Fresh hurdles for banks in sale of matrimonial homes

The newly-enacted land laws have struck a major victory for borrowers using their homes or land to secure loans.

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Banks selling a defaulter’s property are now required to do so at the highest possible market value, and upon receiving the sales proceeds deduct whatever the borrower owes and remit the rest to the property owner – saving them from the total loss they have been suffering when they fail to fully service the loans.

“The new laws have imposed a fiduciary duty on the lender towards the borrower to ensure the securitised property gets a price closest to the market value,” said Frank Ireri, the managing director at Housing Finance.

There has been no legal requirement on lenders to recover any amounts from the sale of a collateralised asset above the outstanding loan amounts, leaving helpless borrowers at the risk of losing their entire investment even after servicing part of the loan.

Banks are also required to involve tenants and all interested parties, including spouses and guarantors, before disposing of any property to recover outstanding loan amounts where property has been used as security.

Under the new laws, loan agreements must clearly spell conditions for disposal of the collateral, including the reserve price that must be determined before the loan is disbursed.

The biggest challenge that the lenders have to contend with in dealing with securitised loans is that any charge on matrimonial property can be reopened if a disgruntled spouse emerges, even if the transaction has been closed.

Bankers said this provision is particularly hurting to their business because it raised the prospect of the lender incurring additional costs associated with the reopened suit, even where its chances of winning are remote because the lender would be assumed to have been negligent.

The provisions will apply to both new and existing loan contracts and are aimed at protecting borrowers from the double loss they currently suffer for failing to fully service a loan.

Banks have been seizing such borrowers collateral for sale without regard to any payments already made, sometimes amounting to as much as three quarters of the loan.

In some instances, such distressed property has been sold at significantly higher prices with the borrower getting nothing. Last November, for example, the High Court allowed Credit Bank to sell a huge chunk of land in Trans Mara District worth Sh1 billion to recover an outstanding loan of Sh125 million from Kilena Limited.

Kilena had used its 548 hectares of land as collateral to secure Sh140 million loan from the bank but was unable to settle the outstanding balance to redeem the suit property.

Mr Justice Alfred Mabeya declined to give Kilena a reprieve by restraining the bank from advertising the sale of the vast land and instead ruled that the balance of convenience “lies in allowing the bank to recoup its outlay.”

Mr Ireri said that although the new laws are progressive in their protection of borrowers, they risk slowing down mortgage lending.