What is a Mortgage Shortfall
A mortgage shortfall occurs when a property is repossessed by a lender following significant arrears and is then sold on at a value which is less than the outstanding mortgage. This can happen because the value of the property has decreased, over the years, or because the lender accepts a lower offer in order to sell quickly.
When the lender is faced with a mortgage shortfall situation, they will then pursue the previous owner or owners for the remaining balance.
Dealing with a Claim for Shortfall
All building societies have a duty to get the best price which can be reasonably obtained; correspondingly, banks have a duty of care to the borrower. Since the end of October 2004 the Financial Services Authority mortgage rules state that all lenders must now obtain the best price that might reasonably be paid. This offers an avenue for an individual to dispute a claim for a shortfall.
If you find yourself in a shortfall situation, consider the following arguments:
the property was not marketed sufficiently;
a sale was arranged privately that the lender rejected but then later went on to sell for a lesser price; and
if the property has been vacant for some time, it could be argued that the lender should have rented the property in order to use the income to offset against the shortfall.
Mortgage Indemnity Insurance
Many mortgages have a mortgage indemnity insurance attached, which effectively insures the lender against any loss. This is actually a complicated area of law and it is not clear exactly how the indemnity works as, technically, it only covers the lender and not the borrower, causing potential difficulties.
For example, it is possible that the insurance company, having paid out to the lender, will then pursue the borrower for the debt. In addition, it is not uncommon for lenders to omit to inform the borrower that they have made a claim against the insurance policy. As a result, the borrower does not reap any of the possible benefits. Whenever you are facing a shortfall claim, also request details of any insurance claim that has been made because this may reduce your liability.
A mortgage shortfall occurs when a lender sells a property to settle an unpaid mortgage but does not achieve a sale price that covers the entire value;
a lender is under an obligation to achieve a best price for the property and you can dispute your shortfall charge if you feel that this has not been done;
many lenders have indemnity policies (which the borrower pays for at the outset) and this may mean that your liability is reduced, so always ask in order to find out if any claims have been made.