Can’t pay your mortgage? Why foreclosure may not apply

I intend to buy a house and currently shopping around for a mortgage firm with a friendly repayment plan. However, I have a feeling that most banks have employed smart marketers who only portray the positive side of their products and don’t talk about some underlying issues. For instance, none of them is ready to talk about foreclosure, which my online reading reveals can see my investment go up in smoke in case of default. Could you tell me more about foreclosure and how it is applied in the local market?

Frank, Nairobi.

Foreclosure is a legal action in which a bank or mortgage firm bars a client from settling the loan and takes over the property. It happens when a buyer fails to clear the mortgage.

A foreclosure absolute order means the right of the client to settle the mortgage balance is revoked and property ownership transfers to the lender. However, the financing institutions must first apply for a court order which involves two major processes.

First, they must apply in court for a foreclosure order nisi, which gives the client time to repay the debts and consequently redeem the property.

Unpopular

In most cases, the second process ensues after the client is unable to comply with the orders and a foreclosure absolute issued by the court. Foreclosure is usually an unfair and unpopular process because it is harsh on home owners.

Moreover, should the property appreciate in value over the years and worth more than the debt, the lenders are not obliged to pay the balance to the debtors.

For that reason, foreclosure is often viewed as the most draconian remedy open to lenders in the event of default in payment by home owners. As such some banks and financial institutions shy away from the remedy after the amendment of the Indian Transfer of Property Act, applied locally.

Competition

Moreover, many mortgage firms would not want to be seen as draconian in recovery of debts in the face of fierce competition for borrowers.

Instead, the money lenders opt for the statutory power of sale, which is increasingly becoming popular in the real estate sector.

Even so, there must be a default in repayment for at least three months after notice to the borrower.

Furthermore, there must be arrears of interest unpaid for two months or gross breach of the mortgage agreement.

Thus, while the foreclosure option exists, few lenders would want to go that direction because of their operating environment.

— The writer is an advocate of the High Court.

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