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ombudsman news

issue 12

December 2001


dual variable mortgage rates - an update

In the September 2001 edition of ombudsman news we gave a short "interim report" on what was happening on this subject. Since then, the whole issue has gathered much more momentum - with column feet (rather than inches) being devoted to it by the press.

We cannot comment fully on our approach because cases are still being considered. But here, in general terms, is an update, with a summary of the position at 31 December 2001.

where we were three months ago

We had received a number of complaints about several different lenders. Some complaints were under investigation. In two cases, concerning lenders A and B, one of our adjudicators had already issued preliminary decisions recommending that the particular borrowers should have their mortgages linked to the new, lower, variable rate.

Both lenders had appealed, and the cases were being reviewed before an ombudsman issued a final decision.

what has happened since

We have issued an ombudsman's final decision in the case concerning lender A. In that case, the ombudsman decided that the particular borrowers were entitled to have their mortgages linked to the new, lower, variable rate.

The decision was based on the particular circumstances of the borrowers concerned, including the terms of their individual mortgage contracts. The decision did not deal with the general issue of lenders having more than one variable mortgage rate.

A preliminary decision has been issued in a case involving lender C, recommending that that lender should link the particular borrower's mortgage to the new, lower, variable rate. The lender appealed against that decision.

So the cases involving lenders B and C now await an ombudsman's final decision. It is likely that a preliminary decision will be issued at about the same time concerning lender D.

other mortgage problems

Mortgages are still our single largest area of complaint. The problems raised are not confined to such "hot topics" as dual variable rates or early repayment charges, as the following three cases illustrate.

case studies - mortgages

which valuation type - and who pays for a valuer's negligence-

In preparation for their retirement, Mr and Mrs G decided to move to the West Country. They applied for a small mortgage to help them buy their "dream cottage". On the mortgage application they ticked the box for a "detailed" property valuation. That type of valuation was important to them because parts of the cottage dated back to 1800.

The firm arranged the valuation and Mr and Mrs G got the report the following month. It was generally satisfactory (it said the cottage only needed "general maintenance") - so the couple went ahead with their purchase. But even on the day they moved in, they started to discover things that were wrong with the cottage - things they thought the valuer should have spotted. So they looked again at the valuation. That was when they realised they had been given a "simple" valuation, not the "detailed" one they asked for.

It cost Mr and Mrs G £60,000 to put everything right with the cottage. To pay for the work, they cashed in a life policy and also used some of their savings. Some of the problems were with things Mr and Mrs G did not expect the surveyor to have found. But as the firm accepted that it had given the valuer incorrect instructions, Mr and Mrs G asked it to pay £30,000 towards the repairs. It would only offer them £5,000.

When we looked at the complaint, we thought there was a chance that Mr and Mrs G should have realised sooner than they did that they had been given the "wrong" type of valuation. But it was just a small chance - because there was only one small reference to the type of valuation on the whole form. However, by then it was clear that many of the problems - accounting for a significant part of the repairs - should have been spotted even with a simple valuation, not just a detailed one.

Another valuer, and an independent loss adjuster, both agreed that the first valuer had been negligent. And we decided that, given the overall circumstances, the firm should be held responsible for that negligence. The courts say that the starting point for working out compensation in this type of case is to calculate the difference between the price paid for the property, and the price that would have been paid had all the defects been "out in the open". However, if Mr and Mrs G had known of all the problems to begin with, it was very likely that they would have bought another property instead. There were plenty on the market at the time.

We were told by independent valuers that the price differential would only have been fairly small. But because we accepted that the couple might well have bought another property if they had known the cottage's true condition, we thought they should get more than that. So we told the firm to pay them £25,000.

duty to get a fair price when selling a property taken into possession

In 1990, Mr B bought a house for £250,000 with a mortgage from the firm of £150,000. But by 1994, he was having money problems and he fell into arrears with his mortgage. He put his house up for sale at £300,000 - but no offers came in even after he reduced the price, in stages, to £220,000.

In 1996, the firm obtained a court order authorising it to take possession of the house. Mr B was made bankrupt the same year. In January 1997, the firm took possession of the house and put it up for sale at £160,000. In March 1997, the firm accepted an offer of £155,000 from a Mr J.

12 months later, in March 1998, Mr B found out that Mr J had sold the house for £250,000. Mr B complained to the firm that it had sold the house too cheaply. The firm did not agree. It said that Mr J's initial offer for the house had only been £130,000 but it had managed to sell for £25,000 more than that. In any event, Mr J's offers were the only ones it received.

We were satisfied that the firm had done all the right things when it put Mr B's house on the market. It had consulted a number of local estate agents and had followed a recommended marketing strategy. There were good reasons why Mr J got much more for the house the following year. Prices generally had gone up, he had done a lot of work on the house and he got a premium price from the neighbouring hotel - which wanted the property as part of its expansion plans.

Mr B said the firm should have approached the hotel the year before. But we decided the firm had done enough and it had no reason to suppose the hotel would be interested in the house. The hotel had shown no interest when Mr B had been trying to sell it the year before, and if it had really wanted the house then, it would hardly have waited a year and then paid much more for it.

So we decided the firm had fulfilled its obligations towards Mr B and there was no evidence that - in accepting just £155,000 for the house - it had acted unfairly.

repaid mortgage deed not properly dealt with

Back in 1991, Miss M bought an 80% interest in a house. The other 20% was kept by a housing association. The firm gave Miss M a mortgage to buy the 80% and the housing association took a second mortgage to secure its 20% interest.

In 1996, Miss M borrowed more money from the firm in order to buy out the housing association. The housing association's solicitors sent the second mortgage documents to the firm's branch, which sent them off to its centralised deeds department. That department should then have sent them to the land registry to get the second mortgage deleted from the register. But all that happened was that the documents were put with the main set of deeds.

Three years later, Miss M wanted to borrow some money from another lender and offered it a second mortgage over her house. Because she needed the money quickly and the housing association's mortgage was still on the register, she decided to borrow the money unsecured, which cost her more interest. Despite much to-ing and fro-ing between the housing association's solicitor and the firm, the problem had still not been sorted out by the time Miss M wanted to re-mortgage her house with her new employers (who were offering a cheap deal).

We considered that Miss M had been caused a lot of distress and inconvenience by the firm's failure to deal with the second mortgage documents when it received them from the housing association's solicitors. But we did not agree that she had suffered any financial loss. A secured loan would have been cheaper than the unsecured one, but Miss M had made no attempt to change the loan over - or to chase matters up. And her new mortgage with her employers was not delayed by much. So we told the firm just to compensate her for distress and inconvenience. As that had been considerable, we said that the firm should pay her £1,000.

Walter Merricks, chief ombudsman

For printed copies of this or any of our publications, phone 020 7964 0092 or email publications.

ombudsman news gives general information on the position at the date of publication. It is not a definitive statement of the law, our approach or our procedure.

The illustrative case studies are based broadly on real-life cases, but are not precedents. Individual cases are decided on their own facts.