CeMAP MRT2 Arrears, Shortfalls & Lender Remedies question: mortgage indemnity insurer pays the lender

CeMAP MRT2Arrears, Shortfalls & Lender Remedies

After repossession and sale, Craig’s mortgage shows a £30,000 shortfall. The mortgage indemnity insurer pays the lender £22,000 under its policy. What is Craig’s position?

A He owes nothing, because the insurance has paid out
B He owes only the £8,000 the insurer did not cover, to the lender
C He owes £22,000 to the insurer only; the lender’s uninsured £8,000 loss is written off
D He can be pursued for all £30,000: £22,000 by the insurer and £8,000 by the lender

Show the answer and explanation

Answer: D. He can be pursued for all £30,000: £22,000 by the insurer and £8,000 by the lender

Paying the claim gives the insurer the lender’s rights against Craig for the amount it paid, under the doctrine of subrogation (common law), so it can pursue £22,000; the lender keeps its own claim for the uninsured £8,000. MCOB 13.6.3R requires the lender to tell Craig of the shortfall and that another company, such as a mortgage indemnity insurer, may pursue it. Any recovery must still be notified in time (MCOB 13.6.4R).

Common mistake

Assuming the insurer’s payment reduces what the borrower owes.

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Related CeMAP MRT2 questions

Last year Jon’s lender automatically capitalised a small shortfall, adding £30 of interest over the term and 18p to the monthly payment. A second automatic capitalisation would add £25 of interest over the term and 15p a month. May the lender apply it automatically?Chris is in arrears on his repayment mortgage. His lender agrees a temporary switch to interest-only for six months. Chris has no repayment strategy for the capital. Which statement is correct?After Leah's home is repossessed and sold, £35,000 is still owed. The lender's mortgage indemnity insurer pays the lender £20,000 under the policy. Who can pursue Leah, and for how much?

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Original practice material mapped to the published CeMAP MRT2 learning outcomes. Independent, not endorsed by Walbrook (formerly LIBF). Verify figures and rules against current guidance before relying on them.