LEGAL: Housing Rights argues mortgage was missold

Carmel Ferguson, solicitor with Housing Rights, recently assisted an elderly couple who had been missold a mortgage.  Housing Rights first assisted the couple at court as part of our Housing Possession Court Duty Scheme.  The adviser at court represented Patrick and Mary at court before asking Carmel and our legal team to look into the case in further detail.

Housing Rights was granted a legal aid certificate to pursue this matter.  Alyson Kilpatrick BL agreed to represent the clients and prepared a legal defence to the possession proceedings

Was the mortgage missold?

Patrick and Mary are 76 and 72 respectively.  The mortgage on their home was taken out nine years ago, just before the housing market crashed.  The couple had sold their previous family home and decided to buy another property, which would be more suitable for them in their advancing years.  At this stage Patrick, who had been a builder, had retired from his main job but had started a second career liaising between building contractors and consumers.  The proceeds from the sale of the couple’s family home were used as a deposit on a new property and they planned to take out a mortgage to finance the remainder of the purchase cost.   Patrick and Mary’s home is in negative equity with estate agents suggesting the property would now sell for £120,000 less than Patrick and Mary owe to the bank.

Our legal team looked at Patrick and Mary’s allegations that the mortgage had been missold.  The couple claimed to have approached a broker, recommended by Patrick’s accountant, and to have explained clearly what their income was and how much they could afford to put down as a deposit on the property.  The couple had a chat with the broker and felt he was “a lovely man, and very helpful”.  The broker asked them to sign a form and they agreed to leave the matter with him.  Patrick and Mary say that they did not see the details the broker put on the form and did not check the form before it was submitted on their behalf. There was no discussion with the broker about the term of the mortgage or the fact that it was an interest only mortgage and that, therefore, the full amount borrowed would become due in 25 years’ time.

Change in circumstances leads to arrears and possession action

Unfortunately, Patrick suffered a stroke not long after completing the purchase of the property.  As the building market crashed, so too did Patrick’s business and income.  Within several months, their property started to lose value and the couple became trapped by negative equity.

They maintained payments as long as they could, but eventually their savings ran out. The lender took proceedings in court for possession of the house as the arrears were significant and the couple could not make any proposals to pay.

The legal team at Housing Rights requested a copy of the mortgage application from the lender.  On reviewing the documents, it became apparent that false information had been included on the form without the knowledge of the borrower.  The issues of most concern to our legal team were

• the declaration that the couple had an annual income of £100,000 despite no accounts or bank statements having been requested from the borrower;
• the statement that the borrowers intended to retire at the age of 90, a matter which had never been discussed with Patrick and Mary
• the lender had not contacted the borrowers to verify any of the information on the application form

Patrick and Mary stated that they had never discussed with the broker or the lender how they would repay the lump sum at the end of the term or how they intended to meet their repayments as they grew older.   They were adamant that they hadn’t provided this information about their income or their plans for retirement and stated that the lender had made no attempt to confirm any of the information on the application.

Relevant legislation

Our legal team’s argument was based around several key pieces of legislation: the Mortgage Conduct of Business Rules; the Administration of Justice Act 1970; the European Convention on Human Rights and the Human Rights Act.

Mortgage Conduct of Business Rules

The Mortgage Conduct of Business Rules (the MCOB) Rules exist to ensure fairness in regulated mortgage dealings. Under 4.7.2 of the MCOB Rules

“A firm must take reasonable steps to ensure that it does not make a personal recommendation to a customer to enter into a regulated mortgage contract unless the regulated mortgage contract is suitable for that customer”

A contract is suitable only if, having regard to the facts disclosed by the customer and other relevant facts about him, of which the firm is or should reasonably be aware, the firm has reasonable grounds to believe

• that he can afford to enter in to it,
• that it is appropriate to his needs and
• is the most suitable of those which the firm has available to it for the purpose.

A mortgage is not suitable if the customer does not have the means to repay it on the terms proposed-Emptage v FSCS [2013] EWCA 729 (CA)

Administration of Justice Act

Under section 36 of the Administration of Justice Act 1970, as amended, the court has power to adjourn, stay or suspend mortgage possession proceedings if satisfied that a borrower will be able to pay the sums due within a reasonable period of time.

ECHR and Human Rights Act 1998

Article 8 of the European Convention of Human Rights, which protects a person’s right to respect for his private and family life, home and correspondence, typically applies to public bodies. However, Master Ellison, in Swift Advance Ltd V Heaney [2013] NIMaster 18, stated: “The court has a duty, pursuant to section 6 of the Human Rights Act 1998, as a public authority to respect ECHR rights and may be acting unlawfully if it does not do so.” Therefore, it might find itself considering the engagement of Article 8 “horizontally”, i.e. where neither party is a public authority.  As a court, it also must pursuant to section 3(1) read and give effect to legislation, whether primary or subordinate, so far as possible in a manner compatible with ECHR rights. Therefore the court is likely to find itself considering how domestic legislation relating to the rights of secured lenders and borrowers should be interpreted having regard to the requirement to do so, so far as possible, compatibly with the often competing Convention rights of the parties  (and in some circumstances, the rights of others)”. 

The borrower also argued that the broker was the agent of the lender and that questions should have been asked directly of the borrower if the stated income seemed high, as per guidance in the Council for Mortgage Lenders Handbook

Lender’s defence to misselling arguments

The lender argued that

• the borrower had approached the broker. The lender had not engaged the broker. The broker therefore was not the agent of the lender and the lender was not therefore liable for any wrongful or negligent acts by the lender
• the lender had not recommended the mortgage to the borrower
• any breach of the MCOB rules was by the broker, who was not the lender’s agent
• even if there had been a breach of the MCOB rules, this did not invalidate the mortgage or make the mortgage unenforceable or restrict the lender's right to take possession
• the borrowers had signed a declaration that the information given in the application was true and that they had disclosed all relevant information to the lender
• the borrowers had signed the mortgage deed and accepted the terms and conditions
• the occasions where the Human Rights Act would be engaged were extremely limited, for example, where the borrower suffered from an immobilising and life threatening condition or that relocation might shorten a defendant's life. There was no evidence of such risk or threat in this case

Settling the case

On completion of the legal documents, and following protracted negotiations, a settlement agreement was reached without a full court hearing. The terms of the agreement were

• both parties agreed to a suspended possession order
• the order would be stayed for 6 months to allow time for the borrowers to sell the property
• the borrowers could avail of the lender’s assisted sales scheme to help with the sale of the house if they wished
• if the property was not sold within 6 months the lender will take possession of the property for the purpose of sale
• the lender agreed to write off any shortfall in the sale. It is estimated that there will be a shortfall of approximately £100,000, given the negative equity in the property.