Untying the knots

Now we have reached 2002, many mortgage advisers will be focusing on passing the MAQ or CeMAP exams, so they can continue to do business in 2003. Both sets of exams require a good working knowledge of the legal issues surrounding the purchase of properties and mortgage loans. This will enable advisers to provide an added value service to their clients helping to ensure a regular stream of satisfied customersš enhance their own reputation in the marketplace, and build future business by favourable referrals.

Staying up to speed

The subject of high quality service is often the speed (or otherwise) of the application being processed by the lender and there is nothing quite like a legal query for holding up a decision on a case. This frequently arises from the lenders’ underwriters and applications. Staff need to process as many applications as possible each day, but unfortunately, human nature dictates that ‘problematic’ cases requiring extra time to sort out will often be left at the bottom of the pile.

It would, of course, be unrealistic to suggest that advisers should become quasi legal experts, because solicitors are already responsible for safeguarding the legal interests of both purchasers and lenders. The real challenge for advisers is to gain a good understanding of the legal framework of house purchase and mortgages, and where problems can arise.

Forewarned with this knowledge, advisers can spot potential problems at an early stage and flag up the need to address them, rather than waiting several weeks before discovering a case is bogged down in the lender’s system due to a minor legal hitch.

The legal perspective

From a legal point of view, three topics are key: the value of the property; the correct title to it; and the validity of the contract.

The lender must ensure that the security held in the property will cover the amount advanced, should the property become the subject of possession proceedings and sale. Likewise, borrowers must be confident they have correct title to their property and that there are no hidden problems that may devalue it to below the purchase price.

So, what is the applicant’s solicitor’s role in the process? In most cases, to minimise legal costs for the borrower, the solicitor wears two hats, acting for both the borrower and the lender.

From the lender’s point of view, when the property to be used as security for the loan is changing hands, they must be sure that the new owner is getting good title to the property (ie, ownership). This provides the lender with the confidence that the borrower has the security to back up the loan, before they part with their funds. Of course, the purchaser also needs the same assurance, so the purchaser’s solicitor is able to do the same job to satisfy both parties. With a second charge mortgage, or where a borrower is remortgaging with the same lender, the matter of title to the property has already been under scrutiny and is therefore an important element of the pre-loan checking process.

In the vast majority of cases, the property’s Office Copy Entry (which shows the title to the registered land) is sufficient proof of good title. However, not all properties are registered and, if the property happens to be unregistered, the solicitor will have to go back through 15 years of document history to check the title. Needless to say this is a time consuming process, so advisers ‘ who are so often first in the firing line for borrower queries ‘ will need to be forewarned that delays may be likely.

With the other key legal factor, the true value of the property, proper title is often a crucial issue. If, for example, there is any question about rights of way across the property, potential boundary disputes, or proper title to the land on which the property stands, no lender will be able to release the funds until they are sure the queries are resolved. This is in addition to the true market value of the bricks and mortar ‘ which is dealt with by the surveyors and valuers ‘ and any such queries will take their toll in terms of delays.

Stumbling blocks

Before bringing all this theory to life with some case studies, a couple of other legal issues need to be mentioned, although it is rare for mortgage advisers to become involved in them on a day-to-day basis. The first is fraud, and in particular illegal contracts, where dishonest parties to a property and/or mortgage contract conceal facts, or invent them, for personal gain. For example, individuals may fraudulently attempt to get multiple loans on a property, or dishonest professionals may collude to obtain funds from lenders (either mortgage advances or fees).

Secondly, illegal money laundering is becoming an increasing concern and certain types of property transaction are being used by criminals to legitimise money made through drug dealing, or other criminal activities. Any hint of such illegal activity must be reported immediately to the appropriate authority.

Some recent examples from our own experience particularly in the seconds mortgage market will help explain these issues.

The pitfalls of title

First, with regard to registering title, it is not uncommon for small inconsistencies over names to cause delays and frustration. In these circumstances ‘ where often a solicitor does not act for the borrower ‘ advisers need to be aware of the pitfalls if they want to give the best service to clients.

Occasionally, properties which are identified by a street number, name or house name on the mortgage application may have originally been registered at the Land Registry as a plot number in a new building development. When these properties come to change hands, there may be delays because the Land Registry will not register the charge if the address on the title deeds does not match the address on the mortgage deeds. In addition, someone who is registered as the property owner may have changed his/her name over time and this causes similar problems. For example, borrowers of ethnic origins (using a non-Roman alphabet) may have bought and registered a property in their original name but have now adopted a more westernised version and used this on the mortgage application form. Once again, this discrepancy has to be rectified before the loan can go through. Although the mortgage adviser is not responsible for sorting this out, a clear explanation of why there is a delay will help to cement the adviser/client relationship.

Another potential title problem is adverse possession. Adverse possession occurs where someone who has no right to occupy the land does so without the permission of the owner. A person who remains in ‘adverse possession’ for over 12 years may acquire title to the property, which will be valid against the person who originally owned the land. Often the adversely possessed land is part of the property (usually the garden) that the borrower is acquiring. However, until this has been resolved, it presents a potential problem for the lender, as if the adversely possessed land cannot be registered in the borrower’s name then the whole property may be worth less than the valuation figure.

Other examples of potential legal/title problems include: leasehold property where there is an absentee or insolvent landlord; property which has been transferred at an undervalue (eg, with a deed of gift); and property that includes additions or improvements that are not backed up by planning permission or building regulations. In all these cases, lenders will not advance funds until they are sure the problems have been resolved and there will be no detriment to the value of their security in the future.

Minimising the problem

However, the increased use of title insurance has reduced the threat of these problems to a minimum, as the insurer will take on the responsibility of sorting out any title problems, so the mortgage and property transfer can go ahead without delay. In this way, title insurance can guarantee a fast mortgage turnaround from a legal point of view.

The legal aspect of mortgage advice is a field that is often viewed as difficult and complicated by advisers. However, pretending that problems do not exist does not work as they will inevitably be exposed at some point. A better policy is to arm oneself with a good working knowledge of the potential pitfalls, gather as much information as possible from the borrower, and make sure that all parties are aware of the position from the outset. This can only earn the respect of both the lender and the client, and help to cement business relationships.

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