Banks to be hit with avalanche of cases from dispossessed home owners
South African banks are about to be hit with an avalanche of more than 100 legal suits from home owners whose properties were repossessed and sold at auction for a fraction of their value.
The dispossessed home owners are demanding a total of more than R20 million in compensation from the banks, and a change in the law to outlaw the practice of selling houses at auction for a fraction of their worth. After years of taking it on the chin, banking customers are starting to fight back, using the Constitution as their primary legal weapon.
While the cases are being brought individually, they are being coordinated by a group of attorneys across the country.
It is reckoned that upwards of 10,000 homes are repossessed each year by the banks. The majority are sold at auctions for a fraction of their market value – in some cases as low as 10% of their worth. At a conservative estimate, if each home is sold at auction for roughly R300,000 less than its market value (the actual figure is reckoned to be higher than this), ordinary South Africans have lost more than R60 billion over the last 20 years. In many cases, it is the banks that repurchase these homes for their own benefit and then resell them at market price. In such cases, they still come after the defaulting borrower for the outstanding amount.
The bank receives the proceeds of the sale less the auctioneers’ fees, and then demands that the home owner repay the difference between the proceeds of the sale and the value of the mortgage bond.
“This represents a massive transfer of wealth from one section of the population to another,” says Advocate Douglas Shaw, who has been briefed by some of the attorneys to represent various litigants. “This is a transfer of wealth from the have-nots to the haves, and we say this is unconstitutional. This practice violates South Africans’ constitutional right to property, to housing and to just administrative action.
This represents a massive transfer of wealth from one section of the population to another. This is a transfer of wealth from the have-nots to the haves, and we say this is unconstitutional.
“There is a fundamental question of human rights at stake here. Many people have their houses repossessed by banks having lost their jobs or due to some other unforeseen event, and often they do not recover from these situations. There are cases of people committing suicide after an event like this. There is a broader issue here than the repayment of a debt.
“The banks on the one hand present in their TV advertisements a public face of beneficence, but you don’t see much of this once you are handed over to the legal department.”
Adv Shaw says the litigants are not arguing that banks should not be repaid their loans, but that they should be prevented from selling repossessed houses “in the extremely prejudicial manner of sales in execution. In global terms, South Africa is one of the worst offenders of property rights in this regard and it is time for the law to change."
The banks on the one hand present in their TV advertisements a public face of beneficence, but you don’t see much of this once you are handed over to the legal department.
Human rights lawyers have long argued that if banks want to be seen as the benificent organisations they claim to be, then they should be made to uphold the Bill of Rights and respect the dignity of customers who run into financial difficulties. Mortgage loans typically allow the bank to sell the house at auction in the event of default, though some lawyers argue that this can, in many circumstances, violate the borrower's property rights.
Residential property is protected by Section 26 of the Constitution, and Section 25 prevents arbitrary deprivation of property. "Arguably, the execution process is arbitrary in that it has widely different outcomes for different citizens’ homes," says Adv Shaw.
Most of the litigants have also raised the securitisation defence, demanding that the banks provide evidence that their loans have not been securitised. Securitisation is the practice of bundling loans together and on-selling them to investors, though the banks continue to act as collection agents for the new owners, which is in violation of Section 78 of the Banks Act. The home owners are claiming that their loans have been securitised and that the banks are no longer the owners, therefore had no right to bring legal action against them.
Banks typically issue a bare-faced denial when asked if a borrower's loan has been securitised, or they demand the borrower provide proof - a virtual impossibility given the secrecy surrounding this practice. The courts have tended to give the banks a free pass whenever a customer raises securitisation as a defence. Yet is is well known that billions of rands of mortgage and other loans are securitised by the banks each year. It is also known that several banks have settled out of court with customers who presented irrefutable proof of secutisation, out of fear that proceeding to court would create a precedent that could sink the banks in legal claims.
Bank staff colluding in property sales
One of the litigants who lost her home, Amanda Smith, had her property sold for half its market value of R1,4 million in April this year. This left her with an outstanding bill of R700,000 to FNB, which she is now claiming back from the bank. She also says the interest calculation presented by the bank is incorrect. She argues in her summons that the bank’s supposed contractual right to sell her house in execution in the event of default is void because such contracts are signed under duress. All litigants are making basically the same arguments. "In my case, I never received summons from the bank. I was notified by SMS that the house had been sold. Suddenly, when the house was sold, everyone could find me no problem - the bank had all my details. Yet, when the bank wanted to serve summons, they could not find me."
Smith says she was given seven hours by the sheriff to clear all her belongings out of the house. "This was the most embarassing part. My neighbours were standing around watching. I got talking to the sheriff and he told me people in the bank inform their friends that there is a property coming on sale which can be picked up for next to nothing. It happens all the time."
Bank buys back R700,000 property in Soweto for R135,000
Mohato Motsamai lost his house in Protea, Soweto, after placing himself under debt review in March 2009. Despite this, the bank issued summons against him, though he never received it and was therefore unable to mount a defence. His house was sold for R135,000, when its market value was R700,000. In his summons against Standard Bank, he says the bank has a duty to “obtain as close to the market value as possible. It can do this by putting in a reserve price. I aver it has failed to fulfil that duty.” The bank therefore did not act in good faith.
As with several of the litigants now bringing cases before the court, Motsamai, who has two young children living with him in the house, says he never received summons from the bank. "The first time I knew my house was going on auction was when people started coming around wanting to see it. The next thing I knew the bank had sold my house back to itself for R135,000. I managed to stop them evicting me."
In his summons against the bank, he states: “Even though it was part of their (Standard Bank’s) records that I have two minor children, the bank has nevertheless proceeded against the constitutional principles established in Gundwana v Steko Development CC and others 2011 (3) SA 608 (CC), without due consideration of my circumstances including my right to housing and that minor children were going to be affected by his decision and without exploring alternative means of satisfying the judgment.”
We are saying the law needs to be changed to allow a house to be sold over a reasonable period of time at fair market value. We also see no reason why, when a house is sold at auction, that a reserve price is not put in place to protect the home owner.
The sale in execution process is mainly governed by Rule 46 of the Uniform Rules of the High Court. This rule prescribes an auction as the process to be used, as opposed to estate agents, while another rule of the court prevents the setting of a reserve price. Adv Shaw says he intends to challenge the constitutionality of these rules as they are arbitrary and prejudicial to the home owner.
“We are saying the law needs to be changed to allow a house to be sold over a reasonable period of time at fair market value. We also see no reason why, when a house is sold at auction, that a reserve price is not put in place to protect the home owner,” says Adv Shaw.
The Ministry of Justice has been notified of the cases now being brought before the courts, along with a recommendation that the law be changed to prevent sales in execution at below market price.
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