CeMAP Post-Completion Issues and Arrears 2 — Questions and Answers
Question 1: What is mortgage forbearance and what options might a lender offer?
- Forbearance means the lender writes off the entire debt
- Forbearance involves temporary concessions such as payment holidays, reduced payments, term extensions, or temporary interest-only periods (Correct answer)
- Forbearance is only available for buy-to-let mortgages
- Forbearance means transferring the mortgage to another lender
Correct answer: Forbearance involves temporary concessions such as payment holidays, reduced payments, term extensions, or temporary interest-only periods
Forbearance is where the lender offers temporary or longer-term concessions to help borrowers in difficulty maintain their home.
Mortgage forbearance refers to a range of temporary or permanent arrangements that lenders can offer to borrowers experiencing financial difficulty. Options include: payment holidays (deferring payments for a period); reduced payments (covering interest only or partial interest); extending the mortgage term to reduce monthly payments; capitalising arrears (adding them to the balance); temporary switch to interest-only; and agreed payment plans to clear arrears over time. MCOB 13 requires lenders to consider forbearance before pursuing repossession. The FCA monitors how lenders use forbearance to ensure it genuinely helps borrowers rather than just delaying inevitable problems.
Question 2: What is the Pre-Action Protocol for possession claims and what does it require?
- It is a protocol for surveyors conducting property valuations
- It is a set of steps lenders must follow before issuing court proceedings for possession, including exploring alternatives and providing information to the borrower (Correct answer)
- It is a procedure for registering a new mortgage
- It applies only to commercial property repossessions
Correct answer: It is a set of steps lenders must follow before issuing court proceedings for possession, including exploring alternatives and providing information to the borrower
The Pre-Action Protocol requires lenders to exhaust reasonable alternatives, provide clear information about arrears, and give the borrower adequate time before starting court proceedings.
The Pre-Action Protocol for Possession Claims based on Mortgage or Home Purchase Plan Arrears (Practice Direction — Pre-Action Conduct) sets out the conduct expected of parties before court proceedings. Key requirements include: the lender must provide clear written details of the amount owed, arrears, and charges; discuss the cause of arrears with the borrower; consider reasonable requests for time to pay; provide information about free debt advice services; give reasonable time to make a proposal; and respond to proposals within a reasonable time. Courts may penalise lenders who fail to comply by adjourning proceedings, making adverse costs orders, or refusing possession. The protocol aims to ensure repossession is truly a last resort.
Question 3: What happens to any surplus funds when a repossessed property is sold?
- The lender keeps all proceeds from the sale
- Any surplus after repaying the mortgage debt, arrears, and costs must be returned to the borrower (Correct answer)
- Surplus funds go to the local authority
- There is never a surplus on repossessed properties
Correct answer: Any surplus after repaying the mortgage debt, arrears, and costs must be returned to the borrower
After the lender recovers the outstanding mortgage, arrears, interest, and costs of sale, any remaining surplus must be paid to the borrower.
When a repossessed property is sold, the proceeds are distributed in a specific order: first, the costs of sale (estate agent and legal fees); second, the first charge lender's outstanding debt including arrears and interest; third, any second charge lender; and finally, any surplus to the former borrower. The lender cannot retain more than what is owed. If the sale proceeds do not cover the full debt, the borrower remains liable for the shortfall, which becomes an unsecured debt that the lender can pursue for up to 12 years under the Limitation Act 1980. The lender has a duty to obtain the best price reasonably obtainable.
Question 4: What is a Suspended Possession Order and when might a court grant one?
- An order preventing the borrower from selling the property
- An order granting possession but suspending it on condition the borrower makes agreed payments towards arrears (Correct answer)
- An order suspending the mortgage entirely
- An order preventing the lender from changing the interest rate
Correct answer: An order granting possession but suspending it on condition the borrower makes agreed payments towards arrears
A Suspended Possession Order grants the lender possession but delays enforcement provided the borrower maintains current payments plus an agreed amount towards arrears.
Under section 36 of the Administration of Justice Act 1970, if the court is satisfied that the borrower is likely to be able to pay arrears within a reasonable period, it can make a Suspended Possession Order. This typically requires the borrower to maintain current monthly payments plus an additional amount towards arrears. If the borrower complies, possession is not enforced. If they breach the conditions, the lender can apply for a warrant of possession without a new hearing. A reasonable period is usually considered to be the remaining term of the mortgage. The court considers the borrower's income, expenditure, and realistic ability to maintain payments when setting the terms.
Question 5: What support services should a mortgage adviser direct a client to if they are facing financial difficulty?
- Only to the lender's own collections department
- To free independent debt advice services such as StepChange, Citizens Advice, and National Debtline (Correct answer)
- To a private debt management company
- To a solicitor for bankruptcy proceedings
Correct answer: To free independent debt advice services such as StepChange, Citizens Advice, and National Debtline
Advisers should direct struggling borrowers to free, independent debt advice services that can provide holistic support.
When a borrower is in financial difficulty, the adviser should direct them to free, independent debt advice services. Key organisations include: StepChange Debt Charity (comprehensive debt advice and solutions); Citizens Advice Bureau (general advice including debt, benefits, and housing); National Debtline (telephone and online debt advice); Money Advice Service / MoneyHelper (government-backed financial guidance); and local authority debt advice services. These organisations can help with budgeting, negotiating with creditors, and formal debt solutions such as Debt Management Plans, IVAs, or bankruptcy. The FCA requires lenders to include information about free debt advice in arrears communications. Private debt management companies often charge fees and are less appropriate.
Question 6: What is the effect of a bankruptcy order on a borrower's mortgage?
- The mortgage is automatically cancelled
- The mortgage remains as a secured debt, but the property may be sold by the trustee in bankruptcy to satisfy creditors (Correct answer)
- Bankruptcy protects the property from repossession
- The lender must accept reduced monthly payments permanently
Correct answer: The mortgage remains as a secured debt, but the property may be sold by the trustee in bankruptcy to satisfy creditors
Bankruptcy does not eliminate secured debts — the mortgage remains, and the trustee in bankruptcy may sell the property to realise its value for creditors.
When a borrower is made bankrupt, their assets vest in the trustee in bankruptcy. However, the mortgage remains as a secured debt — it is not discharged by bankruptcy. The trustee may sell the property to realise any equity for unsecured creditors. If there is equity, the trustee has 3 years from the bankruptcy order to deal with the property interest — after which it reverts to the bankrupt. The mortgage lender retains their charge and is paid first from sale proceeds. If the property is in negative equity, the trustee may disclaim it. The borrower's credit record is severely impacted, and obtaining a new mortgage after bankruptcy is difficult for many years.
CeMAP Post-Completion Issues and Arrears 2
What is mortgage forbearance and what options might a lender offer?