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Judges give banks a grilling over home repo practices

Banks arrive in court without proper paperwork and expect to be given judgments against clients.

A full bench of the Johannesburg High Court sat last week to deliberate on how and when reserve prices should be applied before repossessed homes are sold at sheriffs’ auctions.

For several legal and human rights groups admitted as friends of the court, this is a pivotal case to decide whether the banks’ right to recover a loan supersedes constitutional protections to dignity and property.

Things did not go well for the banks, who were berated by the judges for arriving in court without proper paperwork, expecting the courts to grant judgments against clients who were behind on their mortgage payments. This follows a number of cases where homes were repossessed by banks for as little as R10 and then on-sold at auction for a substantial profit, leaving the defaulting client with a shortfall to the bank.

The judges wanted to know why the banks habitually arrived in court expecting a sale in execution judgment (allowing the property to be sold at auction) without sufficient information to allow the courts to make an informed decision, such as whether the home was a primary or secondary residence, who lived in the house, and what steps the bank had taken to reach an accommodation to allow the customer time to catch up on the arrears. The banks have repeatedly insisted they apply for sale in execution orders only as a last resort.

Gauteng judge president Dunstan Mlambo ordered a full bench of the High Court to decide on four cases involving Standard Bank and Absa. The full bench of three judges was asked to decide on several issues, including the setting of reserve prices to avoid homes being sold at auction for a pittance, and whether banks should be awarded a money judgment at the same time as a sale in execution (SiE) order.

Advocate Steven Budlender appeared for Standard Bank and advocate Wim Trengrove for Absa. The banks argued that reserve prices should only be set by judges in exceptional circumstances, and want the court to split the awarding of the money judgment from the sale in execution order. Budlender argued that the reason for this was that once a money judgment was awarded against a defaulting client, this placed pressure on the client to catch up on arrears. Experience shows that very few homes in arrears end up being sold at sheriffs’ auctions, usually because defaulting clients reach an accommodation with the banks.

The arguments in court were largely technical, but several legal and human rights groups admitted as friends of the court seem baffled by the banks’ insistence on splitting the money judgment from the SiE order. It would save them time and money if both were granted at the same time. One observer suggests the banks are putting up a faux fight by insisting on reserve prices only in exceptional circumstances, and on terms decided by themselves. He says what they really want is a money judgment since this triggers a financial benefit to the banks in terms of credit default swaps. These are a type of insurance policy which protect bondholders against default. A large percentage of mortgage bonds in SA are securitised, meaning they are packaged into a bond and on-sold to investors. This point was not argued in court.

The banks’ counsel was further grilled by the full bench on their defective paperwork when approaching the court, resulting in a large percentage of cases being postponed. The banks attempted to remedy this by filing supplementary affidavits in the four cases mentioned above and to address the issues raised by Mlambo.

Justice Wepener, one of the three judges presiding in the case, repeatedly emphasised that if the banks came to court with all of the relevant facts in the first place, there would be no need to postpone or later seek an execution order. He said the banks seldom place all the facts necessary for the courts to decide whether to grant an execution order or to set a reserve price.

Advocate Alfred Cockrell, representing Legal Resources Centre and Lungelo Lethu Human Rights Foundation (LLHRF), argued that the default position of the courts should be to set a reserve price because not to do so would be detrimental to debtors. He referred to a supplementary affidavit from economist Dr Sean Muller pointing out the misalignment of incentives between banks and debtors when it comes to setting reserve prices. The banks’ sole interest was to recover their outstanding debt and no more, hence it should be up to the courts – and not the banks – to determine when and how the reserve price should be set.

In its papers before the court, LLHRF challenged the banks’ claims that sale in execution was used only as a last resort, and only after exhaustive efforts were made to reach an accommodation with clients in arrears. LLHRF cited several cases where homeowners were evicted without being notified that legal action had been taken against them. The first they knew of the judgments against them was when the new owners arrived to claim the properties they had purchased at auction. It argues that the setting of a reserve price is a key safeguard against a debtor’s investment being completely lost since experience shows once a home is sold at auction, there is little to nothing left for the dispossessed homeowner after legal and other costs are deducted.

King Sibiya, head of the LLHRF, says evictions are currently running “at the same volume as during the apartheid era.”

The SA Communist Party (SACP) weighed in on the case, throwing its support behind LLHRF, arguing that we are witnessing “the beginning of the biggest series of legal actions in SA since 1994.”

It is calling for a moratorium on all evictions, “during which time there must be a full-scale commission of inquiry into all aspects of evictions and housing fraud.

“The SACP fully supports the Lungelo Lethu Human Rights Foundation in fighting the horrors of eviction. There has been much justified criticism of corruption within the public sector. The SACP asserts that we need a thorough investigation into corruption in the private sector, in particular, the financial sector,” it said in a statement.

“Lungelo Lethu has proved that housing fraud is being perpetrated by syndicates which include the four major banks, estate agents and others involved in ‘property development’ together with some municipal housing officials and members of the police force and the legal profession.”

Judgment was reserved in the case.

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These auctions need to be investigated…you see them come and go ,but try to get in on that “action “, try is as far as you get

The role of the Sheriffs’ of the Court must also be investigated on how they deliver the summons to collusion with syndicates on the auction floors. I suggest that after the sale there must be a 21 day confirmation period allowing for counter offers for the property.

A simple solution is that the lender’s recourse should be limited to the asset proceeds. In the US the banks cannot come after client for $50k if the sale in execution left $50k on the mortgage debt.

