An issue many people may be facing in these tough economic times – whether caused by the COVID-19 pandemic or other factors – is falling behind on their home mortgage.
Potentially losing your home is a frightening prospect for anyone and the situation is often exacerbated by the fact an individual is facing the power and resources of the major financial institution who lent them the money to buy the house.
This article is designed to give you the basics on what happens when your mortgage is in arrears and your financial lender takes action to possess or foreclose on the property so that they can satisfy your debt to it, including your rights and obligations.
You’re in arrears on your mortgage repayments – what next?
A borrower is in arrears as soon as they miss a mortgage repayment. Other than providing a reminder notice and perhaps offering a hardship variation of repayments so that the borrower can catch up on repayments, most lenders refrain from serious action on mortgages in arrears until 90 days have passed (usually equating to three months, or three mortgage payments missed).
At any stage once a borrower is in arrears, a lender may issue a default notice allowing the borrower 30 days to fix the default by making the missed repayments, or applying for a hardship variation. If the borrower takes no action within this time period, the lender has the right to seize and sell the mortgaged property in order to recover the whole debt.
The next steps will see the lender serve a statement of claim or summons on the borrower for the arrears, and/or the whole debt, and/or the possession of your home. You then have a set period to respond by filing a defence or lodging a complaint with the Australian Financial Complaints Authority (AFCA).
If you do not respond within the specified period, the lender receives a court judgment in its favour and may apply for a writ to take possession of the property. This is followed by a Notice to Vacate with details on when you will be evicted from the property.
Even if legal proceedings have been commenced by a lender to repossess a property, a person with a mortgage can enter into dispute resolution to try and achieve the best outcome in their circumstances, such as a good sale price for the home. This may constitute a financial hardship arrangement giving them time to sell the property. A negotiation on this basis may involve providing evidence to the lender that the home is on the market, such as a contract with a real estate agent, a marketing plan and ‘for sale’ ads for the home.
After a court judgment about repossession, the dispute resolution process is only available in very limited circumstances and expert legal advice should be sought.
The important difference between repossession and foreclosure
Many people are confused by the difference between repossession and foreclosure. While foreclosure is quite common in places like the United States, repossession is more common in Australia.
This is because foreclosure involves a court proceeding in which the lender applies to have the borrower removed as the title-holder of the property and itself substituted as the owner. With repossession, the lender obtains a court order to take over the property in order to sell it, but the title remains with the borrower.
Because foreclosure can be a lengthy and costly process, repossession of a property where the owner is in arrears is more common, particularly in Australia.
In order to repossess the property in NSW, the lender needs to obtain an order from the Supreme Court. If your property is tenanted, the tenant must be notified, however the court can still make the repossession order even though the tenant did not know about the proceedings.
Supreme Court orders for possession are enforced by the NSW Sheriff’s Office, who will serve the home owner or the tenant with a notice giving the tenant at least 30 days to vacate the property. If you do not move out within this period, the Sheriff can remove you from the property.
What are your options once the property is repossessed or foreclosed?
If your property is repossessed by the lender, it is possible to apply for the judgment to be set aside in some circumstances, provided you can provide a good reason for not stating a defence earlier and you have a cross-claim against the lender. The guidance of legal representatives with experience in mortgagee repossession is vital here.
You can also seek a stay of enforcement of the court order in order to gain more time to sell the house, refinance, or find alternative accommodation. It may even be possible to negotiate a hardship variation with the lender if you’re granted a stay, which are generally only granted for short periods.
Property sale and the place of mortgage insurance
The lender has certain obligations to the property owner in selling the repossessed property.
Specifically it must:
- take reasonable steps to sell the property at market value;
- act in good faith;
- not recklessly sacrifice the interests of the title-holder.
While the lender must account for the sale of the property, it does not need to keep the title-holder informed about the progress of the sale, nor does it have an obligation to improve the property for sale. It may also charge you for its reasonable costs in taking possession of the home and the sale process. These costs can be challenged if they appear unreasonable.
After sale, any money in excess of the loan amount will be forwarded to you as the title-holder. But if the sale of the property results in a shortfall on the loan amount, you are still liable to the lender for the amount owed, including interest, costs and fees.
If you took out mortgage insurance with the lender when the home loan was negotiated, the insurer will pay this shortfall to the lender but also seek reimbursement from you as the policy-holder. Without insurance, you will be pursued by the lender for the outstanding amount on the loan.
In this situation you may need to apply for a release from the debt on compassionate grounds or by citing long-term financial hardship. A repayment plan or even filing for bankruptcy may be the most sensible options thereafter.
Seek expert legal advice
In real life, the steps outlined above are terrifying and stressful. For most people their home is likely their only major asset. To lose it is devastating.
At Felicio Law Firm we have years of experience helping people facing repossession or foreclosure when they fall behind on the mortgage. We can guide you through by providing realistic, workable solutions designed to achieve the best possible outcome in your situation.
Contact us today for an initial appointment on (02) 4365 4249.