What is a mortgagee-in-possession sale?
When it comes to home loans, the lender is technically referred to as the ‘mortgagee’, and the borrower, the ‘mortgagor’. So, a mortgagee-in-possession sale involves a lender taking possession of a home and selling it, with the intention of using the proceeds to pay off or reduce the debt owed on the property.
Finding yourself unable to repay your home loan can be deeply distressing. And it may only take an unforeseen event such as an accident, illness, relationship breakdown or losing your job to find yourself in a situation where it’s a struggle to keep up your loan repayments.
Because banks and other lenders are in the business of arranging loans, not selling homes, mortgagee-in-possession sales generally only occur when a lender feels every other option has been exhausted. In fact, lenders have a number of steps and processes they can go through before taking possession of your home.
If you’re having a hard time making your loan repayments, it might be worth understanding how a mortgagee-in-possession sale works, and the steps you can take which may help you to hold onto your home.
I’m concerned I could lose my house. What can I do?
If you’re facing an uphill battle managing your home loan, it’s important to get in touch with your lender at an early stage. Don’t simply skip a repayment (also known as a default) and hope that everything will work out – this could have a serious impact on your credit record and could ultimately lead to you losing your home.
Instead, by talking to your lender you may be able to negotiate a hardship variation to your home loan agreement. Money watchdog, the Australian Securities & Investments Commission (ASIC), says this means a change to the terms of your loan based on financial hardship. This means your lender can provide temporary relief that helps you get back on track with your loan while protecting your credit score.
Maximum loan sizes can apply to hardship variations (called the ‘hardship threshold’), ASIC states, though this will depend on when you originally took out your home loan. For example, if you took out your home loan from March 2013 onwards, you can apply for a hardship variation whatever the value of your loan. If your home loan was organised between July 2010 and February 2013, you can apply for a hardship variation if you borrowed $500,000 or less. Differing amounts apply across different states if your loan dates from before July 2010.
To start the ball rolling with a hardship variation, you can contact your lender by phone or in writing to discuss your situation and to learn what information and proof you may need to support your application.
Once you’ve made a request for a hardship variation, lenders are required by law to respond within 21 days of receiving your application, ASIC states. The 21-day period only starts after you’ve given the lender sufficient information to make a decision. If your lender refuses your hardship application, they must give reasons for this. If you’re not happy with their response, you can complain directly to the lender or to the Australian Financial Complaints Authority (AFCA).
ASIC’s website, Moneysmart, also suggests that if you believe your financial conditions are unlikely to improve, it might also be a good idea to consider the pros and cons of selling your home or renting it out to help pay off the debt. It suggests discussing your situation with a financial counsellor and seeking legal advice. It also states that if you have income protection insurance, either as a stand-alone product or as part of your super, this may provide assistance if the default is due to an accident, sickness or other event covered by the policy. Check with your insurer or super fund.
What happens if I miss a home loan repayment?
If you miss a loan repayment, your lender will likely contact you either by phone, SMS, email or letter. You may also be charged a late payment fee, and your lender may choose to send you a letter of demand. The NSW Government notes that a lender may choose to send you a default notice at this point as well (more detail on this below), but will usually wait until your payment is at least 90 days overdue before doing so.
What is a letter of demand?
A letter of demand is when a lender sends you a formal letter asking you to rectify a late loan repayment as soon as possible. In the context of a home loan, this may occur after you have missed the deadline for a repayment but before the lender sends you an official default notice. The letter may list a date by which you must pay the money you owe and any steps the lender wants you take. At that point, you may need to explain to the lender how you plan to pay off the full debt – for example, by refinancing the loan, restructuring your payments, or selling your home.
If you’ve missed a home loan repayment, then regardless of whether or not your lender has sent you a letter of demand, it’s important to make the overdue repayment as soon as you can afford to, and to consider contacting both your lender and a qualified financial adviser, financial counsellor or lawyer to discuss your options.
What is an official default notice?
If you fail to make a payment or discuss your options with the lender, you could receive an official default notice. This will typically occur 90 days or so after your repayment was originally due, although it could potentially come as soon as the day your repayment becomes overdue. This notice is required to give you at least 30 days to pay the missed repayments.
