AMIDST THE FIGHT & STRUGGLE AGAINST THE PANDEMIC: WHAT COMES OF THE MORTGAGE YOU ACQUIRED?
Have you ever been in the middle of reading and signing an agreement or contract and you end up seeing a clause mentioning what will happen if a “natural calamity” or “pandemic” disease occurs? Usually people don’t even finish reading that clause because we never anticipate any of that may happen in the near future.
History tells us of the origin of the word “Mortgage”. As many other words you have encountered, its of Latin origin meaning “a dead pledge”. But again, mortgages have been there during the flu pandemic of 1918 and even during the great depression of 1930 and they still exist to this day. The question can be how did they survive then and how can the lenders and borrowers protect their interests in a mortgage during these trying times of COVID 19?
The concept behind mortgage can be simplified as follows: — You get the amount of money mentioned in a mortgage agreement, let’s say a hundred million and you put one of your landed properties with the same value or more as a security. In case you default in paying that mortgage then the Bank or that financial institution that lent you the amount may end up selling that property to acquire their rightful amount as stated in the mortgage agreement.
Amidst the crisis of COVID 19, a lot of individuals and families around the world have endured the economic effects of this crisis. Business is slow, companies are forced to lay off some of its employees basing on their operational requirements and the economic needs. Some non-essential businesses have been required to close up. Individuals and Corporate institutions may be suffering financially and they are not having the same smooth business they were having before the COVID 19 crisis began.
For the individuals and institutions that acquired mortgage for the different purposes may be facing the bigger struggle. Financial hardship due to COVID 19 is a nightmare that people want to wake up from.
Here in Tanzania microfinance institutions, savings and credit cooperative society (SACCOS) and banks are yet to give their statements on how they plan to assist the individuals, industries and corporations which have mortgage agreements with them and they are facing financial hardship due to COVID 19.
As the question of how the financial institutions and their clients in Tanzania can be able to protect their interests in mortgage agreements during these trying times remain solid and un answered, two things come into mind. The declaration of Suspension of payment of mortgage OR the adoption of Mortgage Payment Deferral for the clients suffering from the pandemic distress. These two concepts will be analyzed below.
Suspension of payment of mortgage, this means for the borrower who faces financial struggle due to the effects of the pandemic will not be obligated to pay the mortgage during this time. In the end of the pandemic and upon the return of “business as usual” then they will be obligated to continue to pay their mortgage as the agreement entails. Countries such as Italy that have already declared the suspension but this only covers the individual households and small firms. Simply the lenders have offered them Payment Holidays. But what about the big firms and corporations? This leaves the effectiveness of this measure in question.
The second option can be the financial institutions to offer the option of Mortgage Payment Deferral to the clients that have mortgages payments that are yet to be completed. Deferral agreements between the borrower and the lender will have to be entered immediately.
The deferral agreement will indicate that the borrower and the lender have agreed to pause or suspend the mortgage payments for a certain period of time. In this case the temporary time will be during the crisis of COVID 19. After the agreement ends, the mortgage payments return to normal and the missed payments- including principal and accumulated interest-repaid.
The deferred agreement does not cancel the amount owed on your mortgage. At the end of the agreement the borrower will have to resume the payment according to his payment schedule. Also, the interest that was not paid during the deferral period will continue to be added to the principal of your mortgage. This means the total amount expected on your original payment schedule will be affected as well. The life span of this agreement may be set on six months or any specific time.
Some banks and financial institutions in the world are already offering this option to those who acquired mortgages from them. Example: Banks in Canada are using the same approach I have analyzed above.
All being said and done let us bear in mind that COVID 19 is a global tragedy. And as all pandemics recorded through out history have proven, “The world has never been prepared enough”. Therefore, the financial and banking sectors in Tanzania have a role to play to ensure that their interests and those of their clients are well protected. And perhaps maybe it also a call for changes in our laws regarding Mortgages here in Tanzania.
Article Prepared by
Ken Edwin Heriel
Independent Legal Consultant
E-mail: kenedwin9@gmail.com
