Foreclosure is the process through which a secured creditor (‘lender’) claims ownership over a property mortgaged by a defaulter borrower. In India, lenders used to have to obtain permission from a Civil Court before carrying out a foreclosure, under Section 67 of the Transfer of Property Act (TPA), 1882. In 2002, the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act ( ‘SARFAESI Act’) was passed, which simplified the foreclosure process.
Under the SARFAESI Act, when the borrower for a mortgage is unable or unwilling to pay her equated monthly instalments (EMIs) three times consecutively, the lender has a right to acquire her property and either sell or lease it out. SARFAESI thus entitles the lender to take over the property without obtaining the permission of the court. The lender can also choose to hand over the property to an Asset Reconstruction Company (ARC) for management. An ARC is a special type of financial institution set up under SARFAESI Act that can buy bad debt or Non-Performing Assets (NPAs) of a financial institution at a mutually agreed value and facilitate its securitisation or reconstruction. In this case, the ARC has the power to take possession, sell or lease out foreclosed properties.
After lenders foreclose properties, they set a ‘reserve price’, i.e. the minimum amount the lender will accept as a winning bid for the property during an auction. This reserve price is decided by factoring in the price at which the property was originally bought by the defaulter and the outstanding loan on it. The price of the property may then increase from this minimum amount during the auction.
Foreclosed properties are generally expected to be auctioned off at rates lower than their true market values. According to one commentator, properties repossessed by banks are routinely sold off through auctions at prices that are “20-30% lower than the prevailing market rate”. However, there are not many reliable statistics available to estimate the discount at which foreclosed properties are typically sold. In addition, more research is also needed in the area to understand the costs and risks faced by mortgage lenders in the processes to foreclose properties in cases of default, and how that affects the rates at which they can offer financing.
It is observed that there are numerous concerns regarding the quality of the foreclosed property that has been listed in an auction. News articles note that many defaulters who have been owners of properties that end up getting foreclosed have been struggling financially. This means that their property has not undergone the due repairs, hampering its quality . Experts, therefore, advise buyers to follow due diligence about the location, encumbrances and quality of the foreclosed property.
Online and offline auction
Auctions of foreclosed properties can take place through either online or offline modes. The offline mode requires the bidder to submit her bid and other requisite documents to the bank before the date of the auction. The bank opens bids for the foreclosed property on the auction date and sells the property to the highest bidder.
In an online auction or ‘e-auction’, the bidder submits her bid online on the date of the auction itself. According to an article in the newsletter of Indian Institute of Banking and Finance (IIBF), the Finance Ministry in 2012 had asked banks to undertake e-auctions under SARFAESI Act. In 2013, ‘C1 India’, an e-procurement and e-sourcing solutions provider, formally launched the first online portal to enable banks to auction their stressed assets. Other platforms such as bankauctions.in came up, as well as the websites of individual banks such as State Bank of India (SBI) and Canara Bank started facilitating online auctions for foreclosed properties. Since offline auctions are time-consuming and expensive, these online portals have made bidding on foreclosed properties far more transparent and accessible.
Timeline leading to foreclosure
Issues with carrying out foreclosures
Even though Section 13 (4) of the SARFAESI Act allowed lenders to acquire the mortgaged property directly and sell it without the interference of courts or the Debt Recovery Tribunal (DRT), the process could still be stalled by the borrower by inducting tenants into the property before mortgaging it. Thus, tenants could approach the DRT against the action of a lender to dispossess them, and the DRT could then decide on the rights of the tenants under the relevant Rent Control Act of the State. However, the recent Supreme Court judgement, ‘Harsh Govardhan Sondagar v. International Assets Reconstruction Company Limited, 2014’ gave lenders the power to evict those tenants who have been inducted into the mortgaged property, even though the terms of the mortgage prohibit tenancy or lease of the property.
What foreclosures portend
The frequency and duration of the foreclosure process varies across countries. It is useful to study these aspects in order to understand the health of that country’s housing market.
For instance, when the American economy collapsed in 2007-08 in the Great Recession, the foreclosure rate increased from 1.03% in 2007 to 1.84% in 2008 before reaching 2.23% in 2010. By 2019, the foreclosure rate in the US had declined down to 0.36%. Experts now predict that the rate may again increase as the Covid-19 crisis worsens in the US.
It is also important to note that the time taken to carry out foreclosures varies across countries due to differences in legal requirements for lenders. For instance, in the United States, the lender must obtain permission from the local court to conduct certain kinds of foreclosures. From the first quarter of 2007, to the third quarter of 2018, foreclosures took 713 days on an average in the US. Whereas in India, the permission of the court is no longer needed under the SARFAESI Act for conducting any type of foreclosure. In Italy, a foreclosure takes 120 months on average, whereas it takes six months in Sweden, and nine months in the Netherlands.
In India, data on the frequency of foreclosures and the time frame within which they are conducted is sparse. The websites of ForeclosuresIndia as well as Indian Banks Auctions Mortgaged Properties Information (IBAPI) act as a common platform to display details of properties foreclosed by numerous financial institutions from all over the country. IBAPI, which is an initiative of the Indian Banks Association (IBA), presently has 2800 properties listed on it.
 A ‘secured creditor’ is an individual or institution that lends money after obtaining specific assets as collateral. Banks and financial institutions are secured creditors. Unsecured creditors do not obtain specific assets from the borrower as collateral.
 Before the SARFAESI Act came into effect, only State Financial Corporations and land development banks had the power to foreclose properties under the State Finance Corporations Act, 1951.
 The requisite documents include (i) an application (ii) KYC (know your customer) documents and (iii) Earnest Money Deposit (EMD) which is usually 5 -10 per cent of the reserve price of the bank.
 Foreclosuresindia.com is an aggregator which lists all the properties foreclosed by 28 banks that are scheduled for auction.
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