Negative equity – are the banks responsible?

by Readers Question

9:04 AM, 12th December 2018
About a month ago

Negative equity – are the banks responsible?

Make Text Bigger
Negative equity – are the banks responsible?

A few of my houses are coming to their end of term and the lenders want their money back.

They knew my exit strategy was refinance or sale, but now they don’t seem to recognise any responsibility for the negative equity.

When the banking crisis occurred it followed naturally that house prices dropped dramatically as lenders either folded (albeit bailed out by the government) or sold their book to others. (Not necessarily even lenders).

The banking crisis was caused by reckless lending and the banks ran out of money and were unable to continue their business. The bankers have apologised unreservedly for their error of judgement. Great! But now when some areas are still struggling with negative equity they should (in my opinion) extend the mortgage for a lifetime. Or if they want to recoup their capital reduce the amount owing to an amount that would enable refinancing.

The FCA do not regulate buy to let mortgages, however, the mortgage is a contract. In contract “every contract has an implied contract term that the lender will perform the contract with care and skill”. Surely lending recklessly and being unable to sustain your business, which then has the knock on effect of destroying the value of my investment, is lacking in the performance of care and skill?

There is so much more I can add to this argument but would like to hear a reasonable response that says I’m wrong. I just cannot see it any other way.

But would appreciate your comments.

Gwen



Comments

Neil Patterson

9:09 AM, 12th December 2018
About a month ago

Hi Gwen,

I am sorry to hear you have a negative equity issue.

If the question is should the Banks have a moral responsibility that is a different answer to if they have a legal responsibility unfortunately.

Can I ask if you have been back to the Bank to negotiate an extension in the mortgage term? They will lose money too forcing a sale so may want to buy time rather than crystallise the loss. Have you also been through the Bank's formal complaints procedure?

Gwen Davies

9:24 AM, 12th December 2018
About a month ago

Reply to the comment left by Neil Patterson at 12/12/2018 - 09:09
Yes I’ve continually communicated with the lenders. One gave me a two year extension but when the house was still in negative equity they appointed a receiver.
Another one appointed a receiver less than 3 months after the end of contract. They say they’ve opted out of the section of legislation that requires 3 months!
But my question remains. If they did not perform the contract with care and skill surely that’s a breach of the contract terms?

Ian Narbeth

10:32 AM, 12th December 2018
About a month ago

"Surely lending recklessly and being unable to sustain your business, which then has the knock on effect of destroying the value of my investment, is lacking in the performance of care and skill?"

Sorry, Gwen. Reality check. No. You borrowed the money. You have to repay it. The banks are not legally responsible for your negative equity and there is no implied term that they have to keep on lending especially if you are in negative equity. You have zero chance legally of winning this point against them. Nor are the banks going to "reduce the amount owing to an amount that would enable refinancing".
Unless you think the market in your area is going to rise significantly in the short to medium term (and given the present political situation, that may be unlikely) my advice is to try to sell and make up the negative equity from other sources if you can as soon as possible.
Sorry to add to your woes but there are cases where banks put in receivers and hold on to property because the value is below the debt. The borrowers cannot refinance because of >100% LTV but the lenders then put them on to their standard rate of 6 or 7%. All the while house prices may be falling. So the borrowers get hit both ways with rising debt and falling asset values until the banks decide to cash out at the bottom of the market leaving the borrower owing tens of thousands. I am afraid this is all legal. Banks can refuse to allow borrowers to sell unless the whole debt is repaid..
If a borrower has refinanced against rising equity values (perhaps repeatedly) they may sell "at a loss" (compared to the debt) but have a capital gain compared to the original price and therefore a CGT bill as well.
Gwen if you are in serious negative equity across your portfolio you might want to see an insolvency practitioner about an IVA See also https://www.citizensadvice.org.uk/debt-and-money/debt-solutions/individual-voluntary-arrangements/

Seething Landlord

11:11 AM, 12th December 2018
About a month ago

Dare I ask what steps you took to build up enough cash to bridge the gap between the value of your properties and the amount that you knew would be required to redeem the mortgages at the end of the term, particularly during the two year extension?
The lenders took a business risk in agreeing to lend on the basis that your repayment plan would be to sell or re-mortgage but by taking an interest only loan you assumed the business risk that you would need to make up any shortfall or face the current situation. That strikes me as a fair balance. Any investment or business carries risk which can result in serious financial loss and nobody forced any of us to become landlords.
All the BTL mortgage conditions that I have seen involve the lender contracting out of the various protections afforded by statute.
To slightly change your question and sorry if this just rubs salt in the wound, surely borrowing recklessly and being unable to sustain your business, which then has the knock on effect of destroying the value of your investment, is lacking in the performance of care and skill?
I am afraid that many of us are going to be faced with similar problems if the market crashes or when S24 has its full impact so we need to take whatever steps we can to protect our businesses before it happens.

Gwen Davies

11:12 AM, 12th December 2018
About a month ago

Thank you Ian for your reply. Can you explain what “the lender must perform the contract with care and skill” mean. It is an implied contract term in every contract.
Also the contemplation of both parties at the beginning of the contract still stands at the end of the contract (the Heron) . Why have I lost my profit? Answer the Banking Crisis caused by the banks. Can you explain why this is different to any other contract?

Binkie

11:13 AM, 12th December 2018
About a month ago

I quite understand it's upsetting and stressful to find yourself in negative equity. However, it was your decision to invest and to borrow to the extent you did. If the housing market ripped up, would you be keen to be sharing your profits with the banks? I suspect not.
As BTL investors we need to accept the risk that the housing market will turn against us, it's not a one way game. I'm afraid your strategy of "refinance or sale" didn't take that risk into account. In short, I agree with Ian and his advice above.

Gwen Davies

11:26 AM, 12th December 2018
About a month ago

Reply to the comment left by Binkie at 12/12/2018 - 11:13
Thank you for all your comments but you have all missed the point of the question. Yes I did take a calculated risk and so did the bank. With all their due diligence and high flying statisticians they calculated it was a safe risk. So we contemplated this risk together.
My side of the contract term was to pay the interest every month. There is no contract term that says I must act with care and skill. However if my loss was caused by political upheaval or similar then I’m responsible. But the only implied contract term is on the lender. “Every contract has an implied contract term that the LENDER (not the borrower) must perform the contract with care and skill”. The banking crisis was a blatant contradiction of this implied contract term. Do you not agree?

Neil Patterson

11:39 AM, 12th December 2018
About a month ago

Hi Gwen,
You would have to prove beyond doubt that a) the financial crisis was the fault of your bank and
b) prove the exact extent this affected your individual house prices.
Whilst we all have sympathy for landlords in this predicament and very little for the Banks this is just not an argument anyone would be able to win.

Rob Crawford

11:45 AM, 12th December 2018
About a month ago

Hi Gwen, have you talked to any other lenders or obtained independent financial advice?

Seething Landlord

11:49 AM, 12th December 2018
About a month ago

Reply to the comment left by Gwen Davies at 12/12/2018 - 11:26
The bank performed their side of the contract by lending the money to you and complying with the terms and conditions of the mortgage. They owe you no duty of care beyond that.

1 2 6

Leave Comments

Please Log-In OR Become a member to reply to comments or subscribe to new comment notifications.

Forgotten your password?

OR

BECOME A MEMBER

Your Invitation to Brentwood Property Investment Seminar 20th Feb

The Landlords Union

Become a Member, it's FREE

Our mission is to facilitate the sharing of best practice amongst UK landlords, tenants and letting agents

Learn More