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ombudsman news

issue 81

November/December 2009

a selection of recent mortgage case studies involving disputes over valuations

In our annual review covering the financial year ending March 2009 we noted an 11% increase in complaints about mortgages, compared with the previous year.

A significant proportion of these cases involved disputes about the handling of mortgage arrears - reflecting challenging conditions in the property and mortgage markets.

The complaints we have seen since April this year have continued to reflect difficult market conditions. As these case studies illustrate, these problems regularly include disputed property valuations.

Sometimes these complaints arise from the situation where, having tightened-up its lending criteria, a lender has not offered as favourable a rate of interest as the consumer had hoped for - citing the re-valuation of the property concerned as the basis of its decision. Complaints may also arise following the sale of a repossessed property at what the consumer considers too low a price, in relation to the property's market value. Where such a sale raises insufficient funds to repay the mortgage in full, consumers sometimes argue that responsibility for making good the shortfall lies not with them but with the lender.

consumer complains that after repossessing his flat, the lender sells it for less than its market value

After finding himself in unexpected financial difficulties, Mr A decided to re-mortgage the flat he had only recently bought as an investment property. He re-mortgaged the flat with the lender for £150,000. At that time the property was valued at £180,000.

Mr A's financial situation was not helped by his inability to find tenants for the flat and before long he was in serious arrears with his mortgage repayments. Eventually, just over a year after he had arranged the re-mortgage, the lender took possession of the flat. It was valued at £155,000 but the lender received few realistic offers and in the end agreed to sell for £140,000.

Unpaid interest had been added to Mr A's mortgage and this, combined with the low sale price, meant that £25,000 remained to be repaid after the sale of the flat. Mr A refused to accept responsibility for this sum. He said there would have been no shortfall if the lender had sold the flat for its proper market value. Unable to reach agreement with the lender, Mr A referred his complaint to us.

complaint not upheld
After examining evidence provided by the lender, we concluded that it had acted reasonably and followed good industry practice when dealing with the sale of Mr A's property. It had obtained two professional valuations and allowed sufficient time for potential buyers to view the flat. There had not been many viewings, but the lender had rejected several offers that were considerably lower than the price it eventually accepted.

We noted that the sale had probably been hindered by the fact that the flat was part of a new development. Some properties on the development were still under construction and the developer was offering substantial incentives to buyers of these new properties. We did not uphold the complaint.

consumer complains that lender sells repossessed house for less than its market value

Ten years after they took out a joint mortgage, Mr and Mrs T separated. Mr T moved out of their house but would not agree to transfer ownership to Mrs T. She was soon finding it a serious struggle to pay the mortgage and eventually decided to hand the house back to the lender.

When she told her new partner what she had done, he said he would put in an offer to buy the property himself, so she could continue living there. However, the lender refused his offer as it was considerably less than the price it was asking for the house.

The lender subsequently sold the property at a much lower price than that offered by Mrs T's new partner. Mrs T was far from happy when the lender told her that as the sale had not realised enough to fully repay her mortgage, she would have to pay the shortfall. Unable to reach agreement with the lender, she referred the matter to us.

complaint upheld
We thought the lender had acted reasonably in refusing the offer that Mrs T's partner had made, just after the house went on the market. He was offering significantly less than the current valuation. However, we saw no reason why the lender should not have accepted his offer, once it became apparent that the property would not sell at the original asking price.

We said the lender should reduce the amount that Mrs T still owed by the difference between the price offered by Mrs T's new partner and the price at which the house was sold.

consumer complains that lender sells her repossessed flat for less than its market value

Ms N's circumstances changed significantly not long after she had taken out a mortgage of £207,000 to buy a flat. Realising that she would now find it difficult to afford the monthly payments, she decided to let the property out while she tried to sell it.

She put the flat on the market at £240,000 but was unable to find a buyer. The rent that she was getting helped her to meet her mortgage repayments for a while. However, a couple of years later her mortgage arrears had built up to the extent that the lender decided to take possession of the flat.

Although the lender was able to sell the property reasonably quickly, the sale did not produce enough to repay the outstanding mortgage, together with arrears charges.

