I took a loan from a local bank but defaulted for nearly one year due to economic hardship. I recently got a letter from the lender saying they were planning to auction my house, which I used as security, to recover their money. I am scared as the bank may sell the house at a throw-away price to recover the Sh2.1 million debt.
Many homeowners have defaulted on mortgage repayment due to the economic ravages of Covid-19 over the past two years and high interest rates.
Some banks have, however, resorted to settling such defaults out of court since even auctions do not yield much – people have no money to purchase at the fall of the hammer.
Moreover, the law currently prevents lenders from selling private property for a song to recover debts.
The Land Act 2012 requires banks to sell the property of a defaulter at the highest market value possible or at least 75 per cent of the prevailing market value.
Before the passing of the law, there were reported cases of financial lenders auctioning property below 29 per cent of their market value.
Lenders preferred to dispose of property at public auctions because it was fast. To date, many prospective homeowners peruse auctioneers’ advertisements in the dailies, hoping to get bargain deals.
Land or homes sold at public auctions sometimes go for as little as 40 per cent of the prevailing market value.
Traditionally, there were no legal requirements that the lender recovers a specific amount from auctioning a defaulter’s property.
Before selling a charged property, fresh valuation has to be carried out to ascertain the current market value; otherwise the lender will have broken the law. The intention of this law is to ensure the bank sells the property at the highest market value to settle the outstanding balance and the defaulter pockets the balance.
The law further requires that banks to involve tenants, spouses and other guarantors before selling off property that was used as security for a loan. However, even before the passing of the law, some “humane” banks opted for out-of-court settlements before selling property of defaulters.
The law has forced commercial banks to struggle to auction properties seized from loan defaulters as potential buyers hesitate to pay above the minimum bid price set in law.
The reality is that countable prospective buyers are willing to offer the statutory 75 per cent purchase price, making the auctioneers advertise in mainstream newspapers as a hobby.
The sluggish economic activity has created a growing pool of distressed borrowers whose assets are being seized by newly aggressive lenders.
Ironically, auctioneers are not selling as fast as they are repossessing them, leaving a glut of repossessed land and homes as cash-strapped buyers seek to buy the properties cheaply and at outsized discounts.
– The writer is an advocate of the High Court.