MORTGAGE SHORTFALL DEBT
I am convinced that my purpose in life is to help people. It’s pretty much the ethos behind Acquit Debt Recovery – for the most part we help companies that have not been paid and as a result their cash-flow is sticky! It is what we do – the fact that we get paid on our results is a bonus of course!
This said, we were recently contacted by a lovely lady – lets call her Jane as in doe although that’s not her real name of course. She told us a sad story about having to hand back the keys to her old property, and after the property had been sold at an undervalue, the Estate Agents had taken their cut what had been a £30,000 loan turned into a debt of over £70,000.00.
She came to us for help. It isn’t our thing of course, but we know people who are now in the process of helping Jane out of a tricky situation.
Anyway, why am I blogging about it …… I thought it would be helpful to explain just what a mortgage shortfall – I have taken a lot of this info from the Bankruptcy & Insolvency website – obviously it is for information and to point you in the right direction – it is not a substitute for taking your own independent legal advice.
What is a mortgage shortfall?
Many people find themselves being asked to pay large sums by their mortgage lender after they have been repossessed or have handed in the keys on their house. Often people think that once they have left the house their liability ends. However, this is not the case if the house is sold for less than the outstanding mortgage. The debt that remains is usually referred to as a mortgage shortfall. This also include s the monthly instalments and interest that has been added on to the debt until the house is sold, plus legal and estate agent’s costs. You can still be asked to pay back a shortfall a long time after you left the house as mortgage lenders may try to pursue a shortfall debt up to twelve years afterwards.
How long will this hang over me?
Lenders think that mortgages can be pursued for 12 years under the Limitations Act. Most other debts can only be pursued for 6 years. The time period starts running from the last time the lender contacted you and you agreed that you owed the money (“acknowledged” the debt ) or you made a payment to the lender (or someone who owned the house jointly with you made a payment).
- Following the cases of Paragon v Banks and Halifax v Grant, The Court of Appeal has made a decision. They say the limitation period for mortgage lenders trying to recover mortgage shortfall debts is 12 years (Section 20 of the Limitation Act 1980).
- This means the lender has 12 years from the last time a payment was made on the account or you acknowledged the debt to start action to recover the capital owed on the mortgage. It appears that the lender has 6 years to start action to recover interest added to the debt.
- This decision means that you will not be able to argue that lenders should have started action within 6 years. You may need to contact us again for further advice on your situation. Phone the Bankruptcy & Insolvency advice line for advice 0800 074 6918.
- From 31 st October 2004 the Financial Services Authority (FSA) has taken over the regulation of mortgage lending and problems with existing mortgages. The Mortgage Conduct of Business Rules say that if the lender decides to recover the mortgage shortfall debt they must make sure you are told about this. This must happen within six years of the date of sale. If the lender does not do this then you can complain to The Financial Ombudsman. The Council of Mortgage Lenders (CML) also follows this policy. See the section below.
Council of Mortgage Lenders Policy
Mortgage lenders who are members of the Council of Mortgage Lenders (CML) have not yet changed their policy on recovering mortgage shortfalls in light of The Court of Appeal decisions above. You can still argue the policy to your lender as a point of good practice.
From 11 February 2000 the policy is as follows:
The CML says anyone whose property was repossessed and sold and who has not been contacted by their lender within six years from the date of the sale will not be asked to pay the shortfall.
If your lender has already contacted you before 11 February 2000 then it appears they will continue to try and recover the shortfall even if your house was repossessed and sold more than six years ago.
If this applies to you then you should read the factsheet for options to negotiate with the lender. You could try arguing that it is unfair for the lender to keep trying to recover the money from you if your house was sold over six years ago.
Point out they have already accepted that they have a “commitment to fair and sympathetic treatment for people for whom possession cannot be avoided” and have already limited the recovery period for new cases.
If your mortgage was in joint names, you need to check what the other borrower has done. If they acknowledge the debt it doesn’t affect you BUT if they have made a payment the limitation period starts running again for both of you from the date the last payment was made.
Ask for the details of the debt
If you are contacted by your lender or their agent, the first thing to do is to ask for a detailed breakdown of how they have worked out the amount they say you owe. This should allow you to check all the figures and give you a basis for deciding if the correct procedures have been followed.
Important: don’t acknowledge to the lender that you owe the debt at this stage.
You should ask for details of:
- the exact sale price of the house
- details of any valuations made on the property
- how they have calculated the interest that has been added on up to the time of the sale and since the sale
- any solicitors, estate agency fees or court costs that have been added on.
What if my lender does not reply?