Ms N did not agree with the lender that she was responsible for meeting the shortfall and she referred her complaint to us. She said the lender had "caused the problem" by selling the flat for less than its market value - and she noted that the selling price was lower than offers she had turned down when trying to sell the flat herself.

complaint not upheld
The evidence provided by the lender showed that it had obtained two valuations and had put the flat on the market at £220,000 - the higher of the two recommended sale prices. The lender had rejected several offers that were far lower than the asking price before it finally agreed to sell the flat for £208,000.

The lender pointed out that the flat was on a new development where a number of similar repossessed properties were also on the market. We agreed that this situation was likely to have affected the sale price. We did not uphold the complaint.

consumers complain that lender creates financial difficulties for them by retracting an agreement to change their mortgage arrangements

Mr and Mrs D were finding it increasingly difficult to look after Mrs D's elderly mother, Mrs M, and started looking for suitable care homes. After considering possible ways of freeing up some money to help pay the fees, they contacted their mortgage lender. They asked if they could change their mortgage arrangement from a capital and interest basis to an interest-only basis, in order to reduce their monthly outgoings.

Initially, the lender appeared to agree to this. However, it subsequently refused, after a valuation of Mr and Mrs D's property suggested that it was worth less than the outstanding mortgage. The lender told the couple that this situation meant they did not meet its lending criteria for an interest-only mortgage.

Mr and Mrs D later told us that their arrangements for Mrs M to go in to the care home were already well-advanced by the time the lender said it would not, after all, be able to change their mortgage. They said they felt they had no option but to go ahead with the care home arrangements, even though they would be committed to paying the care home fees as well as the cost of their existing mortgage.

After complaining unsuccessfully to the lender, they brought their complaint to us. They said the lender had "created financial difficulties" for them by changing its mind about altering their mortgage arrangement.

complaint upheld in part.
We accepted that it had been reasonable for Mr and Mrs D to have thought, after their meeting with the lender, that it had agreed to alter the basis of their mortgage.

However, we noted that the lender had contacted them again within a very short time to explain why it had changed its mind. At that point, the couple had still not made any firm commitment for Mrs M to move in to the care home.

Nevertheless, they had then taken the decision to go ahead, despite knowing that this would commit them to paying the home's fees as well as continuing to meet the cost of their existing mortgage.

Our investigation showed that the financial difficulties facing Mr and Mrs D were long-standing and had not arisen solely as a result of their commitment to meet the care home fees. So we did not accept their view that the lender's change of mind had caused their difficulties.

However, we reminded the lender of its regulatory obligation to act fairly towards customers in mortgage arrears. We said the lender should operate the mortgage on an interest-only basis for an extended period, to allow Mr and Mrs D time to seek advice on their overall financial position and on ways in which they could meet the cost of care for Mrs M.

consumers complain that lender based its mortgage interest rate offer on an inaccurate valuation of their property

Mr and Mrs B wanted to transfer their existing mortgage to a tracker arrangement, and applied to do this online, on their lender's website.

When the lender subsequently got in touch with them, it quoted a higher interest rate than they had been expecting. It told them the reason for this was that they were borrowing more than 60% of the value of their property.

After the couple complained about this, the lender arranged for the property to be re-valued. However, the outcome of the valuation did not alter the position. Mr and Mrs B then questioned the accuracy of the valuation, saying it differed considerably from the value that another lender had placed on their house earlier that year.

They provided details of what they said were the sale prices of similar properties that had been on the market recently in their area. They also asked the lender to refund the mortgage application fee that they had been required to pay as part of their online application.

complaint not upheld
We noted that the lender had obtained a professional valuation of the couple's house and we saw no reason to conclude that it could not rely on that valuation.

The information provided by Mr and Mrs B related to the prices at which similar properties were being advertised - not the actual sale prices. The valuation figure used by the lender was supported by such information as was available about the sale prices for similar properties in the same area.

We understood Mr and Mrs B's disappointment that they had not been able to obtain the interest rate they had applied for. However, we did not agree that the lender had treated them unfairly or that it had failed to process their application correctly.

And we did not agree that the lender should refund the couple's application fee. The lender's terms and conditions, which the couple had seen before paying the fee, made it clear that the fee was not refundable. We did not uphold the complaint.

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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.