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September 2009

Going, going, gone — why homes under the hammer is getting some hammer

COMMENT by DAVID PERKINS

AUCTIONS are suddenly back in vogue. However, many of the recent spate are solely selling off homes where the original owners have been evicted by their mortgagees – presumably due to substantial and growing arrears. This is a sign of the times, unfortunately.

But before this discussion goes any further – please note these are not ‘repossessions’, nor ‘repos’ as commonly called. This is a situation which can only really happen once so they cannot be repossessions.

The lending institution involved is taking possession for the first and only time exercising its right under the Mortgage Deed. It will then sell the property hoping to recover its investment – acting as the Mortgagee in Possession.

Another point to bear in mind, although the mortgagors may have been evicted they are still the legal owners of the title. This has two critical implications.

Firstly, any sale proceeds left after the outstanding loan and expenses have been paid off remain theirs and are not the lender’s. But conversely, any shortfall is also theirs and lenders may continue to pursue former mortgagors for this money.

However, before any home-owner is actually evicted, the matter will have been through a County Court where judges are under pressure from the Government not to let such cases through on the nod.

That often happened following the last property price collapse in the early 1990s. Then, the average case took less than 10 minutes with dozens going through every day.

In these recent cases, the judge will have heard from many of the individuals concerned and tried to find an alternative resolution.

The fact remains there are fewer of these hearings than many had expected considering the mess the economy is in and I see two reasons for this.

Firstly, 20 years ago interest rates were at a ridiculously high rate and consequently monthly repayments went sky-high – today, arguably, they are ridiculously low.

The Building Societies Association-recommended rate may have been 15 per cent but few loans were available at that figure and the effective market rate was 17 and a half per cent or more.

Every financial organisation in the country – and many from abroad – wanted to get in on the profitable UK mortgage business.

Banks from places like Brazil and Western Australia built up quite large mortgage books. The thousands of different schemes available help to fuel an unsustainable house-price bubble.

Getting in and building a book was easy: getting out again took time and proved very costly so those lenders are never coming back.

Many had no idea how to handle their growing arrears and instructed expensive solicitors who also had no idea. They just followed the provisions in the Mortgage Deeds to the letter.

That meant getting the evictions organised was simple. Selling on empty houses when there was no real strength in the market proved a different matter.

When the first estate agents recommended further price reductions, other agents were simply instructed. Some firms started to specialise with large departments to manage the flow of instructions.

However, when there are no buyers, there is no market and no right price and empty properties were soon being sent to auction, often, in desperation, without reserves.

That sounds fine for prospective investors who had cash and the necessary nerve but not for the former owners who still had an interest in their former homes which the mortgagees were selling in a trustee role.

Most people were too fed up to do much about it but one or two of their sensible solicitors realised that these ‘no reserve’ sales were more a licence for ‘day-light robbery’ and took extreme cases of negligence through the courts winning damages.

When appeals to the House of Lords also went against the institutions, systems were tightened up. Consequently, few lenders now throw all arrears cases to hard-nosed solicitors.

Thought, consideration and a greater degree of understanding and even sympathy is reducing the worst impact. Hence fewer last-resort auctions.

This time, the housing market is a victim of the collapse rather than a primary cause. Admittedly, a surge of mortgage scams in the United States did not help and triggered wider problems but it was not just the mortgage bankers in trouble.

Since all the banks were involved to some degree, the Government and the Bank of England had to act.

By urging lenders to exercise greater caution and flexibility Government policy has reduced the number of residential evictions while there are far less international lenders involved save perhaps for Iceland and Eire!

Not surprisingly. it was the former building societies turned banks which were in the worst trouble – the likes of Northern Rock, Halifax and Bradford & Bingley.

Once free from the restrictions in the Building Societies Act, they had all tried to innovate competitively rather than diversify responsibly.

The Northern Rock was the first to go under. It was not the worst-managed mortgage lender but was cleverly – too cleverly – sourcing all its funds from wholesale markets.

As a building society, it had had a good record for its handling of mortgage arrears. Evictions were low.

But not now – anything goes, and Northern Rock cases are being pushed through regardlessly.

Nobody at the top cares about anything other than returning the Government’s investment, preferably before the next General Election. No doubt dissolution knighthoods are at stake!