If you lender is being awkward about supplying a breakdown of the mortgage shortfall account to you, then you should write to the lender and request they send you all information held by them on computer to do with the mortgage account. This request should be made under the Data Protection Acts 1984 and 1998 and refer to the “right of subject access” under the acts.
The lender can charge you up to £10.00 for supplying the information. They can also write back to you requesting you to be more specific or ask you for more information. You should be sent anything held on computer but not paper or microfiche files. (The Data Protection Act 1998 also covers paper and microfiche files but will only cover new cases).
If the lender does not comply with the request you should complain to the Information Commissioner who will take it up with the lender and can serve an Enforcement Notice if the information is not sent.
Mortgage Indemnity Insurance
You also need to check whether you had a Mortgage Indemnity Guarantee (MIG) on the house. This is an insurance that covers the mortgage lender against a loss. You would usually have paid it out as a lump sum when you first bought the house, or it could have been deducted from your mortgage advance at the time.
You need to check that your mortgage lender has made a claim on any insurance available. This could limit the amount you owe to the mortgage lender although the insurance company can ask you to pay back the amount they pay out to the mortgage lender. The insurance company sometimes asks the lender to collect their share for them. From 31st October 2004 your lender must inform you in writing if your mortgage shortfall debt may be pursued by another company.
Some people argue that the indemnity policy should cover the borrower for any shortfall as they paid for the insurance in the first place.
This is a complicated area of law .
Following a case called Woolwich v Brown 1995 the Court of Appeal has decided that generally mortgage indemnity insurance only covers the lender and not the borrower.
Can I dispute the amount being claimed?
Building societies have an obligation to find the ” best price which can be reasonably obtained” whilst banks have a ” duty of care” to a borrower. From 31st October 2004 the FSA mortgage rules say that all lenders must obtain the “best price that might reasonably be paid”. It is possible to dispute the amount being claimed by the mortgage lender in some cases.
- If you can show that the house was sold for substantially below the proper market price taking into account the market conditions at the time of sale.
- If the house was not marketed sufficiently to obtain a good sale price.
- If you arranged a sale which was refused by the lender, but after repossession the house was sold by the lender for a much lower price.
- If the house stood empty for a very long time you may be able to argue that the mortgage company should have rented it out and therefore offset possible rental income against the shortfall balance.
- If the lender decides to leave the house empty and not sell it either , then you may have an argument for asking the court to order a sale .
Who do I complain to?
From October 31st October 2004 the Financial Services Authority (FSA) has taken over the regulation of mortgage lending and problems with existing mortgages. This applies to all mortgages where the lender had a first charge over the property and at least 40% of the property is occupied by you and/or your immediate family. It does not apply to secured loans regulated by the Consumer Credit Act. The new rules say that the lender must market the property as soon as possible and obtain the “best price that might reasonably be paid” taking into account factors such as market conditions and the increasing amount you owe on the mortgage debt.
If you are not happy with the way in which your lender has dealt with your mortgage shortfall, you can complain to The Financial Ombudsman.
The debt owed to either the mortgage lender or the insurance company can be treated in the same way as any other unsecured credit debt. One of the following options may be possible.
- We suggest you read through the Money Advice Direct information pack “Dealing with your Debts” and prepare a detailed personal budget. Work out your current income and essential outgoings. If you can afford to make payments, one option is to contact the lender in writing, enclose a copy of your personal budget and make an offer of payment.
- Be careful: lenders may ask you to fill in their own budgeting form. It may ask you for extra details you do not wish to provide . If they have not been to court you do not have to give employers/tax/bank details, but your lender may be less likely to help if you refuse.
- If your house has been repossessed and you are now in rented accommodation, you need to explain to them that you no longer have any assets such as a house and outline your exact financial position. This should help persuade your lender that there is little point in pursuing you for the debt.
- If you can afford only a small offer of payment per month and have no assets then you might want to suggest that they don’t pursue the debt as you are never going to be able to pay it back. Mortgage and insurance companies do not always take action to recover the debt when they can see it is pointless for them to do so. ( e.g. write off the debt).
Warning: you should make sure that your full and final settlement offer has dealt with the whole shortfall and you do not still owe money to an insurance company for the amount paid out under any mortgage indemnity insurance .
- Do not pay any sort of part payment until you have the creditor’s written agreement that they have accepted your offer in “full and final settlement”. It is a good idea to send the payment via a third party as this makes the deal more legally binding. Never make a payment until the offer has been accepted in writing by the lender . If someone else is to make the payment on your behalf then they should only provide the money on condition that the offer has been accepted.