Mortgage Repossessions - who remembers the 1990s?

For most property lawyers the days when they regularly received enquiries from clients who were in danger of having their homes repossessed by their mortgage lender are a distant memory. Indeed, I am sure that many conveyancers had not even been born when the spectre of large-scale repossessions last haunted the housing market in the early 1990s!

However, the effect of a looming recession, increases in the cost of living and higher interest rates have raised concerns that mass repossessions could be back on the agenda as borrowers struggle to make their mortgage payments.

So what happened in the early 1990s? The UK economy shrank during the recession of 1992 on the back of which they were record bankruptcies, high unemployment and interest rates of up to 15 per cent. Yes 15%!! Thousands of homeowners, who had borrowed heavily to buy their properties at then record prices in the late 1980s, became unable to afford their mortgage payments. Some tried to sell their properties but discovered that in the midst of the recession property values had declined, and they had fallen into the “negative equity” trap meaning that their mortgage debt was higher than the price at which they could now sell their property. Mortgage lenders would only allow so much time for the borrower to clear the mortgage arrears and/or repay the mortgage capital and eventually would take possession proceedings to recover the property.

In the late 2000s many feared the worse again in the wake of the financial crash of 2008. The numbers however were not as high as had been predicted and no doubt the reduction of interest rates to record lows was a significant factor in this. Certainly, in my experience nothing has compared to what was seen in the early 1990s.

How can a repossession be avoided? The worse thing to do is nothing! In the event of difficulty with the mortgage payments the borrower should speak to the mortgage lender to explain the situation and explore the possibility of some temporary arrangement being made or any other options that might be available. It also makes sense to consult an advisor, such as Citizens Advice. It costs mortgage lenders a lot of time and money to take possession of properties and so their preference will always be to avoid that scenario if possible.

In practice there may be quite some time before the mortgage lender is able to take possession of the property as, by law, the lender must first obtain a Possession Order in the County Court. Even then the lender must obtain a further Order which authorises them to evict the borrower. Accordingly, there will be some breathing space for the borrower to look for a solution.

If however there is no realistic prospect of resolving the problem then the next step would be to think about selling the property in order to repay the mortgage debt. Obviously, this is an extreme measure and perhaps one that should only be taken as a last resort but sadly in some cases it may be the only option.

Some borrowers may be attracted by sale and rent back schemes, where the borrower sells the property to a third party who then rents the property back to the borrower who therefore becomes a tenant. However, these schemes should probably only be considered as a last resort and only after proper advice has been taken from a lawyer. The property is usually sold to the third party at a price which is significantly lower than the valuation of the property, and there is no guarantee of how long the tenancy agreement will last.

Can you just abandon the property and leave it to the mortgage lender to sort out? In practice yes but it is not to be advised and will not necessarily be the last that the borrower will hear about it. In my experience a common misconception held by mortgage borrowers is that the property belongs to the lender until the loan has been repaid so that if the borrower so chooses they can simply hand the keys to the lender, walk away and never hear anything again. However, this is not the case. The mortgage deed (sometimes known as a legal charge) that the borrower will have signed when they purchased the property contains an obligation by the borrower to repay the loan in full together with interest and any costs incurred by the lender. It also gives the lender the right to take possession of the property (and sell it) if the borrower is in breach of their obligations to the lender. If the sale price is not enough to cover the mortgage debt (including outstanding interest and the costs that the lender has incurred), then the lender can pursue the borrower for the shortfall, and it should be noted that interest will still be charged right up to the point of sale.  

Going back to the early 1990s many borrowers thought they had done the right thing by leaving the property to the mortgage lender to sell. To their dismay they received an unwelcome and unexpected demand from the lender possibly many months later claiming a shortfall that the lender had sustained on the sale. In some cases that I saw, the demand was for tens of thousands of pounds! So not only had the borrower suffered the painful experience of losing their home they then had to deal with the stress of handling the claim for a shortfall.

Having taken possession will the lender sell the property cheap? Not necessarily. A mortgage lender is under a legal obligation to obtain the best sale price that they reasonably can and to act in good faith. However, the definition of the “best sale price” may be open to some interpretation and a borrowers view of the best price may be different to that of the lender. Furthermore, the lender will not want to be spending too much time on marketing the property and may be relatively quick to resort to a sale by auction if marketing through an estate agent has failed to generate a sale. The lender is however obliged to “fairly and properly expose the property to the market”.

What happens to any money that is left over from the sale after payment of all costs and money that is due to the lender? This belongs to the borrower. The lender must account to the borrower for anything that is left.

To conclude, the golden rule for any borrower who finds themselves in difficulty with their mortgage payments is to speak to their lender and take proper advice.