Dealing with a mortgage shortfall debt
Dealing with a mortgage shortfall debt applying to England & Wales.
Once the Mortgagee has completed the repossession process or should the sale by the borrower not raise sufficient monies to cover the total debt to the lender, this will result in a mortgage shortfall. The borrower may end up having to pay the outstanding amount to the insurer but note that there is no obligation on the insurer to recover a shortfall (for example if the sum involved makes recovery unviable). In many cases the borrower will have paid for mortgage indemnity insurance, which will cover some of the debt to the lender, but he or she could still end up having to cover the difference. Mortgage indemnity insurance does not protect the borrower (for example, Mortgage indemnity). The lender must inform the borrower if the debts are to be recovered by an insurer or another company, rather than the lender. Outstanding debts to the lender and/or the insurer after the sale can be recovered through the courts (either via an existing or newly obtained money judgment or via bankruptcy).
The Financial Conduct Authority (FCA) regulations state that a lender must make the customer aware of any shortfall, in writing, ‘as soon as possible after the sale' of the property.
The action that a lender takes to seek repayment of monies owed will depend on the circumstances of each account. A lender may or may not wish to seek repayment of the shortfall debt, but if the lender decides to pursue the shortfall, they must notify the borrower(s) within six years of the date of the sale that they are still liable to pay back to the lender and if interest is being charged on the shortfall debt, the borrower(s) must be provided with annual financial statements which advise how much is owed. Interest will usually continue to be charged on the mortgage loan until the property is sold and any shortfall repaid.
For most debts, a creditor has up to six years to pursue a debtor through the courts, however, special rules apply to mortgage shortfall debts that allow a lender twelve years from when the debt first became due, the only caveat to this is that the borrower(s) must have been contacted within the first six years of the mortgage shortfall debt being known (which should have been completed as per FCA Regulations). In most cases that will be the first time in the history of the mortgage account that the borrower was in arrears. That date will be determined in the mortgage deed, money is deemed to become due shortly after one default in payment.
This means that the twelve-year period may have started years before the property was sold. The benefit of twelve years limitation does provide the borrower(s) time to get back on their feet financially so that they are more likely to be able to pay off the debt. Action to recover mortgage debt is governed by the Limitation Act 1980, which sets time limits (limitation periods) for the issue of court proceedings. An action to recover the mortgage principal (i.e. the actual amount borrowed) should be started within 12 years of the date the debt accrued. (s.20(1) Limitation Act 1980). Proceedings must be taken within 12 years (the limitation period). Lenders cannot argue that the limitation period starts with the date when they regain possession of the borrower's home or when there is a formal demand for payment. (West Bromwich Building Society v Wilkinson [2005] UKHL 44, [2005] 4 All ER 97).
Action to recover interest charges and any other costs the lender may have, and action by the mortgage indemnity insurer, should be started within six years of the date that the right of action arose. (s.20(5) Limitation Act 1980).
DebtLaw uk has extensive experience in the recovery of mortgage shortfall debts. We are very successful at resolving these particular cases without the need for legal proceedings. We feel that it is not always prudent to pursue a shortfall immediately, largely because someone who has just experienced their home repossessed is unlikely to have a cash lump sum available. We look to contact the borrower(s) immediately, assess their financial position and either place on hold for a short period or secure a payment arrangement there and then. In the main, there are two borrowers on a mortgage account although there can be several including Guarantors.
We are entitled to purse either borrower or Guarantor for the full sum owed or a part of it. In the circumstances that the borrowers are no longer together, we actively chase both parties separately to achieve the best outcome for our client, either by a lump sum settlement or instalment arrangement. If we cannot resolve amicably, we risk assess each case individually for possible legal action.
If the borrower acknowledges the debt within the limitation period, the limitation period stops running and effectively starts again. An acknowledgement can arise when a borrower makes a payment or otherwise acknowledges the debt, this would often be in correspondence making an offer to settle the debt. If the Benefits Agency makes a payment of mortgage interest direct to the lender, the Benefits Agency acts as an agent of the borrower, and this is treated as a payment by the borrower. Bradford and Bingley plc v Cutler [2008] EWCA Civ 74.
If a borrower argues that a lender is not entitled to seek recovery due to the limitation period being expired, the borrower, or agency writing on her/his behalf, cannot necessarily rely upon a letter made on a ‘without prejudice’ basis to avoid acknowledging the debt. The effect of the ‘without prejudice’ clause is dependent upon the substance of a letter. The ‘without prejudice’ rule has no application if the subject of the letter was how an admitted debt was to be paid. This was to be distinguished from negotiations to reach a settlement, where the existence of a debt or amount in dispute, could be ‘without prejudice’ and thus would not have stopped the limitation period running. (Bradford and Bingley plc v Rashid [2006] UKHL 37).
In these circumstances we would look at the mortgage deed, establish the date when the mortgage money became due and consider whether, and if so when, the borrower has acknowledged the debt. The time limits for the recovery of a debt, as governed by the Limitation Act 1980, do not apply to charging orders. (Yorkshire Bank Finance Ltd v Mulhall [2008] EWCA Civ 1156).
If legal proceedings are required, in addition to claiming the shortfall on the mortgage debt, the lender can also claim statutory interest which if after six years for example may increase the amount claimed substantially, six years’ interest at 10 % added to a £25,000 shortfall makes a total debt of £40,000. Any legal costs incurred by the lender in trying to recover the shortfall would also be added to the sum owed.