A reader says her lender has informed her that they have secured a court order to auction her family home to recover their debt. “I am disappointed as I had written to the bank to give me a grace period after losing my job three months ago,” she says.

The reader says she had paid off over three quarters of the mortgage, but worries she might walk out empty-handed. “I am scared because the bank may sell the house at a throw-away price to recover the Sh3 million I still owe,” she says.

Many homeowners have defaulted on their mortgages because of high interest rates. However, auctioning property of defaulters at a throw-away price is illegal, according to the Land Act 2012.

The law requires commercial banks to sell property of a defaulter at the highest market value possible or at least 75 per cent of the prevailing market value.

Before the passing of the law, there were reported cases of the financial lenders auctioning property below 29 per cent of their market value.

Lenders preferred to dispose of property at public auctions because it was fast. To date, many prospective homeowners peruse auctioneers advertisements in the dailies, hoping to get bargain deals.

Land or homes sold at public auctions sometimes go for as little as 40 per cent of the prevailing market value.

Traditionally, there were no legal requirements that the lender recovers a specific amount from auctioning defaulter’s property.

Market value

But now, property that fails to register a specific market value cannot be sold for a song, making it harder for lenders to recover debts as they are required under the law never to sell such a property below 75 per cent of the prevailing market price.

Before selling a charged property, fresh valuation has to be carried out to ascertain the current market value; otherwise the lender will have broken the law. The intention of this law is that the bank sells the property at the highest market value to settle outstanding balance and the defaulter pockets the balance.

The law now requires that banks involve tenants, spouses and other guarantors before selling off property that was used as security for a loan. However, even before the passing of the new law, some banks opted for out-of-court settlements before selling property of defaulters.

For instance, Barclays Bank of Kenya recently advertised the sale of the prestigious Hillcrest Group of Schools associated with former politician Kenneth Matiba.

The bank and the Matiba family reached an out-of-court settlement to sell the institutions, which were under receivership over a Sh620 million debt.

The bank had in 2001 unsuccessfully tried to sell Matiba’s five-star hotels that included Jadini, Africana and Safari Beach over a Sh1.8 billion debt.

But the process stopped after the family lodged an appeal with Barclays Plc – the mother company of Barclays Kenya Limited — even as the matter turned political.

— The writer is an Advocate of the High Court