EDITORIAL – A closer look at our country’s ‘foreclosure’ law

The Law Reform Commission is inviting public comment concerning several suggested modifications to the Cayman Islands’ “foreclosure” regime. Although as a rule we advocate for swiftness in government action, this particular subject – which concerns fundamental issues such as home ownership and private property rights – demands careful deliberation.

Home ownership has long been a symbol and sign of financial security in Cayman, ever since men returned from the sea to hand-build wattle-and-daub homes for their families. For many, if not most people, their home will be the largest purchase in their lifetime, and the repository of the greatest portion of their personal wealth.

It is critical that laws governing mortgages and forced sales of property be simple, clear and fair. When it comes time to put pen to paper, all parties involved in a mortgage transaction – lenders, attorneys and borrowers – must understand their rights and responsibilities according to the contract and under the law.

The Law Reform Commission’s report comes amid an accumulation of anecdotal evidence from members of the public who feel – vehemently – that they have suffered hardships as a result of Cayman’s foreclosure laws. However, it appears that, at least statistically, the urgency of Cayman’s foreclosure issue has somewhat waned. The commission’s recently released discussion paper notes a steady decline in home mortgage defaults and subsequent property repossessions over the past two years.

The number of residential foreclosures dropped from 27 in the second quarter of 2016 to only nine in the first quarter of 2018, according to official statistics. The value of those repossessions dropped from 2.82 percent of the total value of residential mortgages to 2.0 percent over the same period.

Careful readers will observe that in the first paragraph of this editorial, we placed the word “foreclosure” between quotation marks. That’s because Cayman’s current law does not technically provide for a foreclosure – if properly defined as an entity taking over the title to a property and becoming the registered owner. Put another way, a bank cannot assume ownership over a property even if a borrower stops making payments on the mortgage. Instead, lenders rely on section 72 of the Registered Land Law to create a charge on a mortgaged property – then, if the borrower defaults, the lender has the right to force the sale of the property, which up until the point of sale remains legally the property of the borrower, not the bank.

In the discussion paper, the commission questions whether borrowers adequately understand lenders’ legal rights in regard to forced sales, whether the current legislation causes the incurrence of too many legal fees (passed along to the borrowers, who as a rule are already in financial distress), and whether a bank-forced sale advertised as a “Bank Sale” or “Foreclosure” artificially deflates the true “market value” of a property (primarily to the disadvantage of the borrower).

Tales of lost homes are often poignant and full of sorrow. From the standpoint of policy and principle, though, the ultimate responsibility for understanding and adhering to contractual commitments falls upon the individuals who are signing on the dotted line. Yes, legal contracts (including mortgage documents) can be lengthy and abstruse. Lawyers who can translate legalese into plain English can be expensive. But when it comes to a significant financial and emotional investment, such as the purchase of a home, it is absolutely mandatory that you know exactly the commitment you are making.

When what appears to be a good deal has presented itself, it can be difficult to walk away from the negotiating table. But if you do not understand what you are signing – don’t sign it.