Mortgagee Sale What Happens when a borrower is in default

What is a mortgagee sale?

A Mortgagee sale is a transaction that results when a Mortgagee (“Lender”) exercises its right to sell a property which it has a security interest in. This situation arises when a Mortgagor (“Borrower”) is unable to meet its repayment obligations, so the Lender (usually a Bank) sells the property in an attempt to recover the loan.  Given the increasing interest rates, this is sadly a situation we are likely to see more of in the year ahead.

What is the process when a Borrower is in default?

A Lender is unable to simply sell a property in which it has a security interest in, there is a process which they must follow. If a Borrower begins to default on its payments, in most cases the Lender will contact the Borrower and initiate discussions around the Borrower’s financial position to establish whether the Borrower can afford to enter into a repayment programme to rectify the situation.

If the Borrower and the Lender are unable reach an agreement regarding the defaults, the Lender may look to issue a ‘Letter of Demand’. This sets out what the Lender requires the Borrower to repay and the timeframe for repayment. In this repayment figure, the Lender is entitled to include any costs associated with having to recover the monies owed. Such costs could include the Lender’s legal fees, real estate commission and advertising as well as valuation fees. While the issue of such letter signifies the initiation of the formal debt collection process, the Borrower still has time and the ability at this point to come up with a payment plan that is acceptable to the Lender.

If the Borrower further fails to meet the requirements specified in the Letter of Demand, the Lender can issue a notice under section 119 of the Property Law Act 2007 (“PLA Notice”). A PLA Notice will provide the Borrower with at least 20 working days from the date the notice is served to pay the amount specified in the notice. At this point, a Borrower may still engage in discussions around a payment plan, but the Lender does not have to oblige. Failure to pay the amount specified in the PLA Notice by the specified date will give the Lender the ability to recover all monies secured by the mortgage.

What should you do if you are a Borrower in default?

If the Lender opts to sell the property, it is in the best interest of the Borrower to cooperate with all parties involved such as lawyers, banks, and real estate agents, in order to achieve the highest possible price for the property. This is because the Borrower will remain personally liable for any shortfall if the property sells for less than what is owed to the Lender as well as any costs associated with the sale of the property. A Borrower also needs to be aware that if a fixed-rate loan is repaid early due to a mortgagee sale, the Borrower may also be liable for any early repayment fees.

As a Borrower, don’t be afraid to reach out to your Lender if you are struggling financially and preferably before you default. A strong line of communication between Borrower and Lender will result in the best outcome for all parties involved.  Many Banks include an ‘Unforeseen Hardship’ provision in their loan agreement which can help accommodate for any tough financial circumstances you may find yourself in. Often options that can be considered include extending the term of your loan to reduce payments, i.e. 20 years to 30 years and/or postponing payments for a specific period.

Latest Update: 1 Feb 2023