Friday 3 January 2014

How to Survive a Bank Foreclosure

In my previous Article titled “The Malaysian Property Dilemma” I examined the financial fortunes of 3 Malaysian Families earning incomes of RM14,000 per month (High Income family), RM8,000 per month (Middle Income family) and  RM3,000 per month (Low Income family).

Based on my study, as at July 2013, after providing for living and related expenses, these 3 Malaysian Families were estimated to have remaining monies available to pay their respective Housing Loan Repayments computed as follows:-

High Income Family
                                                                                    RM
Monthly Family Income (2013)                                 14,000
Monthly Expenditure                                                 11,040
                                                                                    ---------
Income Surplus available to pay Housing Loan        2,960
                                                                                    =====

Middle Income Family
                                                                                    RM
Monthly Family Income (2013)                                8,000
Monthly Expenditure                                     6,280
                                                                                    --------
Income Surplus available to pay Housing Loan      1,720
                                                                                    =====

Low Income Family
                                                                                    RM
Monthly Family Income (2013)                                 3,000
Monthly Expenditure                                                 2,480
                                                                                    --------
Income Surplus available to pay Housing Loan        520
                                                                                    =====

Summary of Surplus to pay Housing Loans as at July 2013

RM
High Income Family                                                   2,960
Middle Income Family                                               1,720
Low Income Family                                                       520

Surplus to pay Housing Loans as at July 2014

The Malaysian Federal Government, numerous Local Authorities and services providers recently announced that effective 1st January 2014 there would actions taken that effectively would result in increases in the Cost of Living of Malaysians in 2014 and beyond.

The Cost and Price increases that commenced on 1st January 2014 include:-

1.00     Increase in electricity charges
2.00     Increase in water charges
3.00     Increase in toll rates
4.00     Increase in petrol prices due to lower fuel subsidy
5.00     Increase of Assessment Rates
6.00     Implementation of the Goods and Services Tax (GST)
7.00     Increase in sugar price due to withdrawal of subsidy
8.00     Increase in transport charges

Such drastic cost and price increases that involve eight (8) key and basic services and commodities ALL AT ONE TIME is UNPRECEDENTED in the history of the Malaysian Economy. There will likely be adverse effects and consequences.

Increase in Costs of Living

With the costs and prices of eight (8) key and basic services and commodities poised to increase commencing 1st January 2014, the overall Costs of Living of Malaysians are poised to increase soon after and are expected to be fully felt by July 2014.

I estimate that by July 2014, when the knock-on effects of costs and prices increase of these 8 key and basic services and commodities become fully felt, the overall Costs of Living of Malaysian families would range between RM500 per month to RM1,000 per month.  

For the purposes of this Article, I propose to adopt a median overall Costs of Living increase of RM750 per month for Malaysian families.

Summary of Surplus to pay Housing Loans as at July 2014

I estimate that by July 2014, after deducting RM750 per month from their existing available surpluses due to higher Costs of Living, the monies available to many Malaysian families to pay their Housing Loan Repayments would be much reduced and may be computed as follows:-

RM (July 2013)          RM (July 2014)
High Income Family                           2,960                           2,210
Middle Income Family                       1,720                              970
Low Income Family                               520                             -230 (negative)

Inevitable Increase in Housing Loan Defaults

I estimate that due to higher Costs of Living, by July 2014 many Malaysian families will likely not be able to pay their monthly Housing Loan Repayments.

Malaysian Banks are already predicting and bracing themselves that by July 2014 the number of their borrowers who will not able to repay their Housing Loans will dramatically increase that will in turn cause the increase of borrowers’ houses to be foreclosed by the Banks and to be sold via Public Auction Sales.
Commencement of wholesale Foreclosure Proceedings

Can Malaysian Banks be relied upon to self-regulate and to act with caution and compassion and not to commence with wholesale foreclosure proceedings against their defaulting borrowers that would cause not only the economic destruction of their borrowers but also would precipitate a crash of the Malaysian Property Market with dire consequences for ALL Malaysians?

Can the thousands of distressed and hapless Malaysian Borrowers defend themselves and survive?

Provisions in the National Land Code of 1965 (NLC)

We need to educate the thousands of distressed Malaysian borrowers to know their Rights as provided for in the National Land Code of 1965 (NLC) and how they can stand up for themselves and know what to do when they are faced with Foreclosure Proceedings by Malaysian Banks

Section 253 to Section 269 of the NLC sets out the Rules and the Rights and Obligations of Malaysian Banks and their borrowers, vis-à-vis the Foreclosure and Public Auction Sale of the properties of borrowers charged to Malaysian Banks for the loans granted to these borrowers. The NLC also gives the Banks the right to foreclose and sell the foreclosed properties through public auctions to recover the loans.

