I bought a holiday fishing shack just metres from the beach. I paid less than the land value and I bought it from the bank, which had repossessed it from the previous owner.
It was great buying on my part. However, was the previous borrower treated fairly in the mortgagee-in-possession process?
More importantly, did the bank use good data to ensure they disposed for the best price?
Responsible lending using better data is a key outcome of the banking royal commission. But responsibility does not end once a lender has properly analysed a borrower’s expenses and understood what they can afford. Nor does it end when the loan is written. Responsibility should extend to the cases where a borrower falls into arrears and the property needs to be repossessed and sold. Here, the lender should ensure that the best price is obtained, and therefore that the borrower minimises any outstanding debt.
In Australia, we have “full recourse lending”, which means that if the lenders sells your property and the sale doesn’t cover your debt, they can still recover the remaining balance from you. The sale price is therefore critical to ensuring that any outstanding debt is minimised.
My personal experience of buying a mortgagee-in-possession property highlights some of the weaknesses.
The property I bought was at auction. The only properties that ever went to auction in the area were bank repossessions – and buyers were often too nervous to bid at auction. As a result, properties were often sold for 20 to 25 per cent less at auction when compared to non-auction sales.
Being the only bidder, I bid very low. The property passed in, but under the rules as set by the bank, and as the high bidder, I was given the option to buy the property at the reserve price. The bank set the reserve price at 80 per cent of what a conservative valuer thought the property was worth. This meant I bought a property for 80 per cent of a low valuation estimate, in a market where I had no competition.
Was this fair on the original borrower? If the property had been sold under private treaty instead, with the best agent representing it, would there have been a better price achieved for them?
What if there was data to show the difference between the auction and non-auction prices in the area, the effect of using a different agent, and if it is the optimum time to sell (or whether it would be better to hold a property instead)?
There is such data, and it is available to bank research teams, from companies such as CoreLogic. Data exists on: what sales type provides optimum results, which agents are best for which properties, the length of time you need to market a property in order to get the best outcome, and even the estimated cost and returns for doing renovations prior to a sale.
Machine learning also extends the data to include predictive future value for a property and, even, which types of buyers to target and where to target them.
Responsible disposal of a property needs to use this data to achieve the optimal outcome for a customer in arrears.