Question

What is meant by mortgage foreclosure and what alternatives are there to such action?

Answer 1

Mortgage involves loan for acquiring a property. Mortgages carry definite terms and conditions including the rate of interest, term of loan, frequency and amount of payments etc. In case the borrower defaults in repayments, the lender has the right to take over the ownership and possession the property involved. This right is derived from the loan agreement or deed. Such action of taking over the ownership and possession is called foreclosure.

Normally, such foreclosure needs approval of judicial authorities designated for the purpose, as per the provincial laws prevailing. The property thus taken over will be sold by the lender in order to realize the dues to the lender. Such sales has to be transparent, normally through the process of auction. Surplus, if any, received on sale after appropriating towards the dues and expenses, will be paid to the borrower.

There are various alternatives or ways to avoid mortgage foreclosure. A few of them are as follows:

1. Refinancing: This involves shifting of the dues to another lender (if willing) with relaxation in terms like longer residual tenure etc so that monthly payment obligation will be less. But this alternative is not easily available since the situation warranting foreclosure at the existing lender might have severely affected the credit score of the borrower
2. Restructuring: This is an arrangement with the existing lender who agrees for extension of loan period and also allow the existing overdue amount to be paid in further installments. This will also result in easing the future payments obligations by reducing the amount.
3. Forbearance: Some lenders agree to forego some of the dues, especially the interest unpaid or other fees and charges so that the borrower’s debt burden will be less. This will be against specific request by the borrowers and mostly depends on the capacity of the borrower, realizable value of the property etc.
4. Pre-foreclosure repayment: In case the property has good realizable value, this is the best option. In this alternative, the borrower arranges for funds (mostly by selling the property or by arranging another mortgage) and repays the loan.