House repossession debt / mortgage shortfall claims

Having a house repossessed is a very distressing and eventful occasion. It is not helpful when solicitors or agents pursue the borrower on behalf of the lender, many years later, in some instances up to 12 years after the event claiming a shortfall following the sale of the property. This initial claim can run into tens of thousands of pounds.

If contact is made you do have options, you have a choice between either refusing to pay anything and rely on the outcome of any legal proceedings that may well begin, or negotiate a settlement.

With skilful negotiation often a full and final settlement can be reached by paying a fraction of the initial claim. However, every case is determined on its merits, including the amount of assets, if any, that you may have and your monthly disposable income as this may well reflect upon the amount required to settle. It is important to note that if you have a partner then that person may well be entitled to a share of any assets that creditors may well try to claim from you, particularly any shared equity in your new home.

Points to bear in mind when deciding what option to go for:

1. Was your house sold below the market value?
2. Was the sale through reputable estate agents or auctioneers?
3. Was your property repossessed more than 6 years ago? The Council of Mortgage Lenders (CML) announced a directive which came in to force on the 11 Feb 2000. Under this directive those that have not been contacted by the lender for more than 6 years from the date of the sale of the property will now 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.
4. If you decide to settle on an amicable basis then ensure that the MIG is also included. It has been known for the lender to claim a sum from the borrower which was the shortfall that the MIG had paid out to the lender. This meant that had you settled then you have only half completed the task as the MIG can still pursue you for the amount they paid out to the lender. Therefore, establish right at the onset that the lender or the agent/solicitor is acting on behalf of both lender and MIG.

Mortgage Indemnity Guarantees (MIG)

MIG is controversial, as the borrower has to pay the premium and the lender reaps the benefit. A condition lenders attach to a claim is that they must try to recover the loss from the borrower and pass it on to the insurer. MIG is taken out by the borrower, at the insistence of the lender, and is usually payable as a one-off instalment, normally when the mortgage begins. However, mortgage indemnity insurers and the lenders argue that the policies are issued to protect the lender and not the borrower.

This is a very contentious issue, and a few years ago one borrower challenged the lender in the case of Woolwich v Brown. In that case the court held that generally speaking these policies are indeed for the benefit of the lender, not the borrower. However, this particular case was decided on the interpretation of the policy itself, where the document suited the lender rather than the borrower.

If the borrower had evidence (usually letters), from the lender or his agents, stating that the policy is for the borrower’s benefit and that the borrower may not be left with a debt following repossession, then he / she may well succeed in his / her argument over the shortfall.

Time Limits to recover shortfalls following house repossession

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

Generally, they have six years in which to recover interest and twelve years for capital sums; 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.

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.

One can contend that once the property has been repossessed and sold then any amount, whether capital or interest, is unsecured and should be subject to the six year limitation rule.

On the 30th January 1997, in the Appeal Court, Lord Justice Auld decided in the case of Hopkinson and others v J. D. Tupper that it was seriously arguable for the time limit to be set at six and not twelve years as previously applied to repossessions. Although this decision was not legally binding, lower courts were expected to follow suit. This was unreported, and therefore, not published in the Times. Consequently one would need to obtain details of the full judgement for oneself.

However, lenders will argue that the shortfall is capital and subject to the twelve-year rule under the mortgage deed and not the six-year one. This was in the case of Global Financial Recoveries v Kelvin Jones, where it was held that where a mortgage to secure a loan is executed as a deed, and there is subsequently a shortfall, then the remaining debt becomes recoverable by the deed which then becomes a speciality debt. This then leads to the lender having twelve years in which to recover their loss.

It is not uncommon for solicitors acting on behalf of lenders to quote this case, however it is important to note that the judgement applied here relates to the mortgage deed of Kelvin Jones only. Detailed in this deed was a specific and explicit clause that allowed for the shortfall to become a speciality debt.

More recently there was another case whereby the Court of Appeal ruled on capital and interest claims following a shortfall on a sale of a property following repossession. The cases were, Bristol & West plc -v- Bartlett & another; Paragon Finance plc -v- Banks; and Halifax Bank plc -v- Grant.

In essence these appeals (which were heard together) considered whether once the borrower’s family home had been sold, did the borrower’s liability arising under the covenant to repay under the mortgage deed remain? The Court of Appeal held that it was impossible to argue that the actual sale of the family home discharged the obligation to pay under the covenant to repay the mortgage deed.

