I found this article from the NZ Herald very interesting in the representation of how a mortgagee sale eventuates and the experiences of the former homeowner.
The article cites the former owner as complaining that her agent wrongly advertised her property – specifically advertising it as a two bedroom apartment as opposed to a three and also identified it as being on a different floor than was the fact.
As to the issue of the accuracy of the advertising, I do not wish to comment, as the facts are not a part of this discussion. The key point of interest though is the exposure of the fact that in such a case (as with most such cases) the former owner has so little decision making role in the process of a mortgagee sale, although of course they hold a significant financial interest and consequential liability. In this case the former owner is proposing to sue the bank for damages as a consequence of the sale proceeds being less than the outstanding mortgage.
The reality is that in taking out a mortgage to buy a property the prospective owner is liable to the lender for the total outstanding borrowed sum throughout the term of the loan irrespective of the situation in the market. That is to say if you borrow $250,000 to buy a $300,000 property you are liable to the outstanding amount of the loan regardless of the value or sale price of the property at any time during which the lender is registered as the first mortgage on the property.
If as is often the case with a prospective mortgagee sale; circumstances tend to start when the borrower fails to meet the repayment obligations. The first situation which will probably arise is that the lender will try and communicate with the borrower to find out the circumstances of why the repayments have not been made. In most cases lenders are really keen to work with the borrower to assist them to continue to meet the repayments. It is worth noting that in most cases the lender has no desire to take over ownership of a property – they are far keener to continue to have the borrower owning the property and paying the loan – this is in the long-term interest of the lender.
If due to the specific circumstances the borrower cannot meet the repayments and the borrower cannot sell the property for whatever reason to repay the loan then the lender tends to see the only solution left open to them being a mortgagee sale.
Once the lender has instigated the legal proceedings to undertake a mortgagee sale then the borrower ceases to have influence in the outcome. So in this hypothetical example if the property had fallen in value to say $250,000 and the outstanding loan had risen to $260,00o (as a consequence of outstanding loan repayments or example) then the lender will try and sell the property as speedily and as efficiently to recover as much of the outstanding amount as possible.
In a mortgagee sale the original owner has no say in the sale price agreement – that is now the decision of the lender, as it is the lender that has taken over primary interest in the property and is seeking the most favourable outcome to secure their liability.
So again in this situation if the property is marketed (the control of which lies with the lender, not the owner) and is sold in an auction or other form of sale for say $240,000 then the property owner (now the former owner) will be liable for the shortfall. Within this calculation of shortfall must be considered the costs associated with marketing and selling the property including agent fees, as well as any other fees which the lender judges appropriate as is defined in a lending agreement.
So in this example the sale of the property is agreed between the lender and the new buyer of the property at $240,000. This sale price would have a hypothetical real estate agent fee of say 3% ($7,200 + GST) plus say $500 + GST of marketing costs (advert online or print). These costs would be judged as reasonable and have to be recovered by the lender. So the original owner of the property ends up with a liability to the lender of $20,000 (the balance between the sale price and the outstanding loan) together with a further $8,662.50.
This calculation and example are purely hypothetical it is not meant to represent a true example or to be taken as a normal situation – the example is provided purely to show what can be the true liability in taking out a loan on a property and recognizing the risks and liability that a borrowers signs up to when committing to a mortgage.
Disclaimer: This post is not intended to be taken as advice, it is provided so as to assist in understanding some of the implications of mortgages. I am not a lawyer, financial advisor or real estate agent. The comments and observations are drawn from reading and discussions on the subject matter over many years. As with any transaction of land and property, legal and financial advice from suitably qualified persons is always a wise move.
As a young kid I was one that never liked the school swimming pool, especially the deep end.
But you know what pretty soon, I think I was about 6 or 7 at the time, I worked out (quite quickly actually) that 1.6m meant just that. I was the one that had to come to terms with the fact that then I was 1.4m tall.
Life’s like that……
Good example Alistair. I’ve always wondered what the average FHB is able to pony up for a deposit on their first home. If I assumed 80K, then our punters have lost 35% (28K/80K) of their savings plus any debt servicing costs over the term of the mortgage until forced sale and associated costs with finding a new home. Oh, you could probably assume an opportunity cost for interest on savings as well.