The Financial and Mental Trauma of Foreclosure
Imagine facing serious illness or prolonged unemployment, leaving you unable to pay your mortgage. Suddenly, your property is at risk of foreclosure, and an impending auction becomes a traumatic possibility. My hope is that my family members and I will never experience this, and I empathize with those living with this reality.
Foreclosure places significant financial and mental strain on homeowners. To fully understand the impact of losing one’s home, it’s important to clarify some common misconceptions and outline the costs defaulters may face. For example, defaulters might assume that once the bank auctions their property, their outstanding mortgage disappears and they only need to pay a small charge. In reality, foreclosure causes a chain of costs on top of mortgage arrears: auctioneer fees, marketing costs, legal expenses, interest, penalties, valuation fees and, sometimes, real estate agency commission. You still have ongoing expenses such as utilities, strata charges, quit rent and assessment.
If you are at risk of foreclosure, ask your bank about all costs that are chargeable to you and whether the auction proceeds can cover them. Request an initial calculation of the proceeds and deductions. Shortfalls may occur, so clarifying these details early is essential.
Once the property is put up for auction, you have little control over the process as it is governed by strict legal frameworks, including the National Land Code 1965 (ref 3). Given the lack of autonomy and mounting costs, you should act early to clear the debt, sell the property, restructure or refinance (if possible). Start by contacting your bank to discuss your options and schedule a meeting with a financial counselor to evaluate your situation. These initial steps can help clarify your financial standing. With that in mind, get clarity from your bank on these key areas.
1. Loan & Interest
- What is the total outstanding loan balance, including accrued interest and late payment penalties?
- If the auction proceeds are insufficient, what are my liabilities?
- How long will the auction process last from the start to the completion of the sale?
2. Legal & Foreclosure Costs
- Which legal fees ( Proclamation of Sale, court filing ) will be deducted from the auction proceeds?
- Will I be charged for these costs separately, or are they included in the loan settlement?
3. Auction & Marketing Costs
- Who pays the auctioneer’s fees, advertising costs and real estate agency commission?
- If real estate agency firms are engaged to market the property, confirm who engages them and how much will be charged. If you have to bear this cost, transparency regarding how bidders are classified, such as walk-in (independent) or agency-introduced, is important. Please verify with your bank how these situations are managed.
4. Valuation Fees
- A valuation report is required to assess the market value and reserve price of the property. Please consult with your bank if a report is required for each subsequent round of auction until a buyer is secured.
- Check with the bank the valuation fees and who will bear the cost.
- Find out the timeframe for each auction if there are no bidders.
5. Statutory Arrears
- Will the quit rent and assessment tax be deducted from the auction proceeds, or must I settle them separately?
5. Utilities & Strata Charges
- Will the buyer inherit arrears on utility bills, maintenance fees and sinking fund contributions, or will they be deducted from the auction proceeds?
6. Surplus & Refunds
- Will an itemized list of deductions be given? Do I have any say in the deductions, and what can I do if I’m not agreeable with the expenses?
- What is the timeframe for receiving the balance after deductions?
- Are there any other costs that I need to bear?
The first priority is to prevent a foreclosure on your property. Chargors (owners) have several rights and defenses in foreclosure proceedings (ref 4). One of the critical rights is the Right of Redemption, which allows the Chargor to prevent the foreclosure by paying off the outstanding debt before the sale (ref 4). Doing that is more cost-effective than losing a property at the auction. Every foreclosure-related cost is money lost that does not reduce your debt.
Remember to contact your bank at the first sign of difficulty and explore all available options. Ideally, before you purchase a property, you should have an exit plan in place if you are unable to keep up with mortgage payments. Seek guidance from professional financial counselors to manage your debts and consider alternatives. Consult legal aid organizations to understand your rights and obligations under foreclosure laws. Search for assistance programs that may offer temporary relief or restructuring. Acting early gives you more options and control.
On a personal note, I hope all parties involved will be considerate towards defaulters who are genuinely facing hardship. For those facing foreclosure, know that you are not alone in this struggle. The emotional and financial difficulties experienced by defaulters can be overwhelming. Let’s try to make the foreclosure process less painful for those who are losing their homes.
References:
1. LACA vs Non-LACA Guide – auctions.com.my
2. Hidden Cost To Prepare When Buying Auction Properties In Malaysia – HousingWatch
4. Understanding Foreclosure Proceedings In Malaysia: A Legal Perspective
5. What Happened Before Your Property Is Foreclosed (Lelong) in Malaysia? | HousingWatch
