There’s an interesting story being reported today out of England, where a couple who have never missed a single mortgage payment are on the brink of having their loan called in and their house repossessed by their lender. You can read about the story here if you want to. The bank is refusing to discuss why they are taking this action, and is not responding to requests from the media (for interviews) or from the consumer advocate group in the UK that has taken up this cause and is clamoring for answers. They’re just saying they want their money back in a week or they take the house instead…
“But wait!” I hear some of you saying. “This story is taking place in a foreign country! Therefore, it must concern the business decisions of whacky foreign persons! Such a thing could never happen here in America, right? Right?” You wish…
What is happening in this case is that the couple whose house is in question took out a second mortgage on the property in an amount roughly equal to 40% of the purchase price. Then the property market began to decline (yes, the bubble has burst overseas, too) and the house was no longer worth what the original lender had loaned the purchasers, let alone the total debt they had loaded onto it (somewhere in the 145% to 165% of its current market value). This is making the original lender nervous, because if the borrowers do default on their loans, there is no way the original lender can recoup the money they would be out, especially if they have to fight with another institution over the scraps...
Fortunately for the original bank, they can invoke the “exceptional circumstances” clause in the mortgage contract and demand repayment of the loan immediately. A lot of loan agreements have such a clause; it’s used to protect the lender in a case where the borrower is doing something unusual (e.g. crazy, weird or stupid) that may result in the loan being unpaid and the loan amount lost. It isn’t usually invoked just because the borrow has loaded the property up with too much debt and the lender is worried about what will happen in the event of a default (that hasn’t happened yet!), but unless the contract is very specific about what constitutes an exceptional circumstance (and most of them aren’t; that’s kind of the point) there’s no reason such a clause can’t be invoked…
Now it’s true that the financial laws in the U.S. are different; it’s also true that you should not get your legal opinions from bloggers who never went to law school. I don’t actually know if the “exceptional circumstances” clauses work the same way in this country; I’m not sure if Federal banking laws would permit a property grab like this one to go ahead, or if you would be able to sue the lender for making such a grab and win. I don’t even know if your mortgage has an “exceptional circumstances” clause in the first place. I’m just suggesting that you read over your contract very carefully and if at all possible consult with someone who DID go to law school before you start taking on any significant debt loading using your house as collateral…
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