The High Court has dealt with a test case re valuers’ liability for residential mortgage valuations prepared in good market conditions In 2006/7, GMAC was the largest centralised mortgage lender in the UK and E.Surv was, and is, the largest residential surveyor. GMAC claim that E.Surv negligently and in breach of contract overvalued many properties they lent against and they have suffered substantial losses as a result. They have assigned all such claims to Webb Resolution..
This case involved 2 relatively modest valuations, each carried out by an experienced valuer. However Webb Resolution have a further 40 claims against E.Surv, and some 200 claims against other valuers, waiting in the wings. GMAC lent 85% of the first valuation and 95% of the second and E.Surv claimed that GMAC was contributory negligent in making the loans in numerous respects.
GMAC’s lending process at the time, like other centralised lenders, was almost entirely automated so as to provide for lending applications to be dealt in seconds rather than minutes. It relied heavily on boxes just being ticked and actively discouraged any additional information being provided by the valuers.
The first valuation related to a flat in Masshouse Plaza, Birmingham which was valued at the asking price of £227,995 notwithstanding the valuer was unable to gain access to it as construction works were ongoing. The Judge valued the flat at £205,000 and had no hesitation finding the valuer negligent as, apart from not inspecting the flat when finished, he also failed to establish what incentives the developer was giving the purchaser and relied on inaccurate sales information for comparable properties. Most importantly, the valuer started with the asking price and simply sought to justify this figure rather than actually valuing the flat.
The second valuation was of a 4 bedroom house in Whitstable, Kent which was valued for re-mortgage purposes at £295,000, being the exact figure put forward by the owner. Once again, the valuer was held to be clearly negligent by starting out with the end figure and not valuing the house independently. He failed to take into account adverse features, such as the nearby railway line and Council Estate, and did not reduce his figure even though he accepted it was at the very top of the possible valuation range. The Judge held the property was only worth £260,000.
Because this was effectively a test case for the many more claims to come, the Judge dealt in detail with a number of important issues which he decided as follows:
- The valuers owed the standard duty to use the reasonable skill and care to be expected of a competent surveyor, and no higher duty pursuant to contract as claimed by Webb Resolution.
- The valuations were to be based on the value of the properties at the time and not their re-sale value even though they were being valued for security purposes.
- It is the result of the valuation that really matters, not the methodology. The essential question is whether the actual valuation figure falls within the permissible range, not how it was reached?
- In a standard residential valuation such as these, the permissible margin for error was only 5% whereas it was normally 10%, or sometimes 15%, for more complicated and/or commercial properties.
- The standard by which contributory negligence was to be judged was that of a reasonably competent centralised lender.A computerised lending system in which common sense plays no part is a negligent lending system.
- In relation to the second valuation, damages were reduced by 50% as GMAC should never have made a loan at 95% of value to a borrower with a bad credit history and with no supporting evidence as to his income.
- Damages were to be based on the amount of the overvaluations, being £22,842 and £35,000 respectively.
The CEO of GMAC had written a book about the Mortgage Market before the crash and before GMAC ceased to be a centralised lender. The Judge referred to it as being ” bombastic in a way peculiar to temporarily successful businessmen. The passage of time has lent hubris to much of the book”.