SA in the Stone Age when it comes to home repossessions
South African laws governing home foreclosure are in the Stone Age compared to other countries, according to a study by Advocate Douglas Shaw, who has argued dozens of cases before the courts on behalf of defaulting borrowers.
It is reckoned that upwards of 10,000 homes are sold at auction every year in South Africa, after the courts have granted judgment against the defaulting home owner. These homes are usually sold for a fraction of their price through sheriffs’ offices around the country.
South African court rules specifically prohibit these homes being sold with a reserve price in place. Other countries require such houses to be sold at market-related prices in a commercially reasonable way. There are instances of houses in SA being sold for as little as R100, prompting accusations of racketeering involving individuals in the banks, sheriffs’ offices and preferred buyers.
Based on an average price of R1,19m for a medium-sized house being sold at 30% below market price, Shaw reckons a typical defaulting borrower loses about R350,000 through the sale in execution process. That amounts to a whopping R3,5bn transfer of value from the have-nots to the haves over the course of single year, and probably vastly understates the true figures. Shaw is now planning to challenge the constitutionality of selling houses at auction without a reserve price, while the National Credit Regulator has announced that it is raising a similar argument against the banks in the High Court.
The banks have argued recently on Talk Radio 702 that they regard the sale in execution process as a last resort, and comply with the rules of the court in sanctioning auctions without a reserve price. Selling at auction in this way allows for a quick sale, but Shaw says this is neither to the benefit of the banks nor the borrower: “The banks would recover a much higher amount if they were to follow the example of other countries by allowing repossessed homes to be sold at close to market value. This would also leave the defaulting borrower with a smaller outstanding loan to the bank.”
As things stand, the banks still pursue the defaulting borrower for any shortfall in receipts from the auction sale.
Legal proceedings start after three months' arrears
Banks typically hand over mortgage loans to their legal departments after three months’ arrears, though it may be some time later before actually applying to the court for judgment against the defaulting borrower, which is necessary before sale in execution order is granted.
By contrast, in Germany the borrower can apply for a temporary suspension of any summons served by a bank on a defaulting borrower if there is a reasonable prospect of repaying the arrears within six months. “This contrasts with SA where banks regularly refuse to withdraw the summons unless the full arrears are paid immediately,” says Shaw.
A German borrower can also apply for suspension of the legal process if the sale in execution may cause hardship contrary to public policy. For example, the medically-certified risk of suicide has been held by German courts as reason to stop legal proceedings.
German borrowers can apply for temporary suspension of the legal process if there is a reasonable prospect of repaying the arrears within six months.
Courts in Scotland will not grant an execution order without first canvassing the debtor’s ability to repay the loan within a reasonable time. This forces the banks to reschedule debts, or at least allow a reasonable time for borrowers to catch up on their arrears.
Belgian law also allows for time extensions to allow debtors to get their affairs in order, the foreclosure proceedings cannot commence unless the judge is satisfied conciliation attempts between debtor and creditor have been made.
In Hungary the law allows for houses to be sold by way of judicial execution, but provides such incentives that the majority of cases involve the bank and the debtor voluntarily agreeing to the lowest price at which the property can be sold, time limits and possibly also the method of calculation of the selling price.
“The average foreclosure period in Europe is about 24 months ranging from around a year in the UK and the Netherlands to about 10 years in Cyprus,” says Shaw.
Unlike SA, in most European countries and states in the US it is essential to establish the market value of the property before sale in execution. In Germany, Poland and Hungary, an evaluation expert is appointed to this task. In Germany, any sale price less than 70% of market value is refused by the authorities. France’s civil code allows the debtor to challenge the reserve price if it is obviously inadequate.
Spain forced to change law
Spanish law is among the most stringent in Europe, and was found to be in contravention of consumer protection laws by the European Court of Justice in 2013 by not allowing a judge to suspend foreclosure proceedings where the terms of the loan were deemed to be abusive. Spanish laws were subsequently amended to place limits on the amount of interest and costs that are levied on defaulted loans and allows the borrower up to 10 years to repay arrears.
European countries also appear to be responding to consumer pressure to limit banks’ ability to seize primary residences. Greece has had a moratorium for several years that prevents banks foreclosing on the vast majority of homes. Greek Prime Minister Alexis Tsipras recently said he would table a new bill to extend the ban stopping banks foreclosing on loans against primary residences.
“The European Union is taking measures to avoid foreclosure proceedings for homes on the basis that foreclosures “are bad for individual borrowers and also for financial stability and society as a whole,” according to the study by Shaw.
Greece has had a moratorium in place for years that prevents banks from foreclosing on most homes.
In Hungary, the debtor is allowed to sell the property privately prior to auction, provided the creditor’s debt is settled. A judicial officer can authorise a sale without auction without seeking the consent of the creditor bank, provided the sale price is enough to cover the debt.
This contrasts with SA’s legal system which gives undue power to the creditor to impose agreements against their interests. For example, banks will make the debtor sign agreements where they acknowledge an amount of debt which may be incorrect.
A European Monetary Fund report in 2007 found borrowers were liable for shortfalls arising from the sale in execution in several European countries, including Ireland, UK, Spain, France, Germany and Greece. In each of these countries it was recognised that sale in execution is a draconian measure that should only be used in extreme circumstances when all other means to reschedule the debt or agree on a repayment holiday have failed.
“In South Africa, none of these tools appear to be legal requirements, and are not used routinely by the courts. If the lender wants execution, despite recent changes, they usually get it,” says the report.
“Speaking in terms of the constitution, it is abundantly evident from the above that foreign law demonstrates that there are an abundance of ways that our law could maintain the purpose of the limitation in ways that were less restrictive of the rights to property, housing and just administrative action.”
How the law should be changed in SA
Pressure is mounting for a change in South African law as it affects home foreclosures. Debtors Defence, a consumer advocacy and defence group, proposes an amendment to the National Credit Act that would make it mandatory for banks to reschedule debt where it is obvious the debtor is able to pay off the arrears over a period of time.
Other suggested changes include:
1. Courts should refuse to grant execution orders against properties where the equity exceeds more than one year’s interest payments and is less than 5% of the total property value.
2. Credit providers should be required to fund a smaller property where the defaulting borrower can show affordability, prior to executing on the existing property.
3. No property must be sold in execution unless it is the genuine last resort, after every other option has been exhausted.
4. No execution should be granted by the courts where the default is as a result of boom-bust cycles resulting from the banks’ own actions.
5. Properties sold at auction should not be sold for less than 75% of their market value (25% less, and then only after trying to sell for market price and then gradually dropping)
6. Where the provisions of this law is not adhered to, any difference between the selling price and the outstanding debt will not be due and owing to the creditor, and it should be an offence for the creditor to attempt to collect such debt.
7. Where a bank buys the property itself from the debtor, any profit from the resale should accrue to the debtor from whom the property was bought and paid to him within 30 days of the property transfer.
8. The credit provider should, in addition to current rules of court servicing of summonses and notices, also serve to all email addresses and fax numbers in his possession for the client.
* This article first appeared in Finweek.