If you’re seeking closure on what the term 'foreclosure' means, look no further because you’ve come to the right place!
Most commonly associated with ‘bank lelong’ properties in Malaysia, foreclosure is the process of taking possession of a mortgaged property, should the owner (the chargor) fail to repay the mortgage.
In most cases, the mortgaged property will be reclaimed by the bank (the chargee) that the mortgage loan is tied to.
Hence, the property will now be owned by the bank, which explains all the 'bank lelong' signs you might see in front of empty homes (and the posters at traffic lights!).
Malaysian banks have to comply with strict statutory rules before foreclosing a property and selling it off. If the banks fail to do so, they can face penalties. Worse, the entire process may even be deemed invalid and void!
Once the property goes through foreclosure, the next step is... You guessed it: The 'lelong' part where it will be auctioned off to the highest bidder.
This usually takes place in offline auctions, but Malaysia has our very own e-Lelong website where bids can take place online too.
If you find yourself in a situation where your property is ABOUT to face a foreclosure, or you’re worried it may happen to you, read on to find out what the steps are before the bank can seize your home.
The usual letters sent by the bank are a letter of demand, reminders, and a letter of termination. However, this may vary according to the respective bank’s Standard Operating Procedures (SOP), so take this as a rough guide.
The 6 Steps In The Foreclosure Process
Step 1: You will be issued a letter of warning by the bank
Once you’ve not made payment for four consecutive months, the bank will send you a letter of warning that will kickstart the foreclosure proceedings.
This is most definitely not good news, so it’s time to start pulling all your available funds together, and paying off what you owe.
But what happens if you’re in a tight spot, without any money? In this situation, you can consider asking the bank to reschedule or restructure your loan:
Rescheduling your loan will give you an extension for your financing/loan tenure.
Restructuring your loan will modify the terms and conditions of your loan principal/financing to match your current cash flow.
Do bear in mind that any restructuring would depend on your bank, as they have their own protocols and processes for that, so it's best to check with them.
At this point, it’s also recommended to ask your bank what their procedure for foreclosure is like, to help you prepare better for what’s to come.
Step 2: In the second month, the bank will issue you a follow-up, final warning notice
As you receive another warning letter, you should know that the level of seriousness increases with each letter, and can ultimately (spoiler alert!) land you in court.
Thus, this is the best opportunity to reach a form of negotiation with your bank to stop the foreclosure from happening.
The bank would also still be open to discussing new payment arrangements with you – like rescheduling and restructuring your loan, as mentioned previously.
Step 3: In the third and fourth month, you will be sent letters from the bank’s lawyers, requesting you pay your remaining arrears
This letter is called the Letter of Demand (LOD), and is formally issued to remind you to pay your outstanding arrears (read: the money you owe) within 14 days.
If you’ve finally decided to pay up at this point, great! However, what if the payment has been made, yet you still receive warning notices that mean otherwise?
In this case, sadly, the acceptance of your payment is at the discretion of the bank. You'll need to contact the bank to find out just exactly why you’re still being served these letters, despite fulfilling the payment.
Step 4: If no payment is made by the deadline, the bank will send you a Letter of Recall/Withdrawal Facility to repay the full outstanding amount within 14 days
Once the Letter of Recall (LOR) is issued, you will unfortunately be one step closer to being called to court.
Before the bank makes the court application, Form 16D (also known as a Default Notice) will be sent to you personally.
You are required to make the full repayment within one month from the date that Form 16D was served to you.
One important thing to take note of for Form 16D: The bank must send it to you personally, and not through another person, or just by leaving it at your gate/mailbox. Doing so will invalidate any foreclosure proceedings!
Additionally, the chargor may also receive a Notice of Vacant Possession, compelling them to hand over their possession of the property to the chargee by a certain date.
Step 5: Depending on the type of property, there are two scenarios:
a) Individual title: Called to the court for legal proceedings
If the property has an individual title (your name on the property’s legal document), the bank will file an action in court to obtain an Order of Sale of Property against you.
Following this, you will then be served with the relevant documents, and you will be required to defend yourself.
You can choose to defend yourself, or appoint a lawyer to defend you. Bear in mind that choosing the latter means you will have to be responsible for the legal fees!
“The only defense available at this step would be to demonstrate that the full payment has been made. The chargor can do that by providing the relevant receipts and payment transactions.
"As the property title is under the buyer and not the developer, the chargee will need the High Court’s approval before the property is put up for sale in a judicial auction," said Vischaal Yogaratnam, partner at Vas & Co. Law Firm.
b) Strata title: An auctioneer will be appointed to sell the property
If it is a strata-titled property and/or has no individual title issued yet, the bank can and will appoint an auctioneer to sell the property through a private auction.
"You will be served with a Proclamation of Sale /Order of Sale notifying you of the particulars of the auction, such as time, date, place, and reserve price. A reserve price is the lowest price the bank can sell the property for.
Strata title properties fall under a non-judicial auction instead, because the property title still bears the name of the developer. Hence, no approval is needed from the High Court," stated Vischaal.
Step 6: Finally, a real estate appraiser will be contacted to set the auction reserve price
An appraiser will appraise the property by calculating how much the property is worth, and the final figure will be based on the current market price and the outstanding loan amount.
As the owner of the foreclosed property, you have the right to challenge the valuation report, and what the appraiser defines as the ‘market value’.
There may also be instances where two appraisers have been appointed, but both produce different valuation reports. In this case, it will be up to the court to decide which valuation report to accept.
Once the property has been auctioned and sold, the purchaser (the new owner) will pay the mandatory 10% of the purchase price, and will need to complete the remaining amount within 90 days.
If the purchaser needs more time to settle the payment, the chargor must be consulted and their consent obtained.
However, if the chargee not have the chargor’s consent, the sale will be rendered void. This is because of the strict rules surrounding foreclosure and selling foreclosed properties.
How To Prevent Foreclosure From Happening
Nobody wants to face foreclosure, because that means giving up something precious and which they may have worked so hard for.
To steer clear of it, here are some steps you can take to prevent yourself from falling into such a situation in the first place:
Before buying any property, make sure you are 100% able to pay back the loan. Always have some extra funds just in case.
Always make your monthly repayments on time. Add a monthly reminder on your phone to remind you to do so.
If you’re facing difficulties repaying your mortgage, communicate clearly with your bank to restructure or reschedule your loan.
If you can no longer afford the monthly instalment, consider selling the property instead of defaulting on your loan or facing foreclosure.
Reduce any unnecessary expenses as they can, and will, affect your current and future finances.
Make sure your address has been updated with your bank. You may be receiving important letters without you knowing!