If this were applied to houses and cars in SA we might see more prudent lending by the banks.

It does however leave little downside for the borrower and will fuel speculation. Merely take out a mortgage and if the property’s value does not increase you mail the keys back to the bank and walk away. This was one of the less publicised causes of the financial crisis

It could be applied perhaps only to the primary residence to avoid speculation.

Not Warren :

It is simple non recourse debt. Some of us believe that lenders should not be lending out 100% of a property value. Maybe we are wrong, maybe it makes sense.

If lenders limit loans to a sensible proportion of auction asset value there absolutely cannot be speculation. Lenders determine loan amounts, not borrowers

King Sibiya, head of the LLHRF, says evictions are currently running “at the same volume as during the apartheid era.”

I don’t see what this has to do with anything.

Credit protection is a fine balancing act but I generally find the disregard for debtors is a big structural problem. Someone owes X and that debt can be doubled pretty quickly with admin and legal expenses. Collection fees should be the first port of investigation as I think they are unethical and affect small debts the most which is likely the most vunerable of the population.

In terms of banks and mortage bonds, I think the banks are fairly accomodating because taking a house onto their balance sheet is the last thing they want. Where the train goes off the rails is when that last resort is taken and the case handed over the recovery teams which are usually a fairly brutal team of people.

The biggest issue is that this can’t be stopped because it is the system on which the home loan market is based but it should be looked at and refined, I’m fairly certain no one wants to evict people but you can’t block that if a fair process has been followed. The focus should whether that process is indeed fair, I’d be extremely agitated if a R500k property was sold for R50k to settle a few thousand rand debt.

“King Sibiya, head of the LLHRF, says evictions are currently running “at the same volume as during the apartheid era.” I don’t see what this has to do with anything

Could not agree more – obviously trying to bring a racist angle into it. Money is colourblind. In any case during apartheid there would not have been much repo’s of black people’s homes because black people were not allowed to own property outside of the homelands

One would think that Govt is dealing with a bunch of children./ Not allowed to make money, not allowed to make a living, not allowed to, not allowed to sue where tenants refuse to pay rent, not allowed to choose those that a landlord would feel comfortable in doing business. Must be forced to approach the law when applying for eviction never mind the damage done to private property. What an unfriendly bunch of politicians we have. Its okay for them to kill each other. Sick and tired of being treated in this way. Message to Parliament. Open your own bank and feel the heat or shall I say charge more taxes to float your boat.

Well , their voters are worse than a bunch of children. These applicants and friends and PC happy clappy commentators and even judges have lost touch with reality. How can court set reserve price?? What if reserve price is not reached at auction. What happens to the house.?? The NCA and Judges in PC mode have totally stuffed up the legal process when it comes to legally get people to pay their debts through the courts.

You said it Lulu.. Too many people are not willing to accept responsibilities for their actions. Too many “adults” that behave like children and cry and whine that they are “victims” when in fact they have been living beyond their means, enjoying the good life and “looking good” in front of their friends.

Also sad that the banks arrived as they did. Where is the pride in one’s work? Where is our “1st World Financial Sector”? Is it too much to ask for a little bit of competence? However, this also makes one question the efficiency of the courts, perhaps it was they who failed to communicate the requirements effectively. Both seem rather likely in our backward little country.

The sloppy paperwork with which the banks approached the court is indicative of how they take their own duty of care and diligent processing.

Banks, Attorneys and Estate agents are a bunch of thieves and parasites. All they want is an execution order to hold helpless debtors to ranson.

When banks get into “shit” it is general public that bails them out.

Lets hope these judges apply they minds and come up with a remedial system that is fair and just to all parties.

Actually there is such a fair and just system. It is called the free market. Before you enter into a transaction with the bank, you get the opportunity to scrutinize the contract. If you do not like the terms, walk away and borrow from your benevolent aunt. People accuse banks of discriminating against people when lending criteria are stringent. When they do get the loan and they cannot repay the debt, it is also the bank that is to blame. The bank will always be seen as the enemy of the people.

in order to solve this ethical dilemma, socially minded people came up with a solution. Everything belongs to everybody, so nobody needs a loan. This is called socialism. People flee across borders to get away from places where there are no banks, to places where banks “exploit” them.

In the “old” days I used to do these sales for the Perm. The last thing they wanted was a sale in executon.They would do anything to avoid a property in possession which meant they owned it and had to secure it and resell it so the loss continued. The minimum bid was R 250 and we bought in for the Bank if there was no other bid. When the property was sold, the Perm credited the debtors account with any profit from the sale. Moral of the story? They acted ethically. So that is where the emphassis should be if it is missing today.

You may think it is ethical but the judges feel differently. So, if the rule of law is to apply the law has to protect the constitutional rights of the defaulters.

Good Afternoon all. A friend of mine is in trouble she paid up her bond within 6yrs and took a second bond years later a small amount that ended up being big and she lost her job. she’s now in arrears and her house is about to be auctioned as well, when she applied for the second bond the monthly instalment on the form is different from what the bank is asking and they never discussed that, even the courts never asked to that level as to how much they agreed upon. What can I advise her to do in this case

Good Afternoon all. A friend of mine is in trouble she paid up her bond within 6yrs and took a second bond years later a small amount that ended up being big and she lost her job. she’s now in arrears and her house is about to be auctioned as well, when she applied for the second bond the monthly instalment on the form is different from what the bank is asking and they never discussed that, even the courts never asked to that level as to how much they agreed upon. What can I advise her to do in this case

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