferred to a forced sale, where the sale price is mostly depressed.
In this particular case, both loans had gone into default and orders for possession obtained by both charge holders. The second charge holder was on the cusp of repossession. The borrower had negative equity (taking both mortgages into account) and, shortly before enforcement was to take place, convinced the bank that a sale he had arranged, promised the bank the best recovery return
The bank took over the sale and sold the property to a buyer introduced by the borrower. The second chargeholder was wiped out, and the bank accepted the sale proceeds together with a covenant to repay their shortfall from the borrower.
The bank had accepted what they had been told by the borrower on face value, and placed the property into their assisted voluntary sales scheme, a documented process operated by them nationwide.
The bank set a number of conditions, and carried out a drive-by valuation, as was required by their process, but the instructions to their valuer were lacking and off-point. Nevertheless, their valuer supported the sale price.
However, a number of red flags existed, and should have alerted the bank to a sale at undervalue:
- The property was sold at significantly less than its indicated value;
- The second charge lender had alerted them to the fact;
- The application into the process indicated the buyer to be connected (by employment) to the borrower;
- The sale price was hugely inconsistent with the history of the property;
- There were no independent agents in the sale, and the “impoverished” borrower met all the fees and expenses of sale;
- The sale took far longer than was allowed for, and the sale breached the bank’s own terms and conditions of voluntary sale in a number of aspects;
- A number of planning consents were pursued (by the borrower!) during the course of the sale, which the bank failed to identify or take into account;
- The sale price was out of synch with other properties which were directly comparable.
In effect, what the bank did, was follow (mostly) a poorly thought-out process, designed with good intention, in a tick-box way, without any truly forensic or considered thinking.
Given the circumstances, the second charge lender took the unusual step of pursuing the first mortgagee, a high street, best of class lending institution, for breaching its duty of care. Claims in respect of sales at undervalue, are rare and difficult. Rarer still are claims where the claims are in respect of a sale carried out by a bank, but the considerations are exactly the same.
The second charge holder’s case was denied in its entirety, highly contested, and met with delay and obfuscation but ultimately resulted in a very substantial settlement in its favour.
What does this case tell us?
It tells us that the brand name of an institutional lender is no guarantee of integrity of action. The first charge lender’s processes can be poorly implemented in practice and lacking. It tells us that institutional lenders are less practised in the ways of crafty debtors who can take advantage of such deficiencies in staff and operation. It tells second charge holders to be alive to what is happening ahead of them, and not to disregard any recovery course which may be available. And it tells us the tenacity, and perseverance is the key to successful litigation.
I also believe it tells us, how far the alternative finance providers have come in knowledge and experience, and professionalism. I very much doubt any of today’s short-term lenders, with sound professional advice, would have been caught in the way the bank was in this case.
The specialist finance sector can be far more robust than institutional lenders. Operating with smaller balance sheets and greater potential exposure to risk, lenders in our industry understand the importance of taking nothing at face value and preparing themselves with proper diligence and legal support.
Jonathan Newman is senior partner at Brightstone Law