Step 1 – How to avoid enforcement

The following is authored by Matthew Bransgrove and derived from the chapter Unjustness Defences in the Lexis Nexis textbook he co-authored The Essential Guide to Mortgage Law in Australia.

The best way to avoid going through the enforcement process is to be careful who you lend to. Organised, rational and decent people, who have problems paying their mortgage, will usually solve the problems or sell their property before the lender has to enforce. These people will communicate frankly about their situation and volunteer to put the property on the market. They will give updates on how the marketing program is proceeding and consult the lender about the reserve.

There is no logical reason for a borrower to bury their head in the sand and run up legal fees and default interest. Nor is it logical to allow a lender to sell the property as mortgagee in possession when it is far better for the borrower to control the sale themselves.

The first thing to do is to search the borrower and guarantors on Google. If you find negative reviews, if you find blogs accusing them of being shonks, then they may well be shonks. If on the other hand there is a lot of material that is all positive then you are probably on a good wicket. If there is no material on the Internet, or it is extremely scant, then you need to dig deeper. A meeting with the borrower at their accountant’s office, or even better at the security property, is a good way to get a feel for who they are and what they are about. You can even do a Zoom interview and record it.

Most successful commercial lenders will never do a loan without personally interviewing the borrower because they find it such an effective filter. If you have someone who gives contradictory or dubious claims about their income, or their exit strategy, or if they seem shifty or evasive in the interview, then you should simply walk away from the deal. Avoid wishful thinking.

Remember a fake website can be put up overnight but a business that trades will have reviews dating back several years and other residue on the Internet, it will have tax records. Ask the borrower who their main client or supplier is and then ask for a telephone reference from that party.

Generally speaking if someone is capable of running a business, or conducting successful developments, is accustomed to making logical commercial choices and the logical choice when you cannot afford your mortgage is to put the property on the market voluntarily.

A business that uses the ATO as an overdraft, and is constantly on a payment plan, is not a bad borrower. A businessman who liquidates his companies and phoenixes them, that is a bad borrower.

A developer who has suffered a shortfall on a development in the past, is not bad borrower. A three times bankrupt developer who has stiffed multiple builders and subcontractors, and now trades through his nephew, that is a bad borrower.

A businessperson bankrupted by the ATO 5 years ago is not a bad borrower, a person convicted of drug importation is a bad borrower. In point of fact it is a good idea to stay away from anyone convicted of any serious crime, or even who has been acquitted of a serious crime. Acquittal means not proven, it does not mean innocent. They may well be innocent, but why take the chance?

Beware of borrowers who are highly geared. If they are not just borrowing from you but have a second mortgage and caveat loans which rank behind you they may have negative equity or be heading in that direction. Negative equity will prevent them from selling their property if they run into trouble forcing you to sell it. Who needs the headache?

Look out for people who are on a downward slide and have not accepted it. An indication of this is when they borrow and capitalise the interest, then a year later refinance and capitalise the interest again. Ask for a loan statement or reference from the outgoing mortgagee to eliminate this possibility.

Do not refinance borrowers who are currently being enforced against by their existing lender for failure to pay interest. If they cannot pay their interest on their existing mortgage, what chance will they have of paying yours with a higher principal?

Avoid people who are borrowing against someone else’s property like the plague. These third party loans are notorious for resulting in painful and prolonged defended possession proceedings. This means loans secured against a mother’s house for the son’s business are a disaster waiting to happen. Likewise loans to a property developer who has found an investor to put up their home (while the spruiker developer is not contributing any hard cash of his own) will come back to bite.

When there is a company borrower, and the guarantor is putting up their residence as security, you want to see that the guarantor owns the company, not 5% of it. The substance of the scenario must be that the person borrowing is both the brains behind the loan and also the person standing to benefit from it. Be alert for machinations carried out to make it look like the person offering the security is behind it, or benefitting, when in fact there is someone else pulling the strings. Give no marks for appearances, choose substance over form.

You do not want to loan to elderly or vulnerable people. You risk having your loan set aside in its entirety as unjust. Another trap for the uninitiated is lending to heirs who are going into business, or developing for the first time, by borrowing against their inheritance. Such arrangements invariably end in disaster with the borrower claiming victimhood and naming you the lender as villain number 1.

Avoid loans to employees, restrict your commercial lending to commercial people who own their own businesses. You don’t want to loan to a mum & dad who are leaving their jobs and borrowing on the family home to start a franchise. You don’t want to loan against a property the wife inherited from her mother to support the husband’s failing business.

These precautions are all just common sense once you think about it. Remember it is the loans you do not do which will make you a successful lender. If you have any doubts call Matthew Bransgrove or Kate Cooper and run the scenario past us. With over 50 years experience acting on mortgages between us we have seen it all before. It may be a cracker of a deal and your concerns are groundless, in which case we will reassure you in writing. Or it may be a disaster waiting to happen and we will advise you to drop it like a hot potato.