New law will save mortgage defaulters from losing homes

The high inflation and ever-increasing interest rates may shatter our dreams as prospective homeowners. Some of us, who took out mortgages to buy homes, have started receiving notices from lenders about increases in instalment payments yet, we have no alternative sources of income. Meanwhile, there seems to be less money in circulation as many people continue to feel the pinch. The fear is defaulters may end up losing their homes.

Patrick, Nairobi

Financial experts attribute the not-so-good situation to the wobbling shilling that has continued to depreciate against the US dollar.

Some homeowners may move to court to challenge legal letters on increased instalments in line with the new lending rates. There will also be court battles involving home buyers who have defaulted on payments even after commercial banks allowed grace periods.

Some of the legal battles will entail attempts by banks to auction properties of investors for defaulting payments. However, unlike before banks are today compelled by law to sell off the property of a defaulter at the highest market value.

Before the passing of the law (Land Act), there were reported cases of financial lenders auctioning property even below 29 per cent of their market value.

Traditionally, there were no legal requirements that the lenders recover specific amounts from auctions of defaulters’ property. But now, property that fails to register a specific market value cannot be sold for a song thereby making it harder for lenders to recover debts.

Banks are therefore stopped from selling property below 75 per cent of the prevailing market price.

Legally, a valuation must be undertaken to get a valuation report or else the bank, mortgage firm or financial institution will have broken the law. The new law requires a bank to sell a property at the highest market value to settle the outstanding balance and the defaulter pockets the proceeds.

Another nightmare for defaulting home buyers over looming increased interest rates is foreclosure, a legal action whereby a bank or mortgage firm bars a client from settling the loan and taking over the property. It comes into play when a prospective investor fails to pay agreed instalments towards settling the mortgage.

A foreclosure absolute order means the right of the client to settle the mortgage balance is revoked and property ownership transfers to the money lender.

However, the financing institutions must first apply for a court order which involves two processes. First, they must apply in court for a foreclosure order nisi, which gives the client time to repay the debts and later redeem the property.

Harold Ayodo is an advocate of the High Court of Kenya.