The property offered by the borrower to the Bank as Security for the loan is “Charged to the Bank”. The Borrower is known as “Chargor” and the Bank is known as “Chargee”. When the borrower fails to repay the Bank loan, the Bank can apply to the High Court or the Land Office for an “Order for Sale” to sell the charged property by way of a Public Auction.

Strict Statutory Rules for Foreclosure and Public Auction Sale

There are very strict Statutory Rules that Banks are required to comply with before they can foreclose and sell their borrowers’ properties. If they fail to comply with any one or more of these Statutory Rules, they will fail in their attempts to foreclose and to sell their borrowers’ properties.

The requirement for strict compliance of Statutory Rules by Malaysian Banks (with penalties for their failure to comply) provides distressed borrowers with plausible defences that they can fall back on when faced with foreclosure proceedings by Malaysian Banks.

Borrowers’ 1st line of Defence

Before the Bank can apply to the High Court for an “Order for Sale”, Section 254 of the National Land Code of 1965 requires that the Bank issues to the borrower a “Default Notice” in Form 16D, a form prescribed in the NLC. This Form 16D must be served on the borrower in person.

It is mandatory for the Bank to comply with the requirements stated in Section 254 of the NLC.

If the Bank fails to comply with Section 254 of the NLC and did not issue and did not personally serve on the borrower the “Default Notice” in Form 16D, all subsequent foreclosure proceedings commenced by the Bank, all the way to the issuance of the “Order for Sale” by the High Court would be considered irregular and cannot be enforced on the borrower.
When a borrower is served with a Court Summons to foreclose his property, the borrower should check his memory and his records to make sure he has personally been served by the Bank through their lawyers with the “Default Notice” in Form 16D”.If he did not personally receive from the Bank’s lawyers the “Default Notice” in Form 16D” the lending Bank did not comply with Section 254 of the National Land Code of 1965 and the consequences for the Bank will follow.

Borrowers’ 2nd line of Defence

After he has ascertained that he did personally receive from the Bank’s lawyer the “Default Notice”, the borrower has now to study the Form carefully. Is it Form 16D or Form 16E?

In essence the difference between Form 16D and Form 16E is:

Form 16D is a default notice issued when the loan granted by the Bank to the defaulting borrower is repayable by intalments over a period of time, like a Housing Loan repayable in monthly instalments over a period of 30 years.

Form 16E is a default notice issued when the loan granted by the Bank to the defaulting borrower is repayable on demand in one payment like an Overdraft granted to businesses. 

When the borrower did not receive Form 16D, even though he received Form 16E, the Bank did not comply with Section 254 of the National Land Code of 1965 and the consequences for the lending Bank will follow.

Borrowers’ 3rd line of Defence

When the Bank’s lawyer apply to the High Court for an “Order for Sale”, the Bank’s lawyer will have to submit to the High Court a copy of the Valuation Report on the borrower’s property prepared by the Bank’s Valuer. The Valuation Report will state the “Market Value” of the borrower’s property as at the date of the Valuation Report.

The Reserve Price for the Public Auction is defined in Section 257 (1) (d) of the National Land Code of 1965 that states:

“Every order for sale made by the Court under section 256 shall require the Registrar of the Court to fix a reserve price for the purpose of the sale, being a price equal to the estimated market value of the land or lease in question”

The definition of “Market Value” as adopted by the Board of Valuers, Appraisers and Estate Agents, Malaysia is as follows:

“Market value is the estimated amount for which an asset should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion”

The borrower has the right to challenge the accuracy and correctness of the Valuation Report prepared by the Bank’s Valuer and to challenge the Valuer’s Opinion on the “Market Value” of his property that is the subject of the foreclosure proceedings.

In the foreclosure dispute between Overseas-Chinese Banking Corporation Ltd (OCBC) and Kredin Sdn Bhd (Kredin) heard and decided by the Kuala Lumpur High Court on 17th December 1995, in November 1988 OCBC appointed a Registered Valuer to value 206,531 sq ft (4.74 acres) residential zoned land next to KLCC off Jalan Ampang, Kuala Lumpur. OCBC’s Valuer valued the 206,531 sq ft (4.74 acres) land in November 1988 at RM19,000,000 (RM92 per sq ft) and on 5th April 1993 OCBC’s Valuer revalued the same properties at RM42,000,000 (RM203 per sq ft).

In his Valuation Report dated 27th July 1993, Kredin’s Valuer valued the 206,531 sq ft (4.74 acres) land at RM134,245,150 (RM650 per sq ft).

After hearing evidences from OCBC’s Valuer and Kredin’s Valuer, the Kuala Lumpur High Court ordered that the Reserve Price for the 206,531 sq ft (4.74 acres) land be fixed at RM108,428,775 (RM525 per sq ft).  

