Mortgage Lenders who have suffered title related losses on their books as a result of the days of frantic volume conveyancing will know only too well the pitfalls associated with the inadequate systems and controls that their service providers had in place.

Title insurers who sit behind mortgage portfolios are also acutely aware of the costly consequences of unintended transactional risks within the lending process. Undeniably, the market has elected in the main to attribute losses incurred as a result of relaxed conveyancing to dual representation and conflict of interest rationalisation.

Arguably, with or without separate representation, relaxed conveyancing is directly correlated to the commoditisation of the lending market, the need to reduce overheads to increase margins and the impetus to reduce transaction lead times. As the Help to Buy Scheme takes hold, the Mortgage Market Review changes become normalised and as anticipation of interest rate rises augments, we will conceivably be ushering in another up-cycle in the property lending market; there is no better time than the present to be cognisant of how essential it is to manage transactional risk.

Lenders now faced with increased administrative costs will need to consider carefully whether they should refocus efforts on improved conveyancing standards or whether insurance might be the way forward. The questions which they must ask are: firstly having crossed the threshold into commoditisation of legal services can there ever be a return to traditional conveyancing methodology and secondly is it better to enable service providers to concentrate on the transactional fundamentals whilst managing risk in other ways?

The answers to these questions may be found in analysis of the historical claims data held by title insurers. Listed below are some examples from our own claims files of how title insurance has been invaluable in absorbing the unforeseen yet potentially disastrous consequences of transactional risk:

 Planning Issues:

A loan was advanced by our Insured over a long leasehold interest in a basement flat. It was discovered  that the planning permission in respect of the freehold was limited to permission to convert the building to five self-contained flats and specifically that the basement was not to be used as habitable accommodation. A report was obtained from planning consultants which concluded that retrospective planning permission or Buildings Regulations consent was unlikely to be granted. The Property which was originally valued at £250,000 was devalued to £25,000 once the defect was known. The claim was settled for £198,184 being the loan amount plus any interest accrued.

Fraud:

Our Insured advanced the sum of £161,035 in favour of two spouses. The mortgage fell into arrears and the Insured attempted to repossess the property. The husband filed a defence to the possession proceedings alleging that he had no knowledge of the loan and that his wife had fraudulently obtained the mortgage. The wife admitted the fraud to the police but only received a caution. The claim was settled for £168,619 being the loan amount plus any interest accrued.

Missing Consents:

The property had been built directly over a public sewer with no Build Over Agreement in place with the local water supplier. Our Insured repossessed the property and was saddled with a liability for a damaged sewer. Retrospective Build Over Consent was not an option as the damaged sewer needed to be re-routed at a cost of £61,000. We indemnified our Insured for the re-routing costs and obtained all necessary third party consents to enable the works to be executed.

Conceivably, a full title diligence exercise by the legal service providers may have flagged the above issues and the lender would then have averted poor lending decisions or mandated pre-lending resolutions. However, full title diligence on each loan transaction comes at a significant operational cost to the lender.  As profit margins continue to erode due to the increased regulatory responsibilities put in place to protect consumer rights, mortgage lenders must bear in mind that they would only need to face claims like the ones detailed above in a systemic way, before the integrity of their loan portfolio is undermined putting increased pressure upon their capital ratios, which in itself will erode margins further as their cost of capital increases.