Avoiding Mortgagee Sale: What You Need to Know

Avoiding Mortgagee Sale: What You Need to Know

Financial pressure is common in many households in the current climate. With the recent OCR increase and 60% of New Zealand homeowners looking at their home loan interest rates doubling this year, it is unfortunate but likely that we will see an increase in mortgagee sales.

What is a mortgagee sale?

A mortgagee sale is a stressful and daunting experience for homeowners. It occurs when a bank or other Lender sells a property to recover the outstanding debt owed by the borrower. A mortgagee sale does not happen overnight however, and before pursuing a forced sale a Lender must consider firstly whether the loan is a consumer credit contract under the Consumer Credit Contracts and Consumer Finance Act 2003 (CCCFA) and secondly whether the Lender has taken all steps necessary before they are able to call a mortgagee sale.

The CCCFA specifies what kind of loan contract is considered to be a consumer credit contract. Loan agreements are a consumer credit contract if the borrower is a private individual entering into the agreement for domestic purposes and has to pay interest. Additionally, the Lender will need to be in the business of lending money.

If a loan contract is a consumer credit contract, then the Lender must comply with stricter "responsible creditor" requirements, and there will be more compliance requirements in the mortgagee sale process. It is important to note that borrowing by trustees of a trust and in most commercial lending situations will not be captured under the CCCFA.

What are the Requirements for a Mortgagee Sale?

Before a Lender can obtain the power to exercise a mortgagee sale it is essential that there must first have been a default by the borrower under the loan agreement. While the most obvious default would be where the borrower has failed to repay their loan repayment it can also include matters such as failure to keep the property insured, failure to keep you rates up to date and/or failure to keep the property well maintained so to avoid it falling into disrepute.

Once a default is established, in most cases the Lender will first issue a notice to the borrower indicating the type of default, the amounts that need to be paid and the time frame in which a borrower must correct the default.

If the default is not corrected after the demand notice is issued, the next step for the Lender is to issue the Property Law Act 2007 (PLA) notification. Section 120(1)(c) of the PLA provides the requirements and the form of the notice that must be to be given before a Lender can obtain a power to sell the mortgaged land.

The PLA also requires borrowers to be given a statutory notice period specifying the time frame that the borrower must remedy the breach in. The time frame outlined in the PLA states that the notice period must not be less than 20 working days. This has been a contentious legal issue in the past and ensuring the time frames have been met correctly is extremely important.

Provided the Lender has complied with the requirements under the PLA and served the notice in the correct form then ultimately if the default remains unremedied within the specified time frame then the Lender is entitled to:

1. Enter into possession ofthe mortgaged land;
2. Manage land or demand and recover income from the mortgaged land (collect rent from tenants); and
3. Obtain the power to sell the mortgaged land.

The Lender does not become the owner of the property but is entitles to enforce its rights in order to recover the loan amount, overdue arrears, interest, and related sale and legal costs.

Assuming all the conditions outlined above are met, the property can then be listed for sale as a mortgagee sale. The method of sale used must be the most appropriate for the property market and usually an auction is the chosen option, although sale by Tender, and Negotiation are also options commonly used.

Section 176 of the Property Law Act 2007 stipulates that the Lender's actions must be for a legitimate purpose and that the Lender must obtain the best sale price under reasonable circumstances. During the sale process, it is recommended to use an experienced appraiser to estimate the sale value of the property and a reputable sales agent to advertise and market the property, so that the property can be given sufficient market promotion and any sale deemed to be a fair arm’s length market transaction.

Avoiding a Mortgagee Sale

If you are currently suffering from financial hardship or are not able to meet your mortgage payments a mortgagee sale should be avoided where possible.

There are some steps that homeowners can take to avoid mortgagee sales.

1. Communicate with Your Lender

The first step is to communicate with your Lender. If you are experiencing financial difficulties and are unable to make your mortgage payments, contact your Lender as soon as possible. Most Lenders are willing to work with homeowners to find a solution and avoid a mortgagee sale. They may be able to offer you a payment plan, a temporary reduction in your payments or other options to help you get back on track.

2. Seek Professional Advice

It is important to seek professional advice from a financial advisor or debt counsellor. They can help you understand your financial situation and provide advice on how to manage your debt. They may also be able to negotiate with your Lender on your behalf to find a solution that works for you.

3. Consider Refinancing

If you have equity in your property, you may be able to refinance your mortgage to reduce your payments and avoid a mortgagee sale. Refinancing involves taking out a new mortgage with a different Lender or renegotiating the terms of your existing mortgage with your current Lender. This can help you to reduce your payments, consolidate your debt or access additional funds to pay off your debt.

4. Sell Your Property

If you are unable to make your mortgage payments and have exhausted all other options, selling your property may be the best solution. Selling your property can help you to pay off your debt and avoid a mortgagee sale. It is important to work with a real estate agent who can help you to sell your property quickly and for the best price.

Avoiding a mortgagee sale requires early intervention and proactive measures. By communicating with your Lender, seeking professional advice, considering refinancing and selling your property, you can avoid a mortgagee sale and find a solution that works for you. If you are facing financial difficulties and are unable to make your mortgage payments, contact DTI Lawyers specialist property lawyer Hayley Willers who can provide you with expert advice and support.