Foreclosure in Kenya: What every homeowner needs to know

Forclosure sign. (Courtesy/iStock)

I have a close friend who recently bought a house on mortgage but now risks losing the investment following irregular payments. She recently received a letter from the lender that the property will be foreclosed to recover the debt. We tried to discuss what foreclosure meant but did not come to a convincing agreement. What does it mean? Vincent, Nairobi

For starters, foreclosure is a legal action whereby a bank or mortgage firm bars a client from settling the loan and takes over the property.

It comes into play when a prospective investor fails to pay agreed installments towards settling the mortgage. It is a legal action that makes a section of prospective real estate investors avoid mortgages like the plague.

Foreclosure often begins with the homeowner missing multiple mortgage payments which signals financial distress and triggers the lender to assess the situation. After a series of missed payments, the lender issues a Notice of Default (NOD). This formal notice informs the homeowner that they are in default and must address the outstanding payments within the specified period before the legal action kicks in.

It could be for similar reasons that home ownership remains a mirage to 92 per cent of the slightly over 50 million human population countrywide.

A foreclosure absolute order means the right of the client to settle the mortgage balance is revoked and property ownership transfers to the money 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.

In most cases, the second process ensues after the client is unable to comply with the orders and a foreclosure absolute is issued by the court.

Nevertheless, even as mortgage firms have the right to foreclosure, it is unfair and unpopular following its harshness on homeowners.

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

For that reason, foreclosure is often referred - in legal circles - as the most draconian remedy open to lenders in the event of default in payment by home owners.

Moreover, many mortgage firms would not want to be seen as draconian in recovery of debts in the wake of competition for prospective homeowners.

-Harold Ayodo is an Advocate of the High Court of Kenya