“In deference to the rule that a mortgage is simply a security and cannot be considered payment of an outstanding obligation, the creditor is not barred from recovering the deficiency.

It is not an unusual story. Borrower obtains a loan from a bank secured by a mortgage on his property. The borrower believes he can pay his loan and the bank lends based on its belief on the capacity of the borrower to pay. Then, for various reasons ranging from financial reverses, wrong estimates on fund availability to sheer recklessness, the loan is not paid. The bank enforces its security by foreclosing the mortgage. The property is sold at auction, but the bid price during the sale is not sufficient to settle the borrower’s outstanding obligation, thereby leaving a deficiency or unpaid claim. Is the borrower liable to pay such deficiency or will the sale of the mortgaged property completely extinguish the loan obligation? Is there a minimum bid price during the foreclosure sale, particularly if the only bidder is the lender? Should the bid price be equivalent at the very least to the appraised value of the property as the lender itself has determined? These questions find answers in jurisprudence, the most notable of which is the case of Metropolitan Bank and Trust Company vs Chuy Lu Tan, et al. (GR 202176, 1 August 2016). Chuy and Tanco obtained five loans from Metrobank with an aggregate amount of Pl9,900,000. These loans are evidenced by five promissory notes executed on various dates. As security for the said loans, Chuy executed a real estate mortgage over a parcel of land in Quezon City.

Subsequently, Chuy and Tanco failed to settle their loans despite Metrobank’s repeated demands for payment. In a final demand letter, Metrobank’s counsel notified the borrowers that their obligations, comprising the principal amount loaned, together with interest and penalties, amounted to P24,353,062.03. Consequently, Metrobank extrajudicially foreclosed the mortgage and the property was sold to the bank as the highest bidder for the amount of P24,572,268.

However, in separate letters, Metrobank claimed that after application of the bid price to the borrower’s outstanding obligation and the payment of the costs of foreclosure, accrued interest, penalty charges, attorney’s fees and other related expenses, there remained a deficiency. As such, Metrobank demanded the payment thereof. For the borrower’s failure to heed the bank’s demand, the latter filed a suit for collection of a sum of money with the Regional Trial Court (RTC) of Makati.

The RTC rendered its decision ordering the borrowers to pay the deficiency. The Court of Appeals (CA) reversed the RTC ruling that to allow Metrobank to recover the amount it seeks from the borrower would be iniquitous, unconscionable and amount to unjust enrichment.

On appeal to the Supreme Court (SC), the bank argued that the CA erred in ruling that the mortgaged property is worth more than the bid price and, hence, bars the bank from claiming any deficiency. On the other hand, the borrowers averred that since the supposed value of the subject property shows that it is more than the amount of their outstanding obligation, then they can no longer be held liable for the balance, especially because it was the bank that bought the property at the foreclosure sale.

The SC ruled that in deference to the rule that a mortgage is simply a security and cannot be considered payment of an outstanding obligation, the creditor is not barred from recovering the deficiency even if it bought the mortgaged property at the extrajudicial foreclosure sale at a lower price than its market value, notwithstanding the fact that said value is more than or equal to the total amount of the debtor’s obligation.

The Court does not agree with the CA that the bid price should approximate the value of the mortgaged property. Act 3135, which governs extrajudicial foreclosure of real estate mortgages, has no requirement for the determination of the mortgaged properties’ appraisal value. Nothing in the law likewise indicates that the mortgagee-creditor’s appraisal value shall be the basis for the bid price. Neither is there any rule nor any guideline prescribing the minimum amount of bid nor that the bid should be at least equal to the properties’ current appraised value. Throughout a long line of jurisprudence, the Court has declared that unlike in an ordinary sale, inadequacy of the price at a forced sale is immaterial and does not nullify a sale since, in a forced sale, a low price is more beneficial to the mortgage debtor for it makes redemption of the property easier.

It bears pointing out though that under the law, if the mortgagee is a bank, quasi bank or trust entity, the redemption price is the outstanding obligation plus interest stipulated in the mortgage agreement and not the bid price (RA 8791, Section 47). Theoretically, the bank can tender a very low bid price during the auction, as long as the price is not so grossly inadequate, and then after foreclosure, demand payment for deficiency. This is because the redemption price is fixed by law and not based on the bid price. In other words, the rule that the lower the bid price the easier for the mortgagor to redeem does not apply if the foreclosing lender is any of the financial institutions referred to above.

This is indeed a double whammy. The mortgagor loses a property appraised by the bank at a price usually lower than market price and is thereafter liable to pay the deficiency. Incidentally, the constitutionality of this law has been upheld by the SC in the case of Golden Gateway Merchandising vs Equitable PCI Bank (GR 195540, 13 March 2013). Morale of the story: If you cannot pay, don’t borrow. If you borrow, make sure you pay.