UK Home Repossessions and Resultant Shortfall Debt

Home repossessions are still at high levels in the UK. Those who fall into arrears on their mortgage by missing a payment need to be in contact with the lender and try to sort out a solution to the problem. Those who simply ignore the collections calls and the lender can find themselves very quickly facing repossession if they don’t work with the lender.

After 60 days of none payment UK mortgage lenders can apply to obtain a county court judgement, necessary before they can legally repossess a house and evict the home owners. However once a judge has ruled in favour of the lender it is usual that the bailiffs will contact the homeowner with a specific date to leave the property which can be any time from around 28 days of the judgement being issued.

Mortgage lenders are bound by a legal duty as determined by the FSA mortgage rules to obtain “the best price that might reasonably be paid” for the repossessed property. They are obliged to sell the property either by auction or through an estate agent. However the mortgage lenders prime purpose is to recover the debt outstanding and properties are often sold way under value of market prices. In fact many are purchased at auctions only to be sold again for a higher price in a second auction.

The lender will continue to add interest to the mortgage debt until the property is sold, and other costs associated with the sale of the property will be added to the debt. If after all costs there is a surplus left this must be returned to the dispossessed home owner, but in over 20% of cases there is a mortgage debt shortfall which the home owner remains liable for. Losses will be offset for homeowners who were paying for a mortgage indemnity guarantee.

Mortgage shortfall debt can include any capital still owed, bills for essential repairs needed to sell the property, auctioneers fees and other fees related to the sale. Interest will continue to accrue on this shortfall debt. The lender is obliged to contact the borrower to advise of the amount of the shortfall but most choose not to pursue it at this point, being aware that the evicted homeowner is not on top of their finances.

Mortgage lenders do have the right though to pursue the mortgage debt shortfall for up to twelve years.  They must make an effort to contact the debtor within 6 years of the last payment received to advise that they will be initiating collections at some point. If the debtor is traced and notified in writing but chooses to ignore it he is deemed to have been advised.

The longer a lender waits to pursue the shortfall debt the higher the debt will be as it will have been accruing interest all along. The debtor is also more likely to be financially able to pay the shortfall if a long time period has transpired. Thus many who leave their repossessed homes should be aware that the lender has the legal right to come after the outstanding shortfall within twelve years.

Source: FSA.