Data released last week has confirmed that a large number of West Australian families are facing severe financial stress with mortgage defaults on the increase and anecdotal evidence that repossessions and forced sales have increased dramatically. Practical tips coupled with an understanding of the foreclosure process and being ruthless about who you pay first, may see you avoid the tragedy of having the family home sold at Auction.

The grim revelation by Fitch ratings that WA is now the second worst in mortgage defaults comes as borrowers face rising unemployment levels amid economic activity slowing sinking towards recessionary levels. All factors which are likely to see house prices fall further, leaving an even larger shortfall if homeowners are forced to sell.

Essentially, the foreclosure process is an enforcement of the mortgage contract entered into between you and the lender. While many can’t be bothered reading the “fine print”, the loan contract, coupled with statutory provisions under various state and federal Acts sets out exactly what events will trigger certain actions and what rights you have.

If you are late in making a payment, the lender will generally write to you, formally notifying you that a condition of the loan has been breached - you have missed your payment by the due date. In this case, the letter will probably set out what remedial actions you must take and what rights the lender has in recovering the missed payment. You will be asked to make up the payment and possibly, charged a penalty fee or other payment, as stipulated in the loan contract.
A breach can occur in other areas too. For example, a probable condition of the loan is that you keep the property adequately insured, maybe even providing the lender with a certificate of currency after each renewal.

Even at this stage, you may have statutory rights under the Consumer Credit Code. If the loan was for personal use and is less than the current limit, certain concessions must be offered to you. For example, if the payments are late due to severe illness or unemployment, the lender may be required to offer you a two month deferral on payments. The interest clock will still be ticking and it doesn’t mean you avoid the payments, it is simply to recognise a temporary “hardship” situation.

Those who were required to take out mortgage insurance shouldn’t think this provides them with any personal protection. It provides lenders with a payment to cover the gap between the value of the loan and the price the asset is finally sold for. If you have other assets, the mortgage insurer may then move to recover any amounts they have paid out on your behalf from you, compounding your problems further.

As ruthless as it sounds, you need to have a basic understanding of secured and unsecured creditors. A secured creditor will have a lien or a charge over a certain asset which the lender can seize if the loan fails. In the case of a mortgage, this is likely to be the family home with a car loan probably secured against the car.

Unsecured creditors are those that have no security. These could be your phone provider, pay TV or credit card company. In simple terms, they have no rights to seize any of you property without a court order which might happen after suing you for the unpaid amounts. Depending on the creditor and the amount involved, they may or may not decide to pursue you this way. Either way, it is likely that you will have a “black mark” on your credit file and future finance may be difficult to obtain.

Left unpaid, they could also apply to make you bankrupt.
Again and being ruthless. With the limited income you might receive, you will have to decide what’s more important; hanging onto the house or serving out the mobile phone contract and keeping up the repayments for the plasma TV and blue-ray.
President of the Financial Counselors Association of WA Robert Evans says that if you have debts, dealing with possible missed payments before you go into arrears is vital.
“The best advice is to contact your lenders as soon as possible and explain your situation openly and honestly. Most Lenders would rather have the loan repaid than move to enforcement provisions and if you are up-front, you may be surprised at how helpful they can be.” He said
Under the terms of your contract, having missed the payments, having attempted to renegotiate the loan and having tried to solve the problem in a practical way, the lender may demand immediate repayment of funds. This might prompt you to seek someone else to help sort out the mess.
“Be very careful about companies who advertise extensively on TV offering to solve your financial problems, they prey on people in distress, often refinancing your loans into more expensive products which could compound your problems in the long run” says Robert Evans
Again, depending on the lender and the state of the market, they may give you time to sell the property as a private sale, rather than by mortgage. Some experts believe that a “forced mortgagee auction” can see the sale price being 10 to 15% less than through a private, more orderly sale. But remember, the lender will be wanting to see the money by a specific date
If you are unable to repay the loan in full and are unable to reach an agreement and stick to it, the lender will then move to enforce their contract under a court order. In most cases, bearing in mind the stress of the situation, homeowners will hand over a property in reasonably good order. Very rarely the Sherriff will get involved and notify you to vacate the property by a certain date and time. Given the lender is now dealing with empty premises, the lender’s representatives will arrive to secure the premises and probably change the locks.
The lender will look to recover the outstanding loan the best way possible having regard to the value of the asset, the state of the market and the amount owing. Whilst lenders have an obligation to repay any surplus amounts to you, they will inevitably want their money back as soon as practicable. In many cases, this will be by Auction. They may or may not decide to expend money to make the asset more attractive but with many possible foreclosures on the horizon, this may not be a priority.

If your financial planner doesn't know about this, then perhaps you should find a planner that does. This is "standard advice" for clients of N.C. Bruining & Associates