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Categories:Mortgages

Negligence claims could drop after GMAC-RFC vs Countrywide verdict

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A ruling in a High Court case between GMAC-RFC and Countrywide Surveyors could result in fewer lenders making claims of negligence against surveyors.

Former lender GMAC-RFC started legal proceedings against Countrywide Surveyors in 2008 for allegedly negligently overvaluing a property which it lent on in 2004.

But Countrywide in turn made allegations of contributory negligence against GMAC-RFC for its lax lending practices.

A judgment on the case was finally made on December 14 2011, in which his Honour Judge Keyser ruled that Countrywide had not been negligent.

But he added that if it had been found liable, the judge would also have found that GMAC-RFC was contributory negligent for not verifying the borrower’s income and other information on the mortgage application.

He claimed that if the lender had carried out the proper checks on the applicant it would probably not have advanced the loan.

A debate was also had in court as to whether the nature of GMAC-RFC’s sub-prime lending was in its itself contributory negligence, but the judge ruled it was not.

He did however rule that GMAC-RFC contributed to its own loss by not carrying out the proper checks and as a result he would have deducted 60% of any money awarded to it if the court had found Countrywide liable.

Ed Coulson, a consultant at law firm Mills & Reeve, says: “Sixty per cent is a significant reduction and should concentrate the minds of mortgage lenders when they are considering suing their own professional advisers.

“In this case the contributory negligence was not as gross as it has been in other cases I have seen with lenders – on that basis one can expect to see reductions for contributory negligence increase significantly in the future.”

One industry source has described the ruling as “landmark”, but Coulson says that he does not see it as a landmark ruling because it is in line with a number of earlier decisions  with equally significant reductions for contributory negligence.

The case centred around a buy-to-let property Countrywide valued in 2004 at £185,000. The applicant had requested a 10-year interest-only mortgage of £166,500 – 90% LTV.

In 2007 the applicant defaulted on its repayments and GMAC-RFC repossessed the property, which was sold in September 2008 for £123,500. The net proceeds of the sale were £118,103.

GMAC-RFC claimed the property should only have been valued in the region of £154,000 in 2004.

The judge ruled that the correct valuation should have been £175,000 but the one given was within the acceptable range of value.

Countrywide also argued that because the deal had been securitised the lender had not suffered any loss as a result of the alleged overvaluation, but this was dismissed by the judge.

A spokesman for GMAC-RFC, which now trades as Paratus AMC, says: “In line with its usual practice, Paratus AMC pursued this case on a contingent fee basis with the benefit of after the event insurance.  The case turned on the expert valuers’ evidence, based on which the judge found the valuation not to have been negligent.

“Paratus AMC do not accept the judge’s findings on contributory negligence which were in any event obiter.  Paratus AMC welcomes the judge’s comments that lending on non-conforming criteria does not constitute contributory negligence per se.”

He adds: “The judgment also helpfully dismisses the suggestion that the securitisation of a mortgage loan somehow extinguishes a valuer’s liability for a negligent overvaluation”.

In its 2010 accounts Countrywide made provisions of £11.9m to guard against potential claims by lenders.

A spokeswoman for Countrywide says: “When we took the decision to make provision in our accounts for potential claims against our surveying business we made the point that we, like the rest of the industry, had seen a considerable increase in claims and that we would defend our position robustly. We are not surprised to see the courts supporting our position.

“We will continue to defend our position when we believe we have fulfilled our responsibilities, but if an error is made, then we seek to settle with claimants as soon as possible.”

Countrywide relied on evidence given by Brian Pitt, an expert witness and  director of Rockstead, while Paratus AMC relied on evidence given by Adrian Bloomfield, also an expert witness and chief executive of the Association of Short-Term Lenders.

Fortress Investment Group bought GMAC-RFC in April 2010 and later changed its name to Paratus AMC.

The claim was made by Paratus AMC and RMAC 2005, the former lender’s special purchase vehicle.

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