However, according to the National Debt Helpline, neither a letter of demand nor a default notice is a court document. Court documents (discussed below) include a ‘statement of claim’ or a summons.
The steps of a mortgage-in-possession sale
ASIC states that there is a set list of steps a lender must take before entering into a mortgagee-in-possession sale.
1. Default notice
What is a default notice?
A default notice is a letter from your lender which states the length of time you have to make a missed payment (typically 30 days).
What do you do if you receive a default notice?
If you receive a default notice, do not ignore it. The Moneysmart website recommends talking to your lender or seeking free legal advice straight away. This could involve contacting your relevant state or territory Legal Aid service, a local community legal centre or the Financial Rights Legal Centre.
If you can’t reach an agreement with your bank, or you choose to do nothing by the time your default notice expires, there are two options available to your lender, depending on if your property is vacant.
- If you (or someone else) lives in the property: your lender may choose to apply for a court order to take possession of your home and sell it.
- If the property is vacant or it’s land: it could be possible that the lender takes ‘vacant possession’ of the property, which could mean you are locked out and the lender is able to sell it without going to court, according to the Financial Rights Legal Centre.
2. Court proceedings
Before you go to court
The National Debt Helpline states that if a lender decides to take the matter to court, you will generally ‘be served’ a ‘statement of claim’ or summons. (To ‘be served’ means that documents are delivered to you and your identity is verified by the person who gives them to you.) The document will have details in it about:
- how much is owing, and who the lender believes is responsible for the debt
- what type of outcome the lender is hoping the court will grant them. This could be, for example, that you pay the outstanding amount and/or the lender is given possession of the property, which would be when a mortgagee-in-possession sale process kicks in.
- a strict deadline for you to respond to the claim (which means letting the court know what your plan is).
- when the matter will be heard by the court (the time that the claim is read aloud in a courtroom in front of a judge, who will make the decision about what happens next). Different states and territories have different rules about in which court the claim may be heard.
The National Debt Helpline, ASIC and other official bodies strongly recommend that people served with court documents such as a statement of claim or summons seek suitably qualified legal advice as soon as possible after receiving them. There could be other legal avenues open to you, depending on your circumstances, which may help in efforts to keep your home.
If your matter goes before a court, a judge or magistrate will hear both sides of the case and then make a decision. If the court rules that the lender can take possession of your home, then the lender can start the mortgagee-in-possession sale process.
The National Debt Helpline states that if a court rules in the lender’s favour, it is likely that you will be given notice that you will be evicted from the home, with a date that you have to move out. “You will be given notice and a sheriff (an officer of the court) will come to your home and change the locks,” it states. If it is your investment property, and you have tenants, the lender could also decide to evict your tenants. Typically, tenants would have 30 days after being notified to move out.
4. Mortgagee-in-possession sale
If a lender is given ownership of your home, they can repossess it, which means they can sell it. Strict rules apply around mortgagee-in-possession sales, though this may be cold comfort to any homeowner in this position. Once you’ve moved out, the lender is then obliged by law to get the best possible price for your home, but as the mortgagor, you have no say in how this is achieved.
Once the sale is complete, the lender is entitled to pocket the amount owing on your home loan (or as much of it as they were able to get from selling the home), as well as any reasonable costs involved in taking possession of, maintaining and selling the property. If there is any money left over, your lender is required to pay the surplus to you.
Do buyers always get a bargain at mortgagee-in-possession sales?
It is common for people to assume that mortgagee-in-possession sales mean buyers can swoop in and get a bargain, perhaps believing that lenders in such situations are desperate to sell. However, that’s not always the case. As we’ve noted, lenders are obliged to try to sell your home for the best possible price, or at least for its market value.
If you’re having a hard time making home loan repayments, get in touch with your lender at an early stage, ideally before you miss any home loan repayments. This can give you a greater range of options with your lender while helping to protect your credit record. Opting to sell your home yourself can be a difficult decision but it could also potentially spell the end of considerable financial stress. It could also see you walk away with more money than if you wait for a mortgagee-in-possession sale, which is likely to see a good chunk of the sale proceeds go to the lender as compensation for its costs.
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