Mortgage shortfalls

If you have just received a payment demand for a property that was repossessed, you need to know what this means and how to deal with the situation. If a lender has repossessed a property, or you have handed back the keys to a property, the full extent of your liabilities (how much you owe) often remains unclear until the property is sold. Until the property is sold you still have to pay the monthly mortgage repayment (including capital and interest), as well as the cost of repairs, maintenance and insurance.

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The lender has a “duty of care” to you to obtain the best possible price for the property and to keep any potential loss on their part to a minimum. This may include renting the property out to obtain some form of income, which would be offset against what you owe.

Once the property has been sold the lender will take what is owed to them, plus any costs for solicitors or estate agents. Having done this they will then repay any other lenders who have loans secured on the property. In many cases, there is not enough money to pay everything. The difference is known as a mortgage shortfall and you may be liable for this amount.

Examples of mortgage shortfall

  • Property Value (Current Market Estimate) – £100,000
  • Property Sold at Auction for – £85,000
  • Amount Outstanding on Mortgage – £80,000
  • Fees to solicitor and estate agent – £3,000
  • Secured Loan on Property – £15,000

This would leave a shortfall of £13,000 (payable to the secured loan company). The lender has powers to sue for the difference and can apply for enforcement of a judgment granted at the time of the possession order.

The first thing you need to establish is the length of time which has elapsed before the demand for payment of a shortfall is made. Where the shortfall includes an amount for the capital element of the mortgage i.e secured element, and they usually do, then the lender has up to 12 years to pursue their claim.

Where the money owed is not secured i.e. for interest payments owed, then the time limit is six years (this is part of the Limitations Act). In practice, although most lenders have up to 12 years to contact you and ask for payment, most will do so within the first six years.

Many lenders have recently agreed to a policy of not taking further action after the first six years. It is important to establish when the time limit runs from. This can be either the date when the money was first owed this is the time when the lender could have taken action to recover the debt and is likely to be much earlier than the date of repossession; perhaps when you were first in arrears with the mortgage. Or the last time any payment no matter how small was made.

Be careful – this starts the time limit over again. Or the last time you acknowledged that you owed the debt. This usually has to be in some form of writing from you. Any offer to pay off some of the debt would count as an acknowledgement

Check

How long is it since the time limit period started. If you think it is more than 12 years be very careful about acknowledging that you owe the money to the lender. You may no longer be liable. If you are satisfied that you owe the money and the lender has contacted you within the correct time limit, then there are several ways you may be able to come to an agreement.

Make a pro-rata agreement – contact the lender, explain your circumstances and make them a reasonable offer of repayment on a monthly basis. Offer a lump sum in full and final settlement. If lenders think this is a reasonable amount and that they are unlikely to receive any more by pursuing the matter further, i.e if you have no assets etc then they are often willing to consider a one off payment as an end to the matter. You must ensure that the lender has accepted this amount in “full and final settlement”.

Always try to obtain this in writing. If your circumstances are particularly extreme and there is no chance that they will improve, some lenders may also consider writing off the loan completely. Contact them and explain. In some cases bankruptcy may be the only option, if the debt is more than £5,000.

You could make yourself bankrupt and after the period of the bankruptcy (now only 12 months) the debt would be written off. However this is not something to be taken lightly and you should always seek further advice before considering this route. A lender is unlikely to make you bankrupt unless they think you have assets which would make it worthwhile.

Other points to note

Mortgage Indemnity Guarantee Policies
Many people have paid for one of these policies as a one off payment when they originally took out the loan. The policy is intended for the protection of the lender and they may be able to claim part of any shortfall from the insurer. However, the insurance company would then have the right to recover this payment from yourself.

Possessions Register
The possessions register is held by credit reference agencies. If you have had a property repossessed your name will appear on the register for a period of six years. Lenders will refer to this list when someone applies to them for a loan. For any other information on this subject contact Payplan. Because of lack of communication or prior arrangements which have failed, the lender may already have started possession action in the county court in order to sell the property and recover their money.

This would result in a hearing and it is important to attend. The Courts regard the giving of an outright Possession Order as an extreme measure and will do so only if there seems to be no hope that the borrower can rescue the situation. A likely outcome of an application for Possession by the lender is that the Court will issue a “Suspended Possession Order”.

The right to take possession will be granted but suspended on terms that the borrower pays the contractual monthly mortgage payment plus an amount to reduce the arrears. Courts can often be more lenient than lenders in the time allowed to repay the arrears and can allow longer periods, in certain cases this could be to the remaining term of the mortgage. Failure to conform to the terms of the suspended possession order will enable the lender to apply for an “Eviction Warrant” without further Court action.

When an eviction Warrant is in force the Court Bailiffs will set a date when they will go round to the property to ensure that it has been vacated. At any time before the Eviction date an application can be made to the Court to suspend action on the grounds that the borrowers can retrieve the situation. They will have to convince a Judge of this.


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