Sub-prime cause for consideration

There have been plenty of new words entering the public consciousness this year. In the wake of the Northern Rock crisis, the term that has jumped from jargon to general use is "sub-prime".

With rising interest rates, constricted housing supply and other gloomy economic developments, there is the prospect of a fresh wave of claims by the financial institutions against their professional advisers resulting from over-valuations, broker errors and poor legal advice.

Mortgage fraud has never really gone away, though its ill-effects have been disguised by the rising market. Lenders' prospective exposure has risen commensurate with the sophistication and audacity of criminal syndicates through identity fraud, linked price-inflating transactions, fictitious borrowers and property mis-descriptions.

Professionals in turn have tightened up their procedures since the early 1990s, becoming policed more closely by their own risk managers as well as money-laundering regulations and disciplinary authorities, yet many practitioners are too young to remember the last time and remain prey to the range of tricks and fraud opportunities that becomes ever wider as a result of new technology.

Professional negligence law, forged in a number of cases including multi-action decisions in Bristol & West Building Society v. Fancy & Jackson (1997) and Nationwide Building Society v. Balmer Radmore (1999), should still hold good in a new claims wave. The risk parameters have likely changed significantly though, especially in the commercial sector where occurrences and losses from fraud, relatively light in the last recession, are likely to be higher this time.

Many lenders have been prepared to take substantial commercial risks in a market where home purchase loans exceeded £160.4bn in 2006, up from only £45bn in 1994, and doing so often with disregard to protective lending criteria such as loan-to-value ratios or the borrower's income. They must expect to be targets of many contributory negligence and failure-to-mitigate arguments, and also some complete defences. In this economic climate, sub-prime lenders should be careful to consider if their decisions were abetted by ignorance or risk mismanagement before blaming lawyers, valuers or brokers.

- Mike Willis, Partner, professional risks group Beachcroft LLP.