Therefore, it held that a 12-year limitation period applies to recovering the principle debt, but that a 6-year limit applied to recovery of interest.

What solicitors' and agents acting on behalf of lenders argue is that Section 20(5) of the Limitation Act 1980 provides that an action for arrears of interest must be brought within 6 years of the date the interest accrued and applies to interest falling due before sale. However, on sale the net proceeds of the sale are used to pay off the interest first and therefore the shortfall consists wholly of principal.

It is important that you take legal advice as case law can change and therefore you must not rely upon this article.

Council of Mortgage Lenders (CML) Policy

Lenders who are members of the Council of Mortgage Lenders voluntarily agreed from 11 February 2000 to begin all recovery action for a shortfall within six years of the sale of a repossessed property. If your property was taken into possession and sold more than six years ago, and you have not been contacted by your lender to recover any outstanding debt, you will not now be asked to pay the shortfall. In Scotland, lenders will begin recovery action within five years

How lenders claim such large amounts

Lenders will add interest, arrears, administration, disbursements, court fees, selling costs, advertising, locksmith, and gardener etc: Then there will be additional legal costs for the lender to defray under any settlement.

Acknowledging the debt

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

Deed of Arrangement (DoA)

A Deed of Acknowledge (DoA) is a particularly sinister form involved in home repossession that, if signed can leave you legally responsible for any shortfall after the sale. This includes after any bankruptcy scenario. What this means is that you agree to still pay the debt after you have finished your bankruptcy. Some debt advisers argue that a post- bankruptcy DoA is unenforceable whilst others say it still could be pursued.

By signing the DoA the 12-year time limit therefore starts the day you add your signature.

The simple and best advice to avoid all this is, don't sign it! If voluntarily surrendering the home then post the keys back registered post. Sign a DoA at your peril!

Read more - Repossessed borrowers - sign a 'Deed of Acknowledgement' at your peril

Settlement claims for mortgage shortfall / house repossession debt

Settlement figures are paid on the understanding that it is in full and final settlement of the debt on the debtor for all claims arising and will include the lender and the MIG mortgage indemnity insurer. The amount you need to pay to settle will depend upon personal circumstances and a level of the claim.

Useful contacts/websites

Nationwide House Price Index

To find out the general trend of house prices in the area of your repossessed property then visit the below link, all you need to do is follow the simple online instructions, such as date of purchase and amount paid, date of sale, (not today’s date) to compare the price that was eventually achieved. If you are unsure of the region then use this link first as it will identify this for you, simply on the postcode.

Nationwide House Price Calculator

LloydsTSB House Price Calculator

To find out the general trend of house prices in the area of your repossessed property then visit the below link, all you need to do is follow the simple online instructions, such as; select the region, insert date of purchase and amount paid, insert date of sale, (not today’s date) press calculate to compare the price that was eventually achieved.
If you are unsure of the region then use the nationwide link first as it will identify this for you, simply on the postcode.

Lloyds Banking Group House Price Calculator

Land Registry 1

The Residential Property Price Report provides a detailed and authoritative insight into what is actually happening to average prices and sales volumes in the residential property market for England and Wales. The report is intended to complement information available from other sources. Any comparison with other data should have regard to the differences in volume, timeliness and coverage of contributing transactions.

Land Registry

Land Registry 2

Details of individual properties in England and Wales can be obtained from their database of over 19 million registered records. These represent the majority of English and Welsh properties. They are unable to provide details of any that are not registered.

When can I obtain it?

A Property Enquiry can be made daily between 7 am and 12 midnight, Monday to Saturday during this trial of Land Register Online. This is to allow downtime for maintenance and further development. You can browse at any time but enquiries can’t be placed outside these hours at present.

How much does it cost?

£4 for each Register (Details of each property).
£4 for each Title Plan (A plan of the property).

These fees are payable online, using your credit/debit card and may vary due to price increases.

Land Registry On-line

Council of Mortgage Lenders

The Council of Mortgage Lenders is the trade association for the mortgage lending industry, and its members account for around 98% of UK residential mortgage lending.

Council of Mortgage Lenders

Need help with mortgage arrears or mortgage shortfall following repossession?

See our list of 'Helpful organisations which include all the major debt charities'