Another problem has been the increase in self-certification. In theory quicker and easier, in practice it opened the door to multiple mortgage applications and fraud.

While fraudulently-mortgaged properties could still be let to generate enough income to service the outstanding multiple loans, all was well. But once this stock had to be resold into a falling market the troubles started.

A few individuals, who realised it was time to get out and sell off everything, survived, but most thought it was a mere blip, albeit a bad blip, and not a serious market collapse.

Stocks, shares and other investments were also sold off but those markets were falling as badly or worse.

Such investors never attended their court hearings and the courts quickly granted possession. Greed and fraud were not regarded as mitigating factors!

Where individuals had real mitigating circumstances – usually enforced and unexpected redundancy – the judges were far more sympathetic.

Some people remain in their old homes now as tenants of their original lender, or paying a rent to the local authority or a well-funded housing association.

But auctions are still growing as a number of new organisations see this as an opportunity and offer estate agents attractive terms to co-operate on a shared agency basis.

What must be remembered is that while auctions are in some practical respects different from normal sales by private treaty, in others the same laws and regulations apply. All property auctions come under the Estate Agents Act Orders and Regulations, and the Property Misdescriptions Act.

They also need Home Information Packs although these are little different from a full Auction Pack. The main new element is the Energy Performance Certificate.

In a property auction, agents have to remember who they are working for – in contrast to chattels auctions where both sellers and buyers pay a sale commission and the auctioneer has a clearly defined dual role.

When selling property the auctioneer is acting for the home owner until the moment the actual sale starts.

Once on the rostrum two things happen. Firstly, the auctioneer assumes an overriding duty to ensure the sale is fair and impartially conducted. Once the hammer falls he reverts to his seller’s agency role.

Secondly, everything the auctioneer says from the rostrum automatically becomes part of the auction contract terms. Pure puffery is fine, but what about other inducements?

Take “backs onto open country” as an example. No problems – unless there is a planning application in progress or the land is being rescheduled from green to white or pink.

The auctioneer may afterwards claim that he did not know and his remarks were innocently made. But the PMA creates a legal imperative of care. If a buyer feels misled there could be trouble.

Many auctioneers think they are above such trifles but I can quote several substantial fines arising from auctions.

Arguably, every errata slip distributed at a property auction is an admission of a PMA offence. Take “the lease is for 12 years and not 22 as stated” or “the garage in the photograph is not included in the sale”. Whoops.

I recall spending three intense days in Horseferry Road Courts as expert witness in a major PMA case with top QCs defending two leading firms charged over a missing clause from a lease. The problem arose due to an agency taking a solicitor at his word.

And did that solicitor go through the hoop? He was left shredded, bruised and bleeding but it was the agencies facing criminal prosecution. This negligent solicitor had said he was “99 per cent certain”. He was wrong and later thrown out by his partners.

Okay, the agencies were eventually acquitted, but at what cost? One auction director was sacked while his department was closed down leading to 12 staff redundancies. And this is one tale among many, and worse.

What made me think about these technicalities was news that some jazzy American outfit is trying to import its own techniques to help shift these empty properties and offering generous terms to introducing agents.

Well, go back to that 99 per cent case just mentioned – both the auctioneers and the sub-agent were on trial. And ignorance of our laws is no excuse.

My advice is to check out very carrefully any scheme and any partnership offers. Auctions may be ancient, dating from 400BC I believe, but they still have to meet all our modern rules and regulations.

Auctions were also back in the news following a recent comment from the Property Ombudsman. He was emphasising that an award mentioned in his annual report did not mean all estate agents now have to offer sales by auction to every home owner.

Here, the agency in question had never mentioned an auction as a possibility and sold the house for what was demonstrably too low a price. The first buyer immediately turned it over through an auction at a useful profit and that second buyer made even more money!

An auction is unlikely to be the answer to an estate property where there are loads of ‘For Sale’ boards festooning the area. But it is a useful sales technique in the right circumstances. It is very much horses for courses. And look before you leap.

If you are interested in the auction idea, I have two guidance notes available — one on the PMA and associated risks. Drop me an e-mail for details.

David Perkins can be contacted
at PO Box 333, Carterton,
Oxon, OX18 3WZ,
on 0870 350 1865 or at:
david@david perkins.co.uk.