- TerrywParticipant@terrywJoin Date: 2001Post Count: 16,213
When a borrower can’t pay their loan, under residential finance the lender will be able to take possession of the property used as security for that loan. They can then sell it to recover the money that the borrower owns them.
Sometimes the security property might have dropped in value and the proceeds from the sale may not be enough to cover what the borrower owes them.
In this case, it is likely the lender will come after other assets of the borrower. They can do this even if those assets are not held as security for the loan.
Homer borrows $80,000 from Bank A to buy a property for $100,000.
He has 2 other properties which are mortgaged to Bank B and Bank C for similar loans.
Homer can’t afford the repayments anymore and just stops paying the loan repayments to Bank A.
Bank A take the property and sell it. They incur $20,000 in legal fees, agent fees etc so when they take this from the sale price of $90,000 Homer still owes them $10,000.
They can then come after Homer to recover this $10,000. It is still a debt that he owes them.
Bank A might be able to force the sale of the property mortgaged to Bank B. Bank B would be first in line to be paid, but Bank A could take what’s left – up to $10,000 (and some more fees)
Where this is not possible is with non-recourse loans. These loans restrict the lender to only coming after the property that is mortgaged to the lender, not the other assets of the borrower. This is how superfund loans work. But note that they can still come after the assets of the personal guarantor.
Homer also has a SMSF with a corporate trustee. The trustee has borrowed, through a custodian trustee, with the custodian trustee holding the property being purchased and giving a mortgage over it. This protects the superfund assets as it is not a borrower and not a mortgagor.
Things go bad with this property too and the fund stops paying the loan.
The lender takes the security property and sells it. It can come after the other assets of the custodian – which are nil as it is an empty company. It can’t come after the assets of the SMSF.
But since Homer has provided a personal guarantee, the lender could come after Homer and potentially sell property C to recover their shortfall