Explained: Foreclosure and Mortgagee Possession

May 4, 2022
foreclosure and mortgagee repossession

Foreclosure is a term commonly used in America to depict a situation where a borrower is unable to make mortgage payments. The lender resorts to selling the asset to recoup their money. The lender, or the mortgagee, changes the ownership in the title and sells the property to regain the remaining funds.

In Australia, the term foreclosure is used interchangeably to mean “mortgagee in possession”. The difference between the two terms lies in the repossession laws. Mortgagee in possession only possesses the property.  But a foreclosure involves a change in ownership before the asset is sold.

In this article, we will define foreclosure and take a closer look at the mortgagee in possession meaning as well as its implications. We will also outline the phases of foreclosure and what it means for you as a borrower.

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What is foreclosure?

Foreclosure is part of the legal proceedings that are initiated by a lender following the default of a loan by the borrower. This situation occurs in mortgage loans where the lender provides debt financing for the borrower to buy a house.

In the event of a foreclosure, the ownership of the property transfers from the borrower to the lender. In the initial stages, the lender will actively take steps to try and resolve the issue. 

Unfortunately, if the borrower is unable to continue making the payments, the property is sold to recover the amount. The sale of the property is only considered a last resort.

What does mortgagee in possession mean?

foreclosure and mortgagee repossession

Like a foreclosure, this is a situation that occurs when the borrower defaults. The lender exercises the right to own the mortgaged property from the borrower.

The distinct difference between a foreclosure and a mortgagee in possession is in the title of ownership. In a foreclosure, the title of ownership is transferred from the borrower to the lender in the event of default. 

A mortgagee in possession implies that the lender only takes possession of the property. The ownership title still remains with the borrower. But, the lender would be within their rights to sell the property.

The mortgage foreclosure process

The process of mortgage foreclosure occurs in several steps. The steps are as follows:

1. Missed payments by the mortgagor

This is the initial stage in the foreclosure process. When a borrower starts to miss the loan repayments, the lender will first reach out. They will try to persuade them to stay up to date with the loan repayment schedule. 

The lender affords the borrower 90 days to make the payments. Past that, the mortgage is considered to be an impaired loan.

2. The issuance of a demand notice

foreclosure and mortgagee repossession

The lender then proceeds to issue a notice of demand or default. This is a document obtained from the courts. It contains all the details of how much the borrower owes, how to make the payments, and where to pay the funds.

The borrower is then given enough time to make the payments as per the National Credit Code. The period for the loan repayments is generally 28 days from the date when the notice was issued.

3. A mortgagee in possession is declared

A mortgagee in possession is declared by the lender only when the period of 28 days lapses without any repayments. The lender files the declaration in the State where the property is located.

The lender also makes a request that the court grants a judgement for the full amount of the mortgage. They will also request an order that the lender possesses the property. Once the homeowner receives the order, the lenders can seek to get physical control of the property.

4. The defence of the borrower

Once the homeowner receives the stated documents, they have a period of 28 days to make their defence. If the borrower fails to do so, the lender can request the court to grant a default judgement.  It would result in the lender obtaining the right to possess the property.

5. Repossession of the property

After the judgement is granted, a notice of four weeks is issued to the homeowner to vacate the premises. Once the period lapses, the mortgagee in possession has the right to change the locks. They can also place notices of repossession on the doors and windows.

In the event that the homeowner would still be present, the sheriff has the mandate to escort them out of the property. The home owner’s furniture and other belongings will also be removed as the bank makes the necessary arrangements to sell the property.

The implications of a foreclosure on your credit rating

A person’s credit rating or credit score serves to show how responsible they are in handling their finances.  It can be used as a criterion for obtaining a loan. In Australia, the credit rating ranges from 0 to 1200. 

Meticulous records are kept regarding a person’s credit activity. Thus, a foreclosure can have immense implications on the person’s financial capabilities.

Here’s how a foreclosure affects your credit rating:

A significant reduction in a person’s borrowing power

A foreclosure can drop a person’s credit rating by as much as 300 points. This makes it much more difficult for the person to get a loan in the future.

Higher interest rates

Since the credit agencies have determined that you are a risky borrower, lenders would only offer you a loan at a much higher interest rate to compensate for the risk of default. Accessing debt would therefore become much more expensive.

Is it possible to prevent a foreclosure?

foreclosure and mortgagee repossession

For the lenders, foreclosure is normally a last resort. In some cases, lenders are willing to come to terms with homeowners to prevent this outcome.

If you’re facing a foreclosure, an attempt at negotiation with the lender is something worth considering. In some instances, lenders would be willing to settle for an amount that is less than the mortgage. 

You may consult a financial advisor to find the best approach to the situation.

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