Mortgage nightmare:
A Guide to Mortgagee sales
Olly Newland's Column, 31 May 2009
'Mortgagee Sale.' These two words can strike terror into the heart of any property owner. A mortgagee sale can destroy families, businesses, and lives.
Over the last year more property owners in financial difficulty have faced the loss of their home or investment to the pay off the lender.
Sometimes the dreaded situation arises from an innocent change of circumstances (job loss, marriage split etc). But sometimes it results from the greed or naivety of those who believed the hype that property prices would rise forever. Now, with the 'worst recession in 70 years' sapping the economies of the world, the lesson has to be taught all over again: What goes up must go down.
In March this year forced home sales hit a 15-year record of 201 properties according to Terralink. This 'worrying trend' showed that 'there were still a lot of distressed owners through out the country' according to Terralink.
Other statistics support this view: Trademe reported an increase of 231% of forced sales in the last twelve months alone. The large number of advertisements appearing for mortgagee sales is evidence we can all see that this explosive increase is not a myth but a sober reality.
What's worse is that a mortgagee sale is the highly visible 'end-game' of a long process. I estimate that for every mortgagee sale that actually gets advertised there are at least another fifty property owners in distress but who manage to sell, refinance, or come to some arrangement under pressure before the hammer falls.
So let's discuss the basics of what really happens before and after the mortgagee sale process begins.
Advice for owners:
If you're a property owner, understand that even if you have a mortgage on a property YOU still own 100% of that property. Not one bit of it belongs to 'the bank'. The mortgagee (lender/bank etc) has lent you money using the property as security. YOU are the registered proprietor (i.e. owner) of every brick, board, nail, and blade of grass.
This means that even should you (the borrower) miss a payment or two, there is no way the lender can just knock on the door, throw you into the street and repossess your property. A house is not a car or a TV. That repossession scenario can only occur with hire purchase agreements where ownership does not pass until the final payment is made. It is just not possible under standard mortgage arrangements.
Before any action can be taken, the lender (mortgagee) must send you a properly drafted Property Law or Default Notice setting out exactly what the arrears are -- including any penalties etc -- and giving you a fixed period of time to catch up.
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Even at that point there is no need to panic and think all is finished. Indeed, it has hardly begun. If you can pay the amount due then that is the end of the matter. So long as you keep on paying what is due, nothing more can happen.
However, if you cannot pay, it is imperative that you immediately have a discussion with the bank or lender -- preferably using a consultant or lawyer -- to see if a deal can be done.
On many occasions I have had to front up to a bank on behalf of financially stressed clients and make these arrangements. In the majority of cases a deal can be worked out provided the process is started early enough.
Bear in mind that in most instances, the last thing the lender wants is to take over your home or investment. They're financiers -- they don't want to become property owners or managers if they can possibly help it. In actual fact, coming into what the Americans call 'bank-owned property' is one of their nightmares -- and is therefore your strongest argument -- so remember it well. Most lenders will be only too happy to give you a few months' relief if you can show that you will be able to catch up and carry on paying as before.
But if, after weighing up all the pros and cons, you find that continuing payments is impossible, then selling is likely to be your only option.
Again, realistically, most lenders would far rather you (as owner) organised the sale on the best terms possible rather than have them do it for you. If you succeed in selling, the lender can only be paid what you owe them at the time and nothing more. Any surplus is yours to keep. This applies to mortgagee sales as well , should it come to that.
As the growing statistics show, some people just can't stand the pressure and stress (there's no shame in that) and so allow the mortgagee sale process to continue. Once the default notice has expired, the mortgagee can put the property up for sale. This takes some time, as you can imagine, especially as by law the sale has to be done openly in public -- usually by way of auction unless the owners agree otherwise.
If you are in this unfortunate position, even then do not despair. All hope is not yet lost. During the auction period you, as owner, can still sell the property so long as you receive sufficient to clear your debt to the lender. Alternatively, if you find a generous aunt who will give/lend you the money, that may allow you to put the sale process off, perhaps permanently. As has been said, "Nothing focuses the mind like a hanging in the morning."
Always remember that you can stop the auction by paying all that you owe (or making a deal ) right up to the last minute before the fall of the hammer.
Advice for property buyers:
Meanwhile if you want to be a buyer and haunt the mortgagee sale market looking for a 'bargain', one of the first things to do is to inspect the property in preparation to bid at the upcoming auction.
One frequent problem is that you will likely find some resistance from the hapless, soon-to-be-dispossessed, home owner. A common tactic employed by irate owners is to prevent access to the property during the sale process in an attempt to frustrate the sale.
I have even heard of some very enterprising home owners using vicious guard dogs to keep potential bidders away. Would-be buyers are less likely to bid at an auction if they have been unable to inspect the interior. (This is of course, a highly questionable tactic and will certainly not advance the cause of the owner in their stressful relationship with the mortgagee.)
A strong pair of binoculars, a stout ladder and a zoom lens camera can be set up in the garden of a willing next door neighbour, and with patience you will probably be able to get all necessary information you need and thus beat the opposition. (Also check online for an earlier listing of the property which may include lashings of photos or even a virtual tour!)
A word of caution: Even if you are successful in buying a property at auction, you may, unfortunately, face problems in physically getting the ex-owners out of the property. Regrettable as this is for all concerned, put this down to being just another hazard in the business and allow for it in your calculations.
Last word: Mortgagee sales, while a tragedy for the owners, can be a bonanza for bargain hunters. Ironically, mortgagee sales have become so popular with the bargain hunters that prices are frequently not bargains at all. The demand for them drives the prices up!
For those of you who think that mortgagee sales are the quick path to riches, best you take a big breath before rushing in. There are often better deals available on the open market -- with far less hassle for all concerned.
Olly Newland
31 May 2008
www.ollynewland.co.nz
© 2009 Olly Newland. All rights reserved.
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