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Court papers shine light on the health of SA’s residential market

The country has eight million properties worth more than R5 trillion.

Court papers filed in the South Gauteng High Court by two of the major mortgage banks – Standard Bank and Absa – provide a fascinating insight into the health of SA’s property sector.

There are about eight million properties in SA, of which 82% are residential. This amounts to 6.5 million residential properties, of which 33.5% are bonded. The bonded properties were worth R2.6 trillion in 2017, amounting to 52.4% of the total value of all residential properties in SA, and 56.5% of GDP.

Citing data from property analytics company Lightstone Property, Absa court papers put the value of SA’s property market at R5.014 trillion at the end of 2017. By contrast, the market cap of the JSE was R15.46 trillion (the current value of the property market is R5.3 trillion, according to Lightstone).

Figures from the Banking Association of SA (Basa) for November 2016 show 1.74 million mortgage accounts across all banks, of which 4.4% were in default. Of the latter, roughly a third had entered the sale-in-execution process. Basa says roughly two-thirds of scheduled sales in execution were cancelled before the auction date.

Following the issue of a directive by Gauteng judge president Dunstan Mlambo, a full bench of the South Gauteng High Court will hear argument later this month from several banks as well as legal and human rights organisations into the issue of home repossessions, and under what circumstances judges should set reserve prices for homes sold in execution at sheriffs’ auctions.

Until recently, no reserve prices were required on homes sold at auction, resulting in some homes being sold at auction for as little as R10, and then on-sold for substantial profits by speculators. This leaves the defaulting client with a substantial residual debt to the bank.

Court rules were changed last year to allow for reserve prices, resulting in some judges applying the new rules and others not. It is this inconsistency in judicial outcomes that the court will address. Among the inconsistencies to be addressed are: when and how a reserve price should be set before a repossessed home goes on auction; whether the money judgment should be given at the same time as the sale-in-execution (SiE) order; and whether judges should have the discretion to postpone immediate money judgments if the sale in execution has been postponed.

Both Absa and Standard Bank have argued in their court papers that legal action against defaulters, though applied only as a last resort, is essential to the general health of the mortgage industry. They argue that the threat of sale in execution provides an incentive to customers to keep up to date with their bond payments. They want the court to apply reserve prices in very defined circumstances, leaving the door open to auctioning properties without reserve prices where a customer is heavily in default.

Others, such as the Lungelo Lethu Human Rights Foundation (LLHRF), take an opposite view and want the courts to waive reserve prices only in exceptional circumstances. It argues that the constitutional rights to dignity, justice and property must be given more weight by the courts. LLHRF cites several cases challenging the banks’ claims to use legal action as a last resort.

Mbuyiselo Khumalo, head of retail home loans at Absa, in an affidavit before the court, says Absa cancelled 70% of sales in execution over the last two years. The average time between the start of legal proceedings and sale in execution is 33 months, versus the industry standard of 27 months. The accompanying graphic from Lightstone appears to support this claim. Only a small fraction of repossessed homes end up going on auction, for a variety of reasons: defaulting borrowers settle their arrears, sell their homes privately or challenge the sale in execution in the courts, among others.

What is also evident from data supplied by Lightstone is that the volume of auction sales has declined markedly in recent years, possibly because of the adverse publicity of properties being sold at auction for as little as R10, and then on-sold for huge profits. The Impairment graph below shows a steady decline in the number of SiE notices being issued by banks against defaulters.

Source: Lightstone Property

The total assets of the SA banking sector amounted to R5.16 trillion at the end of 2017, with gross loans and advances accounting for 73.7% of the total.

The court papers show that mortgage loans were Absa’s biggest asset in 2017, comprising 37.4% of total loans and advances to customers and 25.5% of total assets. Nearly 89% of these fall within the bank’s retail division, and 11.5% were past due or impaired.

Standard Bank argues in an affidavit that without the possibility of timeous execution against assets, security is futile: “And without security, the business of money lending becomes infinitely more risky and therefore more expensive for ordinary members of the public.”

The banks say they offer various alternative remedies for those in default: payment holidays, rescheduling of instalments, voluntary debt review, debt consolidation (to reduce monthly repayments) and bank-assisted programmes to sell homes at better prices than those obtained through auctions.

Standard Bank says it takes on average 29 months from the date of first default to sale in execution. It defines early stage delinquency as an account that has missed less than two payments. On average, a customer is given six months to either settle the arrears or enter a payment arrangement before legal proceedings commence.

The Court Practice Manual was recently amended to provide some relief for homes that are primary residences. Standard Bank says reserve prices tend to attract lower purchase prices, resulting in low levels of interest from bidders.

Source: Lightstone Property

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Maybe what is needed is the existence of an entity like a housing corporation to mop up the bank’s fire sale properties at market-related prices, which would form part of a housing corporation fund.

This is a delicate one and the banks appear to be acting irresponsibly (although the percentage incidence is low) and the certain borrowers act irresponsibly and most possibly belligerently with the loan repayments.

Moral hazard on both sides of the lending fence.

The overall 4,4% default rate on S.A. home loans are already priced-in in the profit margins of the total home loan book by S.A. mortgage institutions. The recoveries on defaulting home loans lift the profit margin even higher. Financial institutions do not experience losses – they operate at a very handsome profit.

Not completely true. Pricing is based on the assumption of recovering at least some amount when a client defaults.

This amounts to 6.5 million residential properties, of which 33.5% are bonded. The bonded properties were worth R2.6 trillion in 2017, amounting to 52.4% of the total value of all residential properties in SA

Thus, another R2 odd trillion not encumbered. How does this gel with our low savings rates in the country so often documented on sites like these.

Paying your house of is not saving. Pouring it into Managed Funds where we can charge fees is.

We might need a re-look at the definition of “savings”

Aye danie and correct me if I’m wrong but these Managed Funds get the tax breaks while property is threatened by ever higher rates, duties, CGT and a Davis wealth tax. We know where the big institutions, the ANC and SARS want to incentivise you to put your money.

The number of SiE events is reducing. One possible contributing reason is that it takes years in the courts to obtain a judgement against a sectional title defaulter for levy arrears.
Courts seem to think that body corporate organisations should just put up with mounting losses.
When making judgments the long history of non-payment and abuse of court processes is simply ignored.

From a legal and and Sectional Title Viewpoint undue meddling with the legal process is bad news. Fatal for certain BC which must spend a small fortune on legal costs and many years to get levy defaulters to pay up and run the court gauntlet to get the Unit sold in execution. These human rights do-gooders and Courts have zero grasp of reality in this regard.

The US has a short-sale model where you can buy houses at a reduced price negotiated by the banks and the previous owner gets to walk away from the bond without getting a poor credit record and the bank takes a smaller hit because it doesn’t get to auction.

This is a good model for the banks to start implementing.

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