Up to the eyeballs in mortgagee sales

Illustration: Pam Templeton

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A slew of mortgagee sales have come before the courts with unfortunate borrowers claiming they've been left up to their eyeballs in debt because the lender didn't get the best price.

But time and again the courts side with the lenders, saying the mortgagee's duty is simply to "take reasonable care to obtain the best price". The judgements also show the grim fate of the growing number of borrowers facing a mortgagee sale, with clear evidence of fire sales producing big discounts to the assessed market value of properties.

In the case between property speculator Ita Vulnic and Southern Cross Building Society, decided in August, the building society was found to have acted properly although the mortgagee sales of four properties left Vulnic still facing debts of $990,000 with interest of $313 a day.

Under New Zealand law, following the sale of a property, a borrower still has to pay their lender any shortfall between the sale price and the sum they borrowed.

Vulnic's lawyers argued the properties she had bought in 2006 for just under $6 million were sold through tender and auction processes unsuitable for buildings with "unique characteristics".

She claimed the building society had failed to get independent valuations before the sales, which would have allowed it to see the prices it was obtaining were not high enough.

Vulnic, who also accused the building society of lending her too much, was upset the building society pocketed an insurance payout after a fire gutted one of the four properties the weekend before it was due to be sold at mortgagee sale, and went ahead with the sale of the bare land.

Her lawyers argued using the insurance money to reinstate the building would have fetched more than the payout and bare land, and its actions left Vulnic facing an unnecessary shortfall.

But the Auckland High Court found Southern Cross had met its duty for reasonable care by appointing a reputable real estate agent to sell the properties, and discounted as "multiple hearsay" allegations from Vulnic's lawyer that the price of one of the properties was "talked down" by agent Bayleys.

It was also well within in its rights to pocket the insurance money and sell the bare land, even though that might have led to a loss for Vulnic.

There was also no need for an independent valuation to be made before a sale went ahead, the court ruled, which is consistent with courts' stances in previous cases where they have given scant regard to valuations, and expect big discounts to valuations in mortgagee sales.

Recent judgements show the costs of mortgagee sales and accrued interest can be startling.

In July BNZ applied to the Auckland High Court for a summary judgement against Damian and Ariana Rahui after the mortgagee sale in March of a property for $475,000 on which it had lent some $580,000.

But the net sale proceeds – the amount that was taken off the debt owed by the Rahuis – was just $395,476.14 with the difference, namely $79,524, appearing to associate judge David Robinson to have been the costs of the sale. He reserved judgement until receiving further information from the bank.

In all, associate judge Robinson wrote: "The bank, if it achieves full payment of the amount of the judgement it seeks, will have received a total of $633,062 in repayment of advances of $580,000."

In Crown Money Corporation's case with Adam Peter Pink-Martin and Gerrard Heston-Martin earlier this year, where properties valued at $3m to $3.5m sold for $2.25m, judge John Hansen said: "The truth is the market sets value even better than the valuers."

Indeed, when real estate agent Janine Ann Wallace sought an injunction in June this year at Auckland High Court to stop the mortgagee sale for $709,000 by the BNZ of a leasehold waterfront apartment she bought for $1.45m in 2006, judge J Wylie said a discount to "assessed value" was to be expected.

A valuation paid for by Wallace, who claimed there had been serious inaccuracies in adverts for the property, gave the apartment a value of $1.25m, although that included a car park over which BNZ had no security.

A valuation paid for by the BNZ estimated the current market value at $1m under normal market conditions. On a forced sale basis, the valuer concluded it would fetch around $600,000.

Judge Wylie did not grant Wallace's injunction, but said if Wallace could later prove BNZ had failed in its duty of care, then she could sue for damages.

"The evidence simply suggests that the BNZ has sold the property at less than its assessed current market value but, in my view, such a discount was what one would expect in the circumstances of this case where a forced sale took place in difficult economic times, when the market was depressed, and without the co-operation of the mortgagor."

Judge J Allan referred to this tainting effect in a second case in April this year involving the attempted mortgagee sale of a property by the Crown Money Corporation (a private business), noting there was "a tendency for the likely sale price to become depressed" when it became known a mortgagee sale was imminent.

In the Pink-Martin and Martin case, a valuer for the mortgagee told the court a discount of $500,000 to $1m should be expected on the forced sale of the property in question, which he valued for $3m to $3.5m.

Despite the courts recognising this effect, case law has established that advertising a sale as a mortgagee sale did not breach the duty of care, and judges have commented that in a small market the motivations for a sale are hard to hide.

Even where borrowers win, the attitude of the courts is clear.

In another recent case property developer Neil Win Wanden argued at the Wellington High Court that Southern Cross Building Society should not be granted a summary judgement against him, which would have led to his bankruptcy.

Wanden's counsel argued flaws in Southern Cross's mortgagee sales process, which relied on the marketing from Wanden's earlier bid to sell up, had left him facing considerable debts after an Auckland block of land against which the building society had lent $2.727m was sold for $2.1m.

Judge D Gendall wrote in his judgement: "Counsel for the defendant contends that the marketing campaign for the property had finished in December 2008. At that time, L&Y [the buyer] was clearly identified as a potential buyer. Counsel argues that since this date, Southern Cross undertook no active marketing of the property at all, but had limited itself to negotiating with a single party – L&Y. Throughout these negotiations, it is suggested that Southern Cross resigned itself to obtaining no more than $2.1 million for the property – in the more than three month period before the final agreement was reached, L&Y attempted to negotiate down the price, but there is no evidence that Southern Cross ever attempted to raise the price."

Judge Gendall did dismiss the summary judgement – meaning a later hearing to establish the facts of the case – but he added ominously, even should those claims be proven: "It is likely in my view that, when all the evidence is heard and tested, Southern Cross will be seen to have acted entirely reasonably."

HOW THE BANKS DEAL WITH MORTGAGEE SALES SHORTFALLS:

In general, as long as people continue to meet their payments, the banks will not call in the debts left over after a mortgagee sale, or head to court seeking summary judgements, which are often a first step towards bankruptcy.

Lending rates for those people will be in most cases the same as for ordinary home buyers.

At ASB, for example, the rate charged on any shortfall would be based on the customer's home lending rate prior to the sale, so if they were on a fixed rate of 6% prior to the sale, they would continue this rate for the shortfall loan.

The banks will also assign staff to support the borrower in question. ASB, for example, says it has a dedicated financial help team which is a first port of call for people who are finding themselves in hardship. "We try to negotiate a plan with the customer to ensure the payments on the shortfall loan are affordable," a spokesman for the bank said.

Westpac said the interest rate was set on the floating housing base rate, currently 6.29%. "This is preferable to having an unsecured personal loan, where the rates can be as high as 17.95%," a spokesperson said.