Auction

(f) Properties in possession may be sold via auction. These properties are reviewed relative to sales experience and the length of time on the market. There are occasions when properties may be sold by auction because either the auction is specifically targeted at the type of property in question, eg a period type of residence, or the property will generally appeal to the speculator market because of its condition. Such properties are referred to an appropriate auctioneer. A catalogue would be issued and the properties are available for viewing. A reserve price is usually based on information relating to the number of viewings and general level of interest. A reserve price is set several days before the auction following consultation with a surveyor on the valuation of the property.

Proceeds of Sale

Following the sale of a property in possession, the proceeds of sale will be applied in the following way. First the lender will use the funds to meet the costs incurred in selling the property and to repay the outstanding mortgage including interest. If there are subsequent loans secured against the property any surplus will also be applied to repay these loans prior to any amounts being paid to the borrower. If there are insufficient proceeds of sale to repay the mortgage, the borrower will remain liable to repay any outstanding debt.

Indemnity Insurance

Mortgage indemnity is insurance which a lender may take out for its protection where a high percentage loan is made. This insurance policy covers the situation where, at some future stage, the lender has to repossess the property and sell it and the lender suffers a loss. For example, if the property is sold for less than the amount of the borrower's outstanding mortgage (including accrued interest) the lender can claim on the mortgage indemnity to recover some of its loss. The basic security for the mortgage is the property. The mortgage indemnity, therefore, acts as a form of additional security for the lender. It provides no protection to the borrower who gains no benefit, other than a high percentage loan advance than would otherwise have been granted.

In most cases, the mortgage indemnity will cover the lender only for part of its loss and, in addition, once an insurer has paid a mortgage indemnity claim, it gains the right of subrogation; this means that the insurer can reclaim from the borrower any money it has paid to the lender under the mortgage indemnity claim. Either the lender or its insurer may take legal action against the borrower to recover the shortfall if the borrower does not repay it voluntarily, although any action is taken in the name of the lender. In most cases, the lender contacts the borrower to recover the shortfall on behalf of itself and its insurer. This does not mean that the lender recovers the loss twice; any money paid by the insurer which is collected from the borrower is then passed back to the insurer.

Loss Recovery Procedures

Following the sale of a property, the borrower remains liable to repay any shortfall which might arise between the amount of the outstanding mortgage and the sale price obtained. When a borrower purchases a property with mortgage finance, the borrower enters into a personal covenant with the lender to repay the mortgage in full. When two or more borrowers purchase a property, the lender will treat them as jointly and severally liable for the entire amount borrowed, irrespective of how much each borrower actually contributed to the mortgage repayments on a monthly basis. The lender has 12 years (5 Years in Scotland ) in which to seek recovery of the shortfall via the courts. Direct recovery could extend beyond that point.

After the sale of a property, the borrower should keep their lender advised of forwarding addresses so that contact can made regarding the sale and repayment of any shortfall. The lender will notify the borrower either by letter or by telephone as soon as practicably possible of the amount of the shortfall. If the borrower has not provided a forwarding address, the lender will try to locate and make contact with the former borrower.

The lender and the borrower will generally agree a repayment arrangement taking into account the borrower's current income and expenditure. In the majority of cases, payment arrangements are made without the need for court proceedings; this enables both parties to review the arrangement as and when necessary should circumstances change. If the borrower is unwilling to enter into an acceptable voluntary arrangement, the lender may use other enforcement remedies via the courts to seek repayment. A record of the repayment arrangement might be held by a credit reference agency and the borrower will need to advise any future lender of the shortfall debt and repayment arrangement.

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Further information can be sourced direct from the Council of Mortgage Lenders.

Call: CML on 020 7440 2255, or visit their website at www.cml.org.uk