Negative equity - Compulsory Purchase Association

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Negative equity


What is the Problem

When the acquiring authority crystallises the debt it means claimants
may be forced into bankruptcy, or
As the negative equity is not compensatable as disturbance compensation, the claimant may be unable to afford the deposit on a new property.

S15-17 Compulsory Purchase Act 1965 deals with situation where mortgage debt exceeds the value of land. It provides the
Value of land to be agreed between mortgagee, mortgagor and acquiring authority
Agreed sum is payable to mortgagee
Mortgagee
is obliged to accept payment earlier than that stipulated in the mortgage deed
is entitled to be paid his costs of reinvestment
is entitled to loss if the rate of interest secured by the mortgage is higher than can reasonably be expected to be obtained on reinvestment

The proposal is that at any time after a notice to treat has been served (or deemed notice to treat accepted) the mortgagor can serve notice on their mortgagee to transfer their outstanding mortgage to another property.

It would also apply to key workers mortgages and shared equity mortgages

To keep the mortgagee’s risk profile broadly similar:
Bank has first charge on the new property
If the claimant buys a cheaper property than the loan, the amount of the mortgage transferred to the new property should be reduced by the amount of the capital released on downsizing. This keeps the negative equity at the same amount.

The change would not apply if claimant already in default on payments; and/or the Mortgagee had commenced proceedings for possession.

Aim

Negative equity is crystallised by the acquiring authority. The claimant may have been able to service payments but unable to fund the capital sum still owed to the mortgagee (the negative equity).

   

What we seek

Focused attention on this issue in the light of the above.

Notes from discussion

Important issue and priority for change – can put a whole Order or Bill at risk.

CPA would need to engage with the Lenders or else we are not likely to achieve anything meaningful.
This appears to be a UK specific issue which is not reflected in practice in other countries where the acquisition powers are much more focused on securing satisfactory relocation of householders and businesses.

Next Steps/Actions

Primary legislation required in next major reform package.

 
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