The respective Valuations of OCBC’s Valuer and Kredin’s Valuer and the Court ordered Reserve Price are represented as follows:-

Valuer/Court                          Valuation                    Value Per Sq Ft                      Times
(RM)                          (RM)  

OCBC’s Registered Valuer                    42,000,000                203                                          1.00
Kredin’s Registered Valuer                   134,245,150                650                                          3.20
Court ordered Reserve Price                108,428,775                525                                          2.58

Borrowers’ 4th line of Defence

After the borrower has been granted the Housing Loan and after the “Legal Charge” was registered by the Land Office in the name of the Bank, the “Original Copy” of the title document would be returned to the Bank to keep as “Trustee and Custodian” of the borrower for the safety of his Title Document.

What would happen when the Bank loses and misplaces the borrower’s title document? It is a fact that in most cases when the Bank lost the “Original Copy” of a borrower’s title document, the Bank would instruct their lawyers to apply to the Land Office concerned for a “Replacement Title” without getting the borrower concerned to be involved as they consider that as the Chargee, the Bank has the right to apply for the “Replacement Title” without the involvement of the property owner (the proprietor).

Section 166 (1) (d) of the NLC states that the “Circumstances in which title in continuation may be issued to land as a whole and for the Application of Replacement Titles when the original issue document of title has been lost or wholly or partially destroyed, or is being improperly or wrongfully withheld”.

Section 166 (2) of the NLC states that the person or body to apply for replacement titles are as listed below:-

a)         The proprietor of the land in question
b)         Any person or body claiming through the proprietor

Section 166 (2) of the NLC as quoted above did not provide for the “Bank” or “Chargee” to be included in the list of person or body permitted to apply for the replacement title.

Section 168 of the NLC stipulated that

“Before issuing title in continuation in the circumstances described in paragraph (c) or (d) of subsection (1) of section 166, the Registrar or [Land Administration] shall:-

(a)               cause notice of his intention to do so to be published in the Gazette in Form 10D; and
(b)        cause copies of the notice to be served on every person or body having a registered interest in the land, and to be published in accordance with the provisions of Section 433”

When a borrower is served by his Bank with a Court Summons to foreclose his property, he should immediately request from his Bank a photo copy of his title document that he had deposited with them as his “Trustee and Custodian” for the safety of his title document. When the borrower has received the document from his Bank he should check to see if the document given by the Bank is a copy of his original title.

Borrowers’ 5th line of Defence

When after the borrower has failed to stop the Bank and they succeed in obtaining an “Order for Sale” against his property and even sold his property at a public auction, the borrower still has one last line of Defence available.

The Proclamation of Sale in most case, requires the Purchaser at the Public Auction to settle the balance of the Purchase Price within 90 days or 120 days from the date of the Public Auction after paying the required 10% of the Purchase Price.

If the Purchaser is unable to settle the balance of the Purchase Price within the 90 days or 120 days stipulated in the Proclamation of Sale, can the Purchaser apply to either the Chargor (borrower) or to the Chargee (Bank) for an Extension-in-Time to pay the balance 90% of the Purchase Price?

Statutory Prohibition for Extension-in-Time to pay

The NLC in Section 257 (1) (g) {for High Court Public Auction Sale} and Section 263 (2) (g) {for Land Office Public Auction Sale) clearly forbids (prohibits) the granting of Extension-in-Time for the Purchaser to pay the balance 90% of the Purchase Price.

Section 257 (1) (g) of the NLC reads “Specify that the balance of the purchase price shall be settled on a date not later than one hundred and twenty days from the date of the sale and that there shall be no extension of the period so specified”

Section 263 (2) (g) of the NLC reads “Specify that the balance of the purchase price shall be settled on any date not later than one hundred and twenty days from the date of the sale and that there shall be no extension of the period so specified”

In the light of the prohibitions stated in Section 257 (1) (g) and Section 263 (2) (g) of the NLC, If the Bank grants an extension in time for the Purchaser to pay the balance 90% of the Purchase Price, the Bank’s action would render the Sale of the borrower’s property at the Public Auction void (has no legal effect and unenforceable)

Even after his property has been sold by the Bank at a public auction the borrower need to monitor the progress of the sale. The borrower knows the balance 90% of the Purchase Price has to be paid by the Purchaser 90 days or 120 days from the date of the Public Auction Sale.


On the 91st day or the 121st day from the date of the Public Auction Sale, the borrower should go to the Bank to ask if the Purchaser has paid the 90% of the Purchase Price which should have been paid to the Bank the day before and if the Bank said the Purchaser has paid, the borrower should ask the Bank to provide him with the evidence of payment.

On-Line Property Price Search Websites in Malaysia 

Before you purchase your next property, you may want visit http://www.ipropertydata.com and check out for yourself latest prices of the types of properties you intend to purchase.

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