Lender Assisted Sales to Avoid Repossession
With a combination of falling house prices and rising unemployment, conditions are ripe for another sharp spike in repossessions. Only low interest rates are keeping repossessions in check at the moment but a rise of even a couple of percentage points, which is surely inevitable in order to control inflation, and a large number of families will begin to default on mortgage repayments. When they do, many will find they can’t sell their way out due to negative equity (they owe more on the property than it is worth).
Fortunately there is sometimes hope. Although a lender has a legal right to take possession proceedings if a borrower defaults on his mortgage, they do have to jump through a few hoops. This is because the Courts tend to sympathise with the “little man” over the faceless corporation and because Government recognises that repossessions are not good for the public in general. Homeless families need to be rehoused, often at cost to the public purse, and a repossessed home owner is more likely to default on his other debts. Before granted an order for possession therefore the Court will want to know that the lender has done all it reasonably can to help the borrower. One way some lenders satisfy this condition is to offer to assist the borrower is selling the property.
Advantages and Disadvantages of Lender Assisted Sales
The major advantage of a lender assisted sale is that it avoids the need for repossession. Though the home owner still has to vacate, and is still liable for any debt outstanding following the sale, it does mean repossession does not appear on the borrower’s credit history. The lender can help the home owner with finding a buyer and with arranging alternative accommodation as well as with certain up front costs of sale such as an EPC and certain legal costs.
The lender can also help with negotiations with other secured creditors who will need to remove their charges. On the down side, where there are other unsecured creditors, the negotiations can become protracted and cause lengthy delays. Ultimately the negotiations may be fruitless so that repossession happens anyway. The longer the delays, the more interest and costs will accrue. It may be more beneficial just to hand over the keys to the lender and allow them to sell under their power of sale. Also, the lender may put pressure on the home owner to accept a low sale price. It cannot itself sell for less than market value.
Properties With Other Debts Secured Against Them
The process of a lender assisted sale is fairly straightforward where there is only the assisting lender’s mortgage secured on the property, however often the borrower will have taken out additional loans to try and escape the debt trap or previously unsecured debts (credit cards, personal loans etc) on which the borrower has defaulted will have been secured by way of a court order (called a Charging Order).
Since the sale is by the borrower and not the bank, any subsequent charges are not overreached, so they either have to be repaid or the creditors have to agree to remove them notwithstanding they will only receive part payment or none at all. Generally the borrower will not have the money to repay the debts and sale proceeds will not be sufficient.
Creditors are in no way obliged to remove their interests without payment but the argument goes that if they do not, the first mortgagee will repossess, sell under its power of sale and their interests will be removed automatically anyway. In the meantime additional costs will be incurred thus placing the debtor in an even worse financial position. Nonetheless a creditor will generally require the debtor to enter into some sort of repayment arrangement before agreeing to remove its interest.
Making a Repayment Arrangement
In order to agree to a repayment plan a creditor will need to see details of the selling price of the property and any other debts secured on it which rank in priority to the creditor and details of the costs of sale. They will also want to see evidence of the debtor’s income and monthly expenditure to establish what he can afford to pay.
It is surprising how little the creditor will be prepared to accept. They will always try for the maximum possible but in the end may accept as little as £1 per month. The rationale behind this is that a relationship is maintained with the debtor. If repayment is not demanded for a number of years then under the Limitation Act, it is deemed to be “written off”. By taking even a pound a month this can be avoided and should the borrower’s financial situation improve in future they can demand a higher repayment.
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