Loan Default Question

[foxyleemoo]

Hi all,

I have a question.

Lets say you own multiple property investments and they all have loans with different banks.
If one of the properties has gone south and you can't sell it. What if you decided to walk away from it, stop making payments and let it go into default and allow the bank to repossess. Apart from the obvious bad credit rating and loss of the house, what is the worse case scenario here?
Can the bank still hold you accountable for any outstanding debt left over after selling the property themselves? Or is it only that property that is security for the loan that they can take from you?

Thanks in advance.

Dave

 

[Rolf Latham]

Hi Dave

the lender can obtain a judgement to complete the debt

that may mean having to sell the other assets, even though the defualted lender doesnt have a mortgage on other props, they have an indirect access to same

ta

rolf

 

[Scott No Mates]

Hi Dave

the lender can obtain a judgement to complete the debt

that may mean having to sell the other assets, even though the defualted lender doesnt have a mortgage on other props, they have an indirect access to same

ta

rolf

Unless you have a non-recourse loan.

 

[Terry_w]

Hi all,

I have a question.

Lets say you own multiple property investments and they all have loans with different banks.
If one of the properties has gone south and you can't sell it. What if you decided to walk away from it, stop making payments and let it go into default and allow the bank to repossess. Apart from the obvious bad credit rating and loss of the house, what is the worse case scenario here?
Can the bank still hold you accountable for any outstanding debt left over after selling the property themselves? Or is it only that property that is security for the loan that they can take from you?

Thanks in advance.

Dave

Of course the bank will pursue you for the remainder of any debt, including legal fees. Your other properties can be sold and the proceeds after paying out the first mortgage used to pay your debt to the first bank. Worst case, you lose everything and become bankrupt

 

[Rolf Latham]

Unless you have a non-recourse loan.

pretty rare these days in Ma n Pa land.

Even the limited recourse SMSF products generally request an external guarantee.

ta
rolf

 

[foxyleemoo]

Hi Guys,

Thanks for the replies.

I wonder then what is the advantage of not cross collateralising loans?

Cheers

 

[Peter_Tersteeg]

Hi Guys,

Thanks for the replies.

I wonder then what is the advantage of not cross collateralising loans?

Cheers

I've never seen anyone loose their entire portfolio due to cross collateralised loans. It can happen, but it's extremely rare.

Avoiding cross collateralising prevevents dozens of other problems. Essentially you keep more control over your portfolio and the loans rather than being at the whim of any single lender. You keep flexibility and control.

I've attached a document that outlines a few of the reasons not to cross colalteralise.

 

[Terry_w]

I've never seen anyone loose their entire portfolio due to cross collateralised loans.

I have!

A mortgage broker cross 2 houses. Had a heart attack, wife left, son's business failed, so he sold a property. Contracts exchanged, but near settlement he found out bank would not release security because prices had dropped. sale fell through. The money he was relying on from the sale didn't come. missed repayments on both. Bank took both eventually.

 

[D.T.]

Sad story Terry. At least there was no deaths to protect against.

 

[miss green eyes]

Everyone on somersoft always says 'don't cross-collaterise'.
I always wondered why, since the bank can take your assets, wife and kids if you default on a loan anyway. So in a sense, unless your assets are hidden (and I'm sure people do this - buy properties overseas or tuck cash away in a tax haven etc), you are automatically cross-collaterising when you take out a loan if you already have assets anyway.
If it just because it's harder to sell the properties you have cross-collaterised on?

 

[Peter_Tersteeg]

Items 3 to 9 in my previous attachment deals with reasons to avoid cross collateralising that have nothing to do with defaulting on loans or selling property.

Loan structuring is all about control of your portfolio. If you cross collateralise you give up most of the control you have, regardless of the circumstances.

 

[Terry_w]

Everyone on somersoft always says 'don't cross-collaterise'.
I always wondered why, since the bank can take your assets, wife and kids if you default on a loan anyway. So in a sense, unless your assets are hidden (and I'm sure people do this - buy properties overseas or tuck cash away in a tax haven etc), you are automatically cross-collaterising when you take out a loan if you already have assets anyway.
If it just because it's harder to sell the properties you have cross-collaterised on?

If a mortgage is held over property the mortgagee can take possession of the property if you default If they don't have a mortgage they may be able to take other property owned by a longer drawn out process. But there is flexibility and time.

In my example above if the person didn't cross then he could have sold the first property, received $20k or so and then used that to cover his debts while he sold the 2nd property. But he wasn't able to complete the sale and this lead to his downfall.

 

[miss green eyes]

Thanks terry!

 

[Rolf Latham]

Hi Guys,

Thanks for the replies.

I wonder then what is the advantage of not cross collateralising loans?

Cheers

there are times where the quality of the questions we ask, really impacts the information we may perceive.

A more appropriate question could be ......what are the advantages of crossing properties ( cant cross loans per se).

There are some times where xcoll is the BEST soln, but they arent that common,and just like your doc wont solely prescribe an antibiotic to fix a deep cut that needs stitches, a decent finance adviser is in best practice when NOT crossing securities.

An oldie but much still applies, and much can be added

http://somersoft.com/forums/showpost.php?p=120656&postcount=6


ta

rolf

 

[Paul@PFI]

Hi Guys,

Thanks for the replies.

I wonder then what is the advantage of not cross collateralising loans?

Cheers

I saw this once and it was aweful for the client. They owned a vineyard (commercial and large scale). They also owned some adjoining farmland. The same lender decided it was far simpler to sell the vineyard...Way in excess of the value needed to discharge its facilities that were being withdrawn. Sale of the farm was sufficient but not even contemplated. They had numerous options and sale of the vineyard was a last resort on paper. It stood to decimate a family owned businesses on adjoining land which processed all local grapes for wine. And it disregarded the vines which were a asset of another entity (poorly structured I argue)...The bank wanted to give them away - Grapes and vines worth millions more than the land alone.

Guess which property the bank tried to secretly sell to a competitor.....The legal costs to prevent it were significant. The court was initially happy to accept the bank defence that the mortgage gave it right to choose whichever property to sell. However sense prevailed - Refinancing of the grapes and vines was then able to proceed.

When banks want to sell they will sell it all if they have to and write you a cheque for the difference after costs. Its one of the reasons why joint and several liability and giving blanket guarantees can be for fools. The bank will often take a prime asset - Not the one subject to the debt.