Negligence in the Banking Crisis

Houses in negative equity after the Banking Crisis. Do the Banks have a duty of care to extend the mortgage term or reduce the mortgage by the amount you’ve lost in expected profit due to the Banks’ negligence?

The FCA have investigated the Banks’ position regarding interest rates hedging products and concluded the Banks have no duty of care. These products are not a loan and here is the difference between this duty of care and the mortgage which is a contract like any other contract.

The FCA did look at buy-to-let mortgage contracts, but in the end said they couldn’t comment because they are not regulated by the FCA. On that basis it’s a contract like any other commercial contract and as such falls to the legal system to decide if the Banks do in fact have a duty of care.

Everyone seems to blame the collapse of the American Banks and the follow on from that that caused Britain’s Banking Crisis. But, Lord Mervyn King (Governor of the Bank of England in 2007/8) has since come out and said the Banking Crisis was caused by the reckless lending of the Banks before the Banking Crisis.

Directors of Banks or any company for that matter, are legally bound to operate their business with due care, skill and diligence for the good of the company. To fail in this duty is negligent.

When the Global Financial Crisis hit the Banks held no reserves. Many failed completely, whilst others stopped lending and only exist to run down their mortgage book. The Government in most cases, picked up the pieces, took over the running of collecting in the mortgages and finally sold off the mortgage book (no doubt at a knock down price) to new banks who continued to collect in the mortgages but, guess what, they did not start lending. They didn’t have sufficient capital to comply with the new stringent rules introduced by the FCA for Banks to comply with when lending.

These new rules were implemented to prevent another Banking Crisis. BUT, where does this leave the small time buy-to-let landlord, who in good faith signed a contract saying that at the end of term they would repay the loan using the strategy of sale or refinance? They (the Banks) contemplated that this was an affordable strategy. It surely would have been, but for the negligent behaviour of the Banks. It is entirely foreseeable that when Banks stop lending property prices drop. Normally over a ten year period this drop in prices over this period of time is eaten up by inflation and the Banks resume lending. In this scenario it could not happen because the Banks did not over this long period of time resume lending.

They are still languishing behind merely collecting in their mortgage books. They’ve securitised their loss and sold off the book to other companies who are happily collecting in the interest and at the end of the mortgage term seized the properties to clear their books. The customer, on the other hand, is left with a loss of their investment, the loss of their expected profit and a debt that the bank is demanding must be paid. Also what of the tenants in these properties. They lose their home. It’s shameful that this travesty of justice is allowed to continue.

As mentioned before the Directors have a duty to perform with care ,skill and diligence. Not every Bank has had to close their lending doors. Paragon as an example, ran around and raised money from other sources and kept their lending book open. This is an example of performing with care, skill and diligence.

The economy with time, coupled with inflation, will bring property back to the values they were before the Banking Crisis and in cities it has proved to be the case. But, in deprived areas it will take longer. The austerity measures introduced by the Government after the Banking Crisis affect these areas more. Most people work in social services, the police, nurses or small industry. Many lost their jobs, or at best, had to take wage cuts or wage freezes. It’s these areas where landlords are being caught in the negative equity trap. The mortgage term has expired. The mortgage was taken out just before the Banking Crisis and now the houses are being taken over by LPA Receivers, or being repossessed and sold off at a song. If the Banks accepted their duty of care they could extend the mortgage term and time together with inflation would equal out the loss and both parties to the contract would come out smiling.

So what does the Law say about this?

1. The Banks must consider the interests of the customer and treat them fairly. However, if they believe they have no duty of care they merely have to write and tell you the mortgage is ending. It’s your responsibility to repay the full debt by a certain date. Advise you to get financial advice and there you have it. They have done their job. The debt is all on your shoulders! Fair? Equality of contract? (Remember they wrote the contract. You had no choice but to accept it as it was). If an officious bystander had suggested that it was on condition that the Bank remained in business it would have been agreed of course that goes without saying. (An implied contract term)

2. Now apparently they have no duty of care. But, the law says they cannot lend unless the loan is affordable. They do affordability checks? They know the exit strategy is sale or refinance (this surely must form part of the affordability check?) are they not responsible? They believe they have no duty of care. The FCA has said on IRHPs there is no duty of care. IRHPs are not loans merely Interest Rate Hedging Products. Quite different from a mortgage contract. This is a contract not regulated by the FCA. So as it’s a legal contract it is regulated by contract law. They have a contractual obligation to perform the contract with care and skill. Contracts that have not been negotiated must not put all the responsibility on one side. There must be equality in contracts.

3. In law to ascertain a duty of care, the Caparo tripartite test is used:-

4. It was foreseeable that the negligent act would cause harm. There is proximity. We have a contract. They have a contractual obligation. Not to harm their neighbour. It’s fair, just and reasonable that a duty of care is applied.

5. Using the case of C Czarnikow Ltd v Koufos or The Heron II (1967). There is an implied contract term as they knew of the special conditions “that the exit strategy was sale or refinance”. They have ignored this implied term: The judgement in this case read:- “The crucial question is whether, on the information available to the defendant when the contract was made, he should, or the reasonable man in his position would, have realised that such loss was sufficiently likely to result from the breach of contract to make it proper to hold that the loss flowed naturally from the breach or that loss of that kind should have been within his contemplation” Lord Upjohn: “If parties enter into the contract with knowledge of some special circumstances, and it is reasonable to infer a particular loss as a result of those circumstances that is something which both must contemplate as a result of a breach. It is quite unnecessary that it should be a term of the contract”.

6. When the Banks offered the loan they have a legal duty to ensure that it is affordable. They will do due diligence to ensure that the repayments are affordable and that the exit strategy is attainable. When it is not they should take reasonable steps to work with customers to find an agreeable solution. Some Banks may have done this, but if not, they should be made to do so.

I have taken a Bank to court to fight them after they appointed a Receiver even after I’d found a buyer willing (as a favour to me) to pay above market value but sufficient to cover the mortgage. They had no consideration for me or for my tenant. A young mother with two children one of whom is disabled. It’s an appalling situation

The Judge was extremely sympathetic and has stayed the directions hearing for one month telling the Bank they must have dialogue with me. (I’ve had a lot of dialogue with them to date) but am not sure how this will help now.

The Judge explained to me that it will be very expensive for me to pursue my case. So for that reason I cannot get justice. Purely because the Bank have deep pockets and I have none.

For this reason I am appealing to anyone who has found themselves in this situation (that is, 1. taken a buy to let mortgage prior to the Banking Crisis. 2. After all this time has a property in Negative Equity. (Maybe already lost their investment) and 3. The Bank they took the mortgage with has either disappeared altogether, or is still no longer lending.) Please join with me to fight this case so we (the little people) can get justice.

Contracts must be equitable and in the interest of business efficacy (The Moorcroft 1889) the negligent party is responsible for the loss. The loss is avoidable if they treat you fairly and consider your interests.

Please join with me so we can fight this injustice.

Gwen

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