Into a den of indemnity

THE pundits may be optimistic that house prices will rise modestly in 1996 but there is a long way to go before the scourge of negative equity - where a mortgage borrower owes more than the value of his or her home - is eliminated.

Indeed, figures out this week from the Woolwich building society for the last quarter of 1995 show an increase of 40,000 to 1,160,000 in the number of households affected. Moreover, a court case at the end of last year involving the Woolwich ruled that borrowers cannot rely on mortgage indemnity policies to bail them out.

Q: What is a mortgage indemnity guarantee?

A: Mortgage lenders usually require the payment of an insurance premium if you borrow more than 75 per cent of the value of a property.

At the Woolwich you pay 5.1 per cent on what you borrow between 75 per cent and 85 per cent, 7.15 per cent between 85 per cent and 90 per cent and 8.5 per cent between 90 and 95 per cent. So if you borrow pounds 57,000 to buy a property valued at pounds 60,000, the premium would be pounds 775.

Q: What do I get for that money?

A: Many argue that as the borrower you get nothing. The premium buys a policy which insures the lender.

If the lender is forced to sell your property but fails to recoup the outstanding debt, the lender will be able, within limits, to claim the shortfall from the insurance company.

Q: But if the lender gets the money, isn't that the end of the matter?

A: Not usually. You as the borrower still owe the money and can be sued for the debt, under what is termed in legalese as the right of subrogation, either by the insurance company or, more usually, by the mortgage lender acting on behalf of the insurer.

Q: So what is the point of paying the insurance premium?

A: The insurance is a requirement of weighty mortgage loans, it is often described as a High Loan to Value Fee, and is designed to protect the lender. If it seems that you do not have the money to pay the debt (perhaps you are unemployed and on income support) you are unlikely to be pursued through the courts but at least the lender has not lost out.

Some experts believe that a mortgage indemnity policy protects the borrower too. Last year a firm of financial advisers, Union Finance of Southend, Essex, claimed it could help borrowers walk away from their negative equity, taking advantage of a lender's ability to claim for losses on mortgage indemnity policies.

In a case at the end of 1995, however, a judge ruled that it was the lender (in this case the Woolwich) which was protected, and that the borrower could still be pursued for all the money owed, even if the policy had paid out. Furthermore the Council of Mortgage Lenders says the recent judgment is binding on future county court judgments because the case was heard in the High Court.

Q: So is that the final word on the matter?

A: Almost certainly not. Paul Judkins & Co, a firm of solicitors in Hertford, has been closely involved in this area. He believes some borrowers may still have protection.

He says you have to look at every individual borrower's situation, the conditions of each mortgage offer, instructions to the solicitor at the time of the mortgage, the mortgage document and the mortgage indemnity guarantee policy. Although the Woolwich won recently, there are still doubts as to how widespread a precedent it will set in practice.

Q: Are there any difficulties in proving your case?

A: It is not an easy business. But if you claim that your debt is cancelled because of a mortgage indemnity guarantee, the mortgage lender may, if pushed far enough, concur without a court hearing.

Mortgage lenders have been reluctant to disclose the details of mortgage indemnity policies. This could be because the policy wording is less than clear on exactly who is covered and in what circumstances an insurer has the right of subrogation, that is, the right to pursue a borrower for the money it has paid to the mortgage lender. It may be that some older policies were badly or ambiguously written. And it is believed that some lenders did not actually buy a policy from an insurance company, instead pocketing premiums themselves and using the money to self-insure.

Q: Does the Building Societies Ombudsman have anything to say on the matter?

A: In his 1994-95 annual report, the Ombudsman said he could not investigate complaints about mortgage indemnity guarantees because a borrower is not usually a party to the actual policy, despite paying for it.

However, he did say that where claims are made against borrowers by insurance companies who had to pay out under mortgage guarantee policies, the borrowers are entitled to satisfy themselves from a copy of the insurance policy that the claims of the insurance company against them are properly founded. The Ombudsman was concerned that building societies refused to provide copies of the policies to borrowers. Borrowers may have to go to court in order to get a policy disclosed.

Q: Any other help?

A: Yes. While not involving a mortgage indemnity guarantee, the Ombudsman ruled on another case relevant to those in negative equity. A borrower was on the point of selling his home but the building society did not allow the sale to go ahead because the sale proceeds would leave a shortfall of pounds 3,500 on the money owing to the society.

One year later the society took possession and sold the property at a much lower price than the borrower had been offered. With mortgage arrears added, the shortfall was by then pounds 40,000.

The Ombudsman ruled that the borrower's debt should be restricted to pounds 3,500 plus the reasonable costs of sale. This particular ruling will be relevant to many borrowers who have been prevented from selling their property, only to end up with substantially greater debts than if their own sale had been allowed to go ahead in the first place.

Q: Where does that leave borrowers?

A: In short, it leaves borrowers in need of advice. Anyone who is being chased for debts they think they should not have to pay should get initial advice from the Citizens' Advice Bureau or a solicitor.

Anyone who is having problems paying his or her mortgage is ill-advised simply to hand in the keys and vacate the home. Mortgage lenders tend to get poor prices on the sale of repossessed properties and this can only increase the debt of their hapless erstwhile borrowers. The Council of Mortgage Lenders says borrowers should talk to their lender if they have problems meeting their mortgage payments, or if they have negative equity and want to move.

Simply walking away could be a very dangerous course of action. You leave yourself open to being pursued legally by the lender and/or MIG insurer and being blacklisted from obtaining a mortgage or other credit in the future.