Jack Darier of Parkhurst in Joburg asked his bank whether his loan had been securitised. No way, said the bank. It was the answer Darier was expecting. Meantime he had the proof that the opposite was true. It was a truth test, he says, and the bank failed.
Sometimes the banks just can’t get it right. Here's a case where Standard Bank’s legal department flatly denied a customer's mortgage loan had been securitised, while another department in the same bank sent proof that the loan had in fact been sold to an entirely different legal entity.
Busted. Thats what happens when the left hand doesn't know what the right hand is doing.
What makes this case even more interesting is that the customer, Jack Darier of Parkhurst in Johannesburg, does not have a judgment against his name, nor is his house under threat of being repossessed. He just wanted to know if his home loan had been securitised €“ in other words, on-sold by the bank to a new owner. That means the bank no longer has legal standing to bring action against the customer in the event of default. You can see below how the banks get around this €“ its a simple cession, they argue successfully in our brain dead courts.
So lets ignore the blather of the R50,000-a-day silks who show up daily in our courts as they repossess upwards of 10,000 homes each year (and for which the SA Communist Party is now calling for an official investigation), and go straight to the law books: Regulation 35 of the Banks Act covers the sale of a loan to a third party by way of securitisation. A debt on-sold to a Special Purpose Vehicle€ť is considered a sale (not a cession) under which the full entitlement, rights and obligations are conveyed to the purchaser. Regulation 35 furthermore blocks the public from gaining access to securitisation transactions, which are deemed to be off balance sheet”€ť.
The reason banks securitise is to move assets off balance sheet and so free up capital for further lending. The provisioning requirements of the Basel accords, which govern banking internationally, means banks have to set aside capital according to the type and risk of loans it makes. So if it can move these off balance sheet by way of securitisation, its a case of rinse and repeat issue a bunch of new mortgage loans, bundle them together, and sell them off to investors. Great business if you can get it. If the mortgage lender defaults, there are various insurance policies and credit default swaps (CDSs) that make up the shortfall. A zero-sum game for the banks. But not if you are the home owner. If the home owner defaults, the bank will get judgment, sell the house at auction for a fraction of its value, and then pursue the hapless defaulter for the shortfall.
In law, thats called undue enrichment. Or selling the same asset twice.
A securitisation is therefore not a cession, but a shift in ownership of the underlying asset. The problem is no defaulting home owner can afford the R50,000-a-day silk to argue this convincingly in court. So the charade goes on. Section 72 read with Section 1 of the Banks Act precludes a bank from participating in any business wherein it may unduly influence and/or place at risk its providential requirements or burden its liquidity requirements. So an SPV cannot be a division or associated entity of the bank. The SPV must be an independent juristic entity.
But lets get back to Dariers to-and-fro discussion with Standard Bank. When he found out his mortgage loan had been securitised despite the bank”s bare denial he went along to visit the commercial crimes unit in Johannesburg. There he laid a charge of fraud against the bank.
Despite having presented evidence of the securitisation along with his correspondence and affidavit and receiving a case number, no further action was taken by the police investigation unit.
Dariers interest in the matter all started when his father ran into difficulty with the bank some years ago. He fired off a bunch of questions to Standard Bank asking whether his mortgage bond had been securitised.
No it had not, said the bank (you can see the correspondence below). But then another division from the same bank sent him a Certificate of Balance showing the mortgage loan was now owned by Blue Granite. This is a securitisation vehicle used by Standard Bank into which it has placed thousands of its loans.
Bear this in mind when reading what followed.
In mid-July this year Darier sent off a standard set of questions thatÂ New Economic Rights Alliance(New Era) advises clients to put to their banks.
Hereâ€s the response from Joop Dekker, executive in charge of complaints resolution at Standard Bank, sent on 24 July 2015:
Good day Mr Darier,
We refer to your note below and would like to reply as follows:
Regarding the questions you have posed below we are of the view that your questions are inappropriate.
The bank does engage in the process of securitization and there is nothing untoward or illegal about this.
It seems that you are being misled by New Era and we note that your question is identical to those that New Era have been inviting people to ask.
The bank has been involved in litigation with this entity and we attach hereto a copy of the latest judgement herein. We draw your attention to paragraphs 24 and 25 where the honourable Judge Baqwa described the NEW Eras action as vexatious. You will also note that legal cost had been awarded against the New Era directors in person. Â
Lastly we confirm that any failure on the banks side to specifically reply to your question below cannot be construed as an admission to the correctness thereof.
We therefore trust that the above clarifies the matter from the banks side.
To which Darier replied on 25 July 2015:
Hi Joop. I have seen by your position at the bank that you are merely doing your job in deflecting any negative PR. As such I harbour no ill feelings or intentions towards you.
However, my response is as follows:
1. I am not surprised the bank finds these question â€śinappropriateâ€ť because they do not want their customers and the public to have an insight into their dubious banking practices. Just because they deem it inappropriate does not infer that there are inappropriate questions to ask.
