3. Mortgage lenders at greater risk of mis-selling claims due to credit crunch
The tightening of lending criteria in the UK in reaction to the sub-prime crisis in the US and the wider credit crunch means homeowners who took out a mortgage before the crisis under more relaxed criteria will emerge from their low rate introductory period mortgage to a very different market.At the end of discounted introductory periods, borrowers often switch mortgage providers to avoid the “payment shock” of their current lenders higher “standard variable rate”. As more lenders shun the sub-prime market and lending becomes generally more restricted, the options available are reduced. Faced with even more unaffordable interest rates, many borrowers may resort to claims alleging mortgage mis-selling, warns City law firm Reynolds Porter Chamberlain (RPC).
To compound the sub-prime problem, the typical introductory term of two years means periods ending now also span a series of interest rate rises from the Bank of England MPC. The cost of borrowing shot up from 3.75 per cent in January 2004 to 5.5 per cent currently, just as borrowers are finding it harder to re-mortgage.
The Financial Services Authority (FSA) warned that 1.4 million borrowers will emerge from their short-term, fixed-rate periods next year, highlighting the scale of the problem. The Citizens Advice Bureau also issued strong criticism of selling practices in the sub-prime sector.
Robbie Constance, solicitor at RPC, said that "defaults always lead to blame – it's human nature. Unfortunately, the finger of blame is likely to be pointed firmly at brokers and lenders, alleging that they recommended unsuitable and unaffordable mortgages." RPC believes that it is now easier for borrowers to bring claims than it was following the housing market crash of the early 1990s. Previously, claims could only be made in the courts, but now borrowers can turn to the Financial Ombudsman Service (FOS) at no cost to themselves.
The FOS confirmed that it is currently budgeting for a significant influx of such complaints in its coming financial year. "The ombudsman decides what, in his opinion, is fair and reasonable in the circumstances of the complaint," said Constance. "This is a broad jurisdiction, not restricted to the legal principles of the courts, so it is an uncertain terrain for lenders and brokers facing claims."
Constance added that mortgage providers are already under fire from a crackdown by the FSA for making unsuitable recommendations and conducting substandard credit checks. Constance warned it may well be the borrowers who "crack down" on lenders next. "Where the FSA goes, claims tend to follow. Repossessions are on the rise, so there will be many disgruntled borrowers looking to recoup their losses and claims management firms eager to help them."
While UK sub-prime mortgage borrowers are the most likely candidates to find themselves struggling, other borrowers are also at risk, says Constance. Those with interest-only mortgages are likely to struggle to pay off the capital borrowed in a falling market, he said. Homeowners with self-certification mortgages are also likely to find that interest rates are too high when they change mortgages. Exaggerated incomes will not be enough when the reality of far higher rates bites.
"Lenders factor in the additional risk of lending to those with poor credit ratings and the self-certified, so rates and charges are higher," said Constance. "Our concern is that a modest reduction in interest rates over the coming months will not be enough to avert personal financial crisis for those with mortgages they could not really afford in the first place."
With house prices now falling in most parts of the UK, the possibility of negative equity becomes a very real prospect, and both lenders and borrowers could lose out. "Those with high loan-to-value ratios will find they owe more than their property is worth," said Constance.
"Bringing a claim for being sold an unsuitable mortgage could be seen as a way to make up any losses. The lenders themselves will lose out too through shortfalls from the sale on, not to mention the cost of repossession."
(14/01/08)
Back to top4. Reforming the planning system
The Planning Bill was introduced into the House of Commons on 27 November, proposing a number of changes to simplify the procedure of the local planning authorities.
Shabana Anwar from Bircham Dyson Bell LLP, who is also contributor to Butterworths Planning Law Service, said: "The Bill generally follows the proposals in the White Paper, ‘Planning for a Sustainable Future’, and many of its provisions still remain in outline and will be the subject of regulations providing further detail on the proposed changes."
The government says that the Bill will reform the planning system to make it fairer and more efficient and speed up decision on major projects. The most controversial change is the creation of a new development consent system for nationally significant infrastructure projects (NSIP), such as the construction or extension of a generating station or an airport.
"The Bill also introduces the concept of a National Policy Statement (NPS). This is a statement by the Secretary of State setting out national policy in relation to one or more specified descriptions of development. A statement can be designated as an NPS before the Act comes into force," said Anwar.
An NPS is subject to public consultation and may deal with the appropriate amount, type or size of development. It considers such criteria as whether the location is suitable, who will undertake the development and whether or not it is necessary to mitigate its impact. An NPS can be challenged in the courts. The Bill creates a new hybrid set of rules, mixing elements of section 288 of the Town and Country Planning Act 1990 with judicial review. The challenge is to be brought within a six-week period, but in accordance with judicial review procedure.
