Archive for August, 2013

Mortgages – Can You Sell Your House if Mortgage in Default?

Thursday, August 29th, 2013

A reader of the blog went through my prior posts and sent me an e-mail wondering if the reader could sell the reader’s home.  (I’m specifically being vague to avoid even giving away whether this person is male or female to avoid any confidentiality issues – sorry for the tortured wording.)

The facts are fairly simple.  The reader and the reader’s spouse have run into financial problems with the spouse being put out of work.  The mortgage fell into arrears for more than three months and, not surprisingly, the lender has claimed that there is a default and has demanded payment in full.  The reader wanted to know if the reader could sell the house and what else the reader could do.

Can the reader bring the mortgage back into good standing – that is, pay the arrears?  The reader had mentioned that 3 payments had been missed.  Could the reader get caught up on those payments?  If the mortgage is in good standing then bankers are in a better position to give extra time, to try and work out new terms for the mortgage (lower payments over a longer period of time, etc.) to try and help you out, etc. But if the mortgage hasn’t been brought up to date then often the banker’s hands are tied.

Assuming that the reader could not do this – or the reader had brought the mortgage up to date but the bank still wanted to be rid of the reader – then the reader could sell the house.  But let me stop here for a moment.  Why would a lender not want to do business with you even if you brought the mortgage up to date?  There could be all sorts of reasons.  There could be a history of late payments that gives the lender a feeling of “yes, we could let you go back to normal today, but we’re just going to have problems again with you tomorrow, so we’re tired of doing it and we just want our money back and you can go elsewhere for your mortgage.”  The lender could be going out of the business or that area of the business.  For example, my mortgage is with a subdiary of a larger bank that announced either last year or early this year that they were not taking any more residential mortgage files and that when my mortgage comes to the end of its present term that I have to take my business elsewhere (along with all of their other customers).  If I was to go into default, even if I brought the mortgage back into good standing, my lender might use that as the excuse to clear me off their books a little earlier than originally intended.

So, back to selling the house.  The starting point is that it is actually preferable if the reader were to sell the house.  Let’s suppose that the house is worth $500,000 and the outstanding amount on the mortgage is $450.000.  If the reader sold the house, the buyer will get various representations and warranties from reader that the buyer can later rely on and can claim on if there are problems. For example, vendors always warrant that they have not put in any UFFI insulation in the home while they owned it (you may recall that UFFI has been linked to cancer).  If the reader sold the house, the reader can give this warranty.  However, if the bank sells the house, the bank has absolutely no idea whether the reader ever put any UFFI in the house. So the bank says “we’re selling as is / where is, take the house as you find it and if there’s UFFI or any other problem, that’s your risk Mr. Buyer.” Because the buyer has to take the risk on a sale from the bank, the buyer will always pay less to give some cushion for the risk. In addition, if the reader is the seller, the buyer does not know how motivated the reader may be to sell.  The reader may be moving to another location.  The reader may have a second house and the sale of this house is not an urgent matter.   If the bank sells, the buyer knows that the bank wants to be rid of the property and will be more motivated to sell.  The end result is that if the reader sells the house, there is a better chance of selling for the fair market value and the bank can be paid off and the reader could possibly have some money left over. If the bank sells, there is a more likely chance that only the bank will get money and nothing will be left over for the reader (and if the reader’s house had been heavily mortgaged up to a high percentage of value, there is the possibility that the sale price will not cover what is owed so the bank could go after the reader for the remainder still owing).

So, it is often better to have the person sell rather than the bank and the bank will often (but not always) agree to this option.  Why not always?  Because it is matter of whether the bank trusts the customer or is comfortable that the customer will act in the interests of getting the highest amount on a sale.  But even if the bank agrees to the customer selling the house,  that permission will often come with various conditions.  For example, the bank will often want it so that they must agree with the listing price. In my example, if the house is worth $500,000 and the reader lists it for sale at $750,000, nobody will buy it at that price and the bank will likely view this as a stall tactic.  Conversely, if the reader were to list the house for $200,000, the bank will not be happy because it won’t be paid out on its $450,000 mortgage – and in many instances the house will be the primary or only security for the mortgage loan.  The bank will also likely want as a condition that no offers that are received will be accepted without the bank’s prior approval – again, to ensure that the house isn’t being sold for too low.  You can expect other conditions that could be imposed – such as the bank requiring that any sale go through a lawyer appointed by them so that the lawyer will report to them throughout the sale process.

In the end, it is probably better for you to sell the property yourself rather than having the bank do it, but you should expect that if the bank agrees that they will want approvals for whatever you do and the ability to manage or veto any steps in the sale process.

Something to think about.