Selling a house in negative equity

johnnyskeleton

Something on the property pin made me think of this:

Suppose someone is in negative equity to the effect that they have been made an offer of €250k for their property and have a mortgage redemption figure of €270k.

The solicitor cannot transfer the property until the mortgage has been discharged.

So, in such a situation, are the banks more likely to:
a) allow the person to sell and pursue them for the 20k as personal debt; or
b) block the sale until the vendors come up with the money.

Quite apart from the people who refuse to sell their house at current market value because they perceive this as a loss from the purchase price or their expected value of the property, I wonder are there many people who simply cannot accept an offer below their mortgage, and this is a contributing factor to the stalled market?

My view would be that the banks would rather let the property be sold and pursue them for the extra funds, rather than have it decrease in value further. Any thoughts?

The_Conductor

The mortgage is a secured loan on the property.
The value of the property is irrelevant, the mortgage will not be satisfied until it is discharged.
It is probable that the bank would not allow the sale to proceed until such time as their outstanding debts are cleared.

SimpleSam06

It could be treated on a case by case basis, with people who have no way to pay off the mortgage (ie in the case of unemployment or illness) allowed to sell the residence, and everyone else stuck with it. I'd say a bank would rather realise the remaining capital than have to seize the property through the courts and pay the costs of selling it themselves; also it would be another bad loan mostly off the books.

In cases where there is a massive disparity between the value and the loan, they might stick to their guns regardless though.

SimpleSam06

I stumbled across this site while looking into this...

The Seized Real Estate Market Is Hot! Every Month Thousand Of Properties Become Repossessed By Banks, State, Federal And Private Orginizations Through Various Seizure And Bankruptcy Laws. Those Properties Could Be Purchased Through Auctions At A Fraction Of Their Market Value.

Its an ill wind, as they say.

seamus

smccarrick wrote: »

The mortgage is a secured loan on the property.
The value of the property is irrelevant, the mortgage will not be satisfied until it is discharged.
It is probable that the bank would not allow the sale to proceed until such time as their outstanding debts are cleared.

Provided that the vendor is in a good financial standing otherwise, it is probable that the bank (or another bank) will provide them with a €20k personal loan in order to discharge the mortgage.

If they can't get the loan however, you are correct in that the sale cannot proceed.

TJM

This scenario is going to become much more common over the next few years. The best analysis I've seen is this Sunday Business Post piece on the consequences of negative equity.

johnnyskeleton

SimpleSam06 wrote: »

I'd say a bank would rather realise the remaining capital than have to seize the property through the courts and pay the costs of selling it themselves; also it would be another bad loan mostly off the books.

That's how I'd see it, the alternative to legal action being the mortgagors simply handing the keys back and running to the hills, or in the worst case declaring bankrupsy.

smccarrick wrote: »

It is probable that the bank would not allow the sale to proceed until such time as their outstanding debts are cleared.

The banks don't want a lot of property hanging around not making them any money, and it's probably better to have 200k and a 20k bad debit than a 220k bad debit secured by a property that won't/can't sell. Plus, I always thought the banks hated selling a repossessed property, so if the vendors can sell for a reasonable amount it would probably cost the bank a lot more to sell it themselves.

SimpleSam06 wrote: »

I stumbled across this site while looking into this...
Its an ill wind, as they say.

Thank God for Irish Judges and their ancestral fear of being evicted by the peelers, although there will probably be a lot of failed residential investment properties being either sold privately or repossessed.

adam.number2

Or the banks could rent the houses to their former mortgage holders. This started happening in UK, I believe. Attractive to the defaulter, as they get to stay in their home while paying smaller cash repayments, attractive to the lender as they dont have to sell at a discount and avoid legal fees.

esmeralda

Someone I know in the states who found herself unable to keep up with her mortgage went into her bank with the intention of simply telling them to take the house (she had bought it about four years previously), because it wasn't worth the struggle of trying to keep paying anymore, or trying to sell in an imploding market. They promptly offered her a massive extension on the number of years of her mortgage, bringing the payments +taxes down to the same amount she would have then had to pay in rent anyway.
Pretty good solution for all concerned I thought.
By the way, she is in her early sixties (they gave her a twenty-year mortgage in her late fifties - yes, I thought that was pretty incredible too, but I suppose that is what sub-prime was all about...). But then even if the mortgage is until she is a hundred, she still has a fighting chance of hanging on to the house till there's an upturn in the market in a few years time, when she could sell it and still make something for her old age...

adam.number2

Exactly Esmeralda. Not that the banks are trying to be humane, but it is the fairest way and happily makes the most business sense for them too

antoinolachtnai

If they are sensible, the banks will avoid creating a situation where property is dumped into the market at discounted prices. The bank has an awful lot to lose if the market continues to sink.