What happens when a loan is more than the price of foreclosed house?

Developers have been using an overall headline price in the sale and purchase agreement (SPA) as opposed to the real price.

StarBizWeek posed a real case scenario to CIMB Group as to what happens when the loan amount disbursed by the bank is larger than the actual price of the house, and the house is under foreclosure.

Mortgages, or house financing, is a lucrative business for the banking sector. House financing comes under the category of consumer loans.

On a year-to-year basis over past three years, mortgage loans have remained consistent with mortgages making up 32.6% to 33.4% of CIMB Group.

This refers to Malaysia-only loans; it does not include loans disbursed in other countries. The banking group has operations around the region.

In this case scenario, the developer is marketing a unit as RM851,000, being the gross headline price. The buyer manages to get a 90% loan, which is equivalent to RM765,900.

The bank is unaware that the real price is RM709,221, after deducting rebates/discounts, freebies and zero down payment offers.

If I manage to get a 90% loan, that will mean the bank giving me RM765,900, which is more than the actual net price of RM709,221. In the event there is a foreclosure, will the bank base the foreclosure proceedings on the SPA price of RM851,000, or the net, net actual price of RM709,221 in a down property market, assuming the price has fallen below RM700,000? It is the standard practice that all foreclosure proceedings will be supported by a formal valuation report prepared by the bank’s panel valuer indicating the value of the property at the given point of time.

The bank has guidelines and processes to ascertain the fair value of a property. The SPA price or the net actual price has no impact on the foreclosure value.

Will the bank be able to get back its loan amount of RM765,900? In the scenario given above, assuming that the foreclosure value has fallen below RM700,000, the bank would not be able to recover the full loan amount of RM 765,900 from the foreclosure. However, the bank reserves the right to recover the balance outstanding amount through legal proceedings.

The last several years, there have been rebates and cashback offers given to buyers which are not stated in the SPA. What sort of precautions does the bank take in order to mitigate these risks?

The bank has existing processes in place to mitigate the risk of over-financing, for example the bank has its internal guidelines to determine the net purchase price or to ascertain the fair value of the property.

Are such deals fraudulent? Can such SPAs stand in a court of law?As the bank is not involved and nor (is it) a party to the SPA, we are unable to comment on this. Generally, based on the provisions of section 24 Contracts Act 1950, where the consideration or object of an agreement is unlawful, such agreement is void.

Under section 24 Contracts Act 1950, the consideration or object of an agreement could be unlawful, if it is forbidden by a law; of such a nature that, if permitted, it would defeat any law; is fraudulent; involves or implies injury to the person or property of another; or the court regards it as immoral, or opposed to public policy.

The bank is broadly divided between two groups, those who earn a commission based on the amount of loan brought in, and those who are looking at the various risks faced by banks and trying to mitigate such risks. Are efforts being made requiring developers to state the actual net, net selling price by the bank? There are existing requirements for developers to declare the net selling price to the bank.

The Real Estate and Housing Developers’ Association has previously issued advice to developers to comply with the requirement.

However, being prudent, the bank continues to leverage on its internal guidelines and processes to ascertain the fair value of the property.