A new approach to mortgagee repossessions
Leo Patterson Ross • 20/02/2020
Over the mid-2000s we saw mortgagee repossessions causing all sorts of issues for tenants. We drew attention to it and the experience gave rise to a serious rethink of the process. It lead to some pretty decent reforms including a 30 day rent free period following repossession. However, it may be time to rethink the broader response to failed mortgages in a falling property market. Our Principal Solicitor, Grant Arbuthnot has been thinking about an approach that would result in better outcomes than what we currently might expect! So today we are pleased to present some economic speculation by a lawyer.
Australia's property owners are recognised as being some of the most heavily indebted in the world, and Sydney is notably higher than the national average. This is particularly bad news if you are a heavily indebted property owner - it can be really bad news if you are the tenant of a heavily indebted property owner who loses their property to the bank.
Here's how we understand mortgagee repossessions might exacerbate a economic downturn:
We have a recession
House prices are falling
Some mortgagor/landlords default on their loan contracts
Mortgagee/banks obtain possession of previously rented properties
Those properties are sold into a falling market
- This causes faster falling of housing prices - return to 2
We risk a cycle that exacerbates the recession and pulls more and more people into the cycle from points 2-6. This is obviously bad - tenants, landlord, banks and others suffer more and for longer.
However, what if instead we replace 4 to 7 above with this alternative process:
4a. Banks take the rent and let the tenants stay in their homes,
5a. The rent is applied to the landlords debt
6a. Banks could strategically sell the properties over time (or, not at all)
7a. Falling housing prices are not accelerated and the recession is not exacerbated
This appears a much better outcome – it leads to less evictions, debt and deflation.
We've always understood the banks to be a little cautious about taking on the role of landlord themselves - but we think this is an unnecessary fear. When a landlord defaults on their mortgage/loan contract, the bank could choose to extract the rent to pay the debt and leave the tenancy contract intact. If the rent is sufficient to cover repayment of the debt, then the bank does not ever need to become the landlord. Using the rent to directly pay the landlord's debts is already possible for council rates and some water providers.
There may also be an opportunity for innovative forms of property management where a third party takes on not just the traditional agency role but the whole operation, simply passing on the return to the bank. This is very similar to Defence Housing model or some forms of community housing leasing.
Of course whilst investors may be more likely to be impacted by a downturn, there's still plenty of heavily indebted owner-occupiers. The banks could apply a similar scheme, perhaps at a reduced rent, owner-occupiers to prevent their properties also getting thrown in to the downturn bonfire.
It goes without saying that our interest here is in enabling tenants to stay in their homes. With all the concern about potential impacts of a significant downturn we encourage government and the banks to have an eye on how to sustain the homes which will always be the base of a recovery.