"A Development Consent will be required in respect of an NSIP," said Anwar. "It will remove the need for planning permission or listed building consent as well as a number of other specified consents and authorisations for any project which falls within the definition of an NSIP."
She added: "In addition to providing the necessary permission, a Development Consent may authorise a number of changes, such as the acquisition of land, the charging of highway tolls as well as modify or exclude provisions of certain Acts of Parliament."
"The Bill provides for applicants to enter into agreements with local authorities in the same way as a developer seeking planning permission. The obligations will be enforceable by the local planning authority."
The applications will be examined by a new examining authority to be created under the Bill called the Infrastructure Planning Commission. There will be a separate body called the Commissioners Council, which will decide applications determined by a single commissioner. Anwar said: "There are detailed provisions governing the acceptance of applications and the giving of notice to, and consultation with, a wide range of parties. The chair of the Commission will decide whether an application is to be dealt with by a panel or a single commissioner, having regard to guidance issued by the Secretary of State."
A spokesman from Friends of the Earth said: "The Bill provides an unelected body with extraordinary and unprecedented powers to change or ignore primary legislation and to change local Acts where ‘expedient’. In each case, such actions can be taken without any reference to Parliament."
He addes: "The Secretary of State’s only power is to give a direction in very narrow circumstances where the changes would be contrary to European Law or the European Convention of Human Rights. Therefore, for the first time in the UK, a body of people unaccountable to the public would have huge influence over the future development of the country."
He continued: "The proposed Commission would not be directly accountable to Parliament, or even a minister, for individual decisions. It would be made up of ‘experts’, rather than being part of the independent Planning Inspectorate."
As a general rule, the examination of applications is to take the form of written representations, although in certain specified circumstances, an “open floor hearing” will be arranged. Friends of the Earth said that written representations inevitably favours those with access to written professional expertise and against those less familiar with formal proofs of evidence.
"The hearing process will be very different from the traditional public local inquiry," said Anwar. "The Panel or single commissioner will decide which issue is to be the subject of a hearing, whether a person may be questioned, the matters to which questions may relate and the amount of time allowed for questions."
Friends of the Earth said: "There is no automatic right to an oral hearing. There are no rights to cross-examine or ask questions and no obligation for other parties including the developer to even be present. It does not provide the opportunities available now to really test the evidence." A decision made in relation to a Development Consent may be challenged in the courts in the same way as an NPS.
The Bill had its second reading on 10 December 2007, and the Committee examining the Bill will sit throughout January and finish on 5 February.
Relevant legislation: Town and Country Planning Act 1990, section 288
(04/01/08)
Back to top Articles
1. Special purpose vehicles owning residential property
Journal: Tax Journal
Citation: Issue 917, 9
Issue date: 21 January 2008
Author: Patrick Cannon
Summary: This article examines the recently announced proposals for a full stamp duty land tax charge on the sale of special purpose vehicles owning residential property.
Back to top
2. A Damoclean sword
Journal: New Law Journal
Citation: 158 NLJ 83
Issue date: 18 January 2008
Authors: Mike Willis and Charles Bending
Summary: This article examines how vulnerable the legal profession is to lenders' claims.
Back to top
3. Partnerships and SDLT
Journal: Tax Journal
Citation: Issue 916, 21
Issue date: 14 January 2008
Author: Nigel Popplewell
Summary: This article reviews the impact of recent changes to the stamp duty land tax regime, which applies to partnerships.
Back to top
4. Getting one's house in order
Journal: New Law Journal
Citation: 158 NLJ 57
Issue date: 11 January 2008
Author: Chhavie Kapoor
Summary: This article examines whether abolishing the law of forfeiture will make it easier to terminate a tenancy when a tenant defaults.
Back to top
Please note subscribers can go to LexisNexis Butterworths for further details about all the above SI. Non-subscribers can sign up for a free trial of the online service.
Discount offers
1. How to book and claim discounts
-
Law Society Publishing: quote “Property Section” to receive a 20 per cent discount off related titles (excluding directories) via Prolog at The Law Society, PO Box 99, Sudbury Suffolk CO10 2SN, telephone 0870 850 1422, fax 01787 313 995 or email lawsociety@prolog.uk.com.
- LexisNexis Butterworths: quote “Law Society Section discount offer” when ordering via www.lexisnexis.co.uk, customer.services@lexisnexis.co.uk or 020 8662 2000.
This e-alert is not intended to provide comprehensive records of information concerning the property sector. If you have any feedback or suggestions, please email propertysection@lawsociety.org.uk. This e-alert was created in conjunction with LexisNexis UK Legal Updater Service. For further information about any of the articles, please contact claire.melvin@lexisnexis.co.uk. The views expressed by the Legal Analysis interviewees are not necessarily those of the proprietor.
Back to top