With the number of home repossessions dropping slightly, DebtWizard explains how mortgage lenders still recover their losses many years later, just when you think it is all over.

“Help, I can’t believe this is happening to me” gasped the man on the phone. “Surely they cannot do this to me, this house was repossessed some 10 years ago and now they are chasing me for the mortgage shortfall after they undersold it!”

I get quite a few such calls from desperate people that have previously had their home repossessed and not heard anything for years but then, right out of the blue, a solicitor’s letter drops on the doormat claiming thousands- in this particular case £66,381.

How lenders claim such large amounts

It is not unusual for lenders to sell a repossessed property at auction for a lot less than what the previous owner though it was worth. With the sale price often not covering the mortgage, the lender will add to this interest, arrears, administration, disbursements, court fees, selling costs, advertising, locksmith and gardener charges, etc. Then there will be additional legal costs for the lender to defray under any settlement.

So what can be done?

If contact is made you do have options. One is to refuse to pay anything and rely on the outcome of any legal proceedings that the lender or their agents may well begin.

Most people however either go bankrupt to wipe out the debt and any other credit card debts, propose an Individual Voluntary Arrangement (IVA) and include the lender’s claim, or make an offer to go away in full and final settlement.

Sometimes this settlement figure can be between 5% and 10% of the claim. So in the example of the above claim of £66,381 this would be anything from £3,300 to £6,600.

With skilful negotiation a full and final settlement can often be reached by paying a fraction of the initial claim. However, every case is determined on its merits and may take into account whatever assets you may have.  What the lender or agent is trying to do is see whether they can put the debt they say you owe onto your current home, if owned,  or whether you can pay back something each month.

All the mortgage lenders know that it is unlikely that the person is able to pay the full amount and they are generally open to an offer.

If you have substantial equity in your current property, (the difference between the value and the outstanding mortgage), then you are at greater risk as the lender or their agents know they can secure the debt on your current home and they would not accept a lesser sum, as illustrated above.

Mortgage Indemnity Guarantee (MIG)

If you decide to settle on an amicable basis then ensure that the MIG is also included. MIG is controversial, as the borrower has to pay the premium for the benefit of the lender.

A condition of any claim is that the lender must try to recover the loss from the borrower and pass it on to the insurer. However I know of cases where the lender has separately claimed from the borrower the amount that the MIG may not cover.  The borrower then believes they have settled the matter only to find the MIG moving in at a later date, so be warned!

Time limits to recover mortgage shortfalls

If your property was repossessed more than 6 years ago and you have not had any contact from the lender or an appointed agent then you should cite the Council of Mortgage Lenders (CML) directive, which came in to force on the 11 Feb 2000. This directive provides that those that have not been contacted by the lender for more than 6 years from the date of the sale of the property will not have to repay their mortgage shortfall debt.

Unfortunately this is a voluntary code and applies only to new cases and not those with existing shortfall debt repayments or where the lender has already started recovery procedures.

If the lender obtains a “money judgement” (MJO) at the time of the re-possession hearing then there is no set time limit for recovery of the deb. However, if the MJO is 6 years old then the lender has to re-apply through the Court, otherwise lenders need to abide by specified limitation rules.

Generally, lenders have six years in which to recover interest and twelve years for the capital sum. This limitation begins when:-

•  the lender was first able to issue proceedings (and would be much earlier than the date the property was repossessed) or,
•  the last time any payment was made irrespective of the amount, or
•  the last time the debt was acknowledged by the client or his/her agent in writing.

Joint names on the mortgage

If the debt is of a joint nature and only one of the party concerned is making a payment then the other person can be bound by the time limitation, even without their knowledge, e.g. if they were separated or divorced. This means that the 12 year time limit will start again, from the date of the last payment or acknowledgement!

Acknowledging the debt

Telephoning a lender just to enquire about the debt is not regarded as acknowledgement. Generally, for the time limit to start again, the acknowledgement must be in writing and signed by the debtor/borrower or his or her agent.

Warning

Those borrowers that have had a home repossessed need to address the situation sooner rather than later. Lenders do not pursue a distressed borrower immediately after repossession because they know that money worries led to losing the home. They do however have a habit of popping up many years later, for example when you are in another home, possibly married and with children and earning good money, and just when you thought it was all over.

If you are worried about a mortgage shortfall debt then it is important that you take legal advice as case law can change.