A mortgagee-in-possession sale involves your lender taking possession of your home to sell it, with the intention of paying out or reducing the debt you owe on the property.
Sometimes all it takes is an unforeseen event such as an accident, illness or losing your job to find yourself in a situation where you can no longer meet your loan repayments.
Lenders have a number of steps and processes at their disposal, including alerting you about your missed repayments, before taking possession of your home.
I’m concerned I could lose my house. What can I do?
If you find yourself struggling to make your mortgage repayments, you may be able to apply for a hardship variation to your home loan agreement.
A financial hardship variation is designed to provide temporary relief by changing the terms of your loan to help you get back on track with your mortgage repayments and to keep your credit score/rating from being impacted.
Depending on when you took out your home loan, there are a number of different maximum loan sizes that may be required to access a hardship variation as listed by ASIC’s MoneySmart website.
However, 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 for a hardship variation.
Lenders are required by the National Credit Code to respond in writing within 21 days of receiving a hardship variation application. However, the 21-day period only starts after the borrower has given the lender sufficient information to make a decision.
To understand your rights and the process, you may find it useful to obtain legal advice, which could involve contacting your relevant state or territory Legal Aid service, or a local community legal centre.
ASIC provides a list on its MoneySmart website of some of the agencies around Australia that may be able to offer free legal advice.
The steps lenders may take before taking possession of your home
If you miss a repayment, your lender may contact you, typically by sending you a letter.
The sooner you act, the more likely you and your lender can make another repayment arrangement.
If you fail to correct the situation or to discuss your options with your lender, you could receive an official default notice. By law, the default notice must give you at least 30 days to pay the missed repayments.
So, what should you do if you receive a default notice?
The Australian Securities & Investments Commission (ASIC) advises on its MoneySmart website to do one of the following:
- pay the amount owed as well as any other repayments that fall due within the 30-day period,
- ask your lender to reduce or delay your repayments, or
- choose to put your house up for sale if your financial situation is unlikely to get any better.
If you fail to take any steps to rectify or improve your situation before the notice period expires, then “your whole loan will be become due and payable,” ASIC says.
Your lender may get a court order to take possession of your home to sell it, otherwise known as a mortgagee-in-possession sale, if you fail to do anything by the time your default notice expires.
ASIC also says that at that point, you will only have a short period of time in which to act by either filing a defence, going to court or lodging a dispute with the Australian Financial Complaints Authority (AFCA). AFCA replaced the Financial Ombudsman Service Australia (FOS) and the Credit and Investments Ombudsman (CIO) from November, 2018.
The regulator also says that if your property is rented, vacant or undeveloped land, the lender can take possession without going to court.
The lender can send you a letter telling you to move out after it has obtained a court order enabling it to take possession of your home.
At this point, the lender can ask for a bailiff, also known as a sheriff, to evict you and to change the locks of your home.
Please note that it is important to seek legal advice to understand the process and your options.
How does the sale process work?
Typically, the lender will put the property up for auction. However, the mortgagee is likely to take care in deciding the best way to sell your home and this will depend on the current market conditions.
If auction clearance rates are low, the lender may decide a sale by private treaty would lead to a better outcome.
The Financial Ombudsman Service Australia (FOS) states on its website that lenders in possession of a borrower’s property “must take reasonable care to sell the property for either its market value or the best possible price.”
If you feel the lender has not taken reasonable care, you can lodge a complaint with AFCA.
When investigating such a complaint, the FOS looks at a number of factors including the valuation of the property, how it was marketed, the condition of the home, the sale price and where the proceeds of the sale went.
If the FOS rules that the lender did not take reasonable care, it may award the borrower compensation, which is usually the difference between the sale price and the market value of the property sold.
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.
Because lenders are obligated to take reasonable care to sell your home for the best possible price or at market value, a mortgagee-in-possession sale doesn’t necessarily guarantee buyers a rock bottom price.
Like other home sales, the price it goes for largely depends on the timing of the sale. For example, if it is on the market during a housing boom, then it may not matter that it is a mortgagee-in-possession sale as buyer demand is high, which generally pushes up home values.
Lenders may also avoid listing the property as a mortgagee-in-possession sale or flagging the sale as urgent.
If potential buyers are aware that the property is a mortgagee-in-possession sale, they may assume that the bank wants to sell the property as soon as possible and would therefore be happy to take the first offer.
They may also assume that they can buy the house for considerably less than its market value, when this may not necessarily be the case.
It is important to note that the borrower can seek compensation if they feel the lender has not sold their house for a fair price.
In summary, there are steps borrowers and lenders can take before a home is repossessed.
If repossession happens, lenders may choose to not advertise the fact that it’s a mortgagee-in-possession sale, however even if they do, there are other market forces, such as a housing boom or housing downturn, that may impact the sale.
While mortgagee-in-possession sales may present an opportunity for buyers, lenders do have an obligation to sell the house for a fair price.