Mortgagee rulings twist the knife

Former homeowners left with heavy debts after mortgagee sales are turning to the courts, complaining that lenders didn't get the best possible price for the forced sale.

But courts are almost always ruling against the complainants, saying that all lenders have to do is show they took "reasonable care" to get the best price, rather than actually achieving that.

During the economic downturn of the past two years there has been exponential growth in the number of mortgagee sales – where owners are forced to sell up because they can't meet the mortgage payments.

Latest figures from land information firm Terralink show that from January to August there were 1824 such sales. In the same period last year there were just 641, and the year before that 304.

In August alone there were 241 mortgagee sales, and 53 were what Terralink managing director Mike Donald calls "mum and dad" homes – where the former owners own no other properties.

For those vendors, losing a home isn't the end of the disaster. Most will still owe their bank a large chunk of the money – the difference between the mortgage and what the bank managed to claw back from the sale. To rub salt into the wound, that debt may even include the costs incurred by the bank in selling the home.

Little surprise, then, that some owners are complaining that the lenders haven't tried hard enough to get the highest possible price.

In a recent case between property speculator Ita Vulnic and Southern Cross Building Society, Vulnic was left with debts of $990,000 after the mortgagee sale of four properties originally bought for almost $6 million. Vulnic's lawyers argued that the sale process for the properties was unsuitable and that the building society sought insufficiently high prices.

But the High Court at Auckland ruled that Southern Cross met its duty by appointing a reputable real estate agent, and that the lack of an independent valuation before the sale was not a problem.

In another case, in which properties valued at $3m to $3.5m sold for $2.25m, the judge said there was no problem with the sale, as "the market sets value even better than the valuers".

The jump in mortgagee sales has also drawn attention to the use of the vendor's distressed finances as part of the marketing. Last week online auction site TradeMe had 268 listings with descriptions containing the word "mortgagee". Some were prominently labelled "Mortgagee Auction!", or "SOS" or "Bargain".

Real Estate Institute president Peter McDonald said the law required mortgagee sales to be advertised as such. He acknowledged that such sales presented opportunities for buyers, but "that's the nature of a mortgagee sale".

Peter Thompson, chief executive of Barfoot & Thompson, said real estate agencies selling mortgagee properties were simply working on instructions from the banks. His advice for sellers was to work with agents rather than resist them, allowing the best photographs to be taken and the best marketing campaign developed.

Deputy banking ombudsman Susan Taylor said that the banking watchdog had received a "handful" of calls from people concerned that their bank had sold their house at mortgagee sale below market value but it was not a significant problem. She added, however, that complaints which involved sums bigger than $200,000 fell outside the ombudsman's jurisdiction, and would thus not be recorded.

Raewyn Fox, chief executive of the Family Federation of Budgeting Services, said her organisation had been noticing an increase in requests for help linked to mortgagee sales, including some families who had not only lost their house but were left with remaining debt.

But she added that the major trading banks were displaying a willingness to work with families, rather than force a sale where they would not recoup their costs. "We are finding banks saying it would be better to find a solution for this family than take their house and lose money."

KEEPING HOLD OF YOUR HOME

Talk to your lender before you miss a payment. All banks stress that the earlier struggling homeowners confront their problems, the greater the chances of keeping their home.

Don't panic – banks don't want to sell your home. Only around 1% of the major banks' loans are more than 90 days in arrears and banks have special units to help people in this category.

Assess your finances – making a budget now can prevent trouble later. Budget advice is free or use an online budget calculator.

Don't keep it a secret – talk to family and friends along with your bank and budget advisers. They may be able to help out.

Check out: www.familybudgeting.org.nz

0508 BUDGETLINE

www.sorted.org.nz