2. It seems to me that your bank and most likely all the banks underestimate the intelligence of the public and they are trying to pull the wool over peoples eyes. Your executives are a bastion of CAs and financial professionals who seem to think they are far more intelligent than everyone else and no-one will be the wiser. This may the case in other instances but I can assure you this is not the case now.
3. With regards to the legality of securitisation: you are 100% correct. The process of securitisation (ie. selling promissory notes/loan agreements to third parties for purposes of using as investment vehicles to invest in stocks) is legal. However, there is no mention of the fact that after ceding the loan agreement to a party without notification to the debtor the banksâ€ rights to repossess houses are null and void. The bank is thus merely acting as the agent for the third party in retrieving monies owed. I see on the website there is but 2 or 3 lines (mentioning) securitisation but there has been a convenient omission of any information which would allude the fact that the bank has no more rights for repossession.
4. I have been influenced by New Era, however I do not deem them as misleading me. The fact you have not been willing to answer my questions is testament to the fact that the bank does not want to draw attention to the matter or reveal the shady practices. If the bank wasnt doing anything wrong they wouldnâ€t find the questions inappropriate€ť. New Era indicated that the bank would not divulge any details on this matter.
5.Securitisation has been banned in the US for the reasons that is shady and it has resulted in a plethora of illegal foreclosures (No. There have been calls for the outlawing of securitisation in the US, but it is not banned â€“ Ed).
6. I assume that because the manner in which securitisation works, it can be utilised in any form of loan/credit agreement (home loans, car finance, credit cards, etc). It would fantastic if the banks and third parties undertook profit shares with the debtor as they are using money which has not been paid to them yet to create profits. They are essentially utilising the hard work and income of their customers to generate massive profits for themselves
7. I am well aware of what vexatious litigation and proceeding are. I examined the document and it was considered vexatious due to the manner in which the litigation was undertaken. It actually has nothing to do with the legitimacy of accusations or the matter on hand and the legality of the bank repossessing houses when it has no right to.
8. New Era have successfully won cases against the bank and you and I both know this (They certainly educated the public, and in doing so frustrated the banks in their attempts to repossess homes, but New ERA does not fight cases for individuals â€“ Ed).
The response does not clarify the matter at all. That being said we can drop the matter on the premise that I assume that my home loan has been securitised and that I am aware the bank has no right to repossess it.
I will be engaging with New Era and volunteering my time and services for free.
On 28 July, Joop Dekker of Standard Bank provided the following reply:
Good day Jack
We confirm that Home loan account number 364814497 has, according to the banks records, not been securitized.
Furthermore we will have to agree to disagree on our respective views regarding New ERAs position, which entity has taken on the banking industry (including the SA Reserve Bank) during the past few years via the Courts, and has had no success whatsoever.
Hypothetically if your homeloan had been securitized, and due to arrears on the account the bank foreclosed on the loan, the homeloan would merely be ceded back to the bank (by the special purpose vehicle) and the banks normal legal and collections process would subsequently been followed.
So what we have here is a serious dispute of fact: Dekkers denial of securitisation, and Dariers inadvertent receipt of proof suggesting otherwise. Based on standards of evidence, it looks like Darier has made his point. The bank's position is that even if the loan is securitised, it can simply re-cede it back from the SPV and continue with the normal collections process. In theory this is fine, except that per our reading of the law as per the above, you cannot reverse an outright sale with a simple cession.
But Darier was just getting started. He then fired off a letter to the Northern Provinces Law Society, asking what it was doing to investigate lawyers implicated in drafting dodgy securitisation agreements.
Good day. I would like to request a meeting with senior counsel at the Northern Law Society in order to discuss multiple instances of banking fraud committed by local banks and their legal teams which are acting on their behalf. Their attorneys and debt collectors are raising judgments in court and making demands for monies owed on credit agreements for which the bank has no locus standi as they ceded the credit agreements through securitisation structures. (And thus ceded the underlying assets as the whole credit agreements along with assets are sold off their books).
Proof of many instances of this shady practice are available AND local attorneys and law societies can no longer claim they do not know what securitisation is and overlook the matter.
The attorneys have presented papers to the court which are untruthful and indicate the bank still has locus standi on properties lodged as surety when in fact they don't. These attorneys are well aware of this and are essentially lying to judges and are actively committing fraud and being complicit to the fraudulent practice.
I would like to discuss this with the law society to understand their views and positions on this as I am sure the securitisation matter has arisen before and the fact that attorneys are still being given free reign to present fraudulent papers to the courts is tantamount to one of the following 2 scenarios: a) either the law society is completely oblivious to this matter and more study and education of the subject in-house is required, or b) the law society has knowledge of this unlawful practice but is allowing it to continue as it represents a great value of business for the local legal system and practitioners (ie. You are complicit to the fraud and deception in court)
I am not working with New Era and I think it would be in the best interests of the law society to meet with me to discuss further as there may be calls for disbarring of many lawyers who are implicated in this scheme.
Also, another matter I am going to be addressing is how certain firms are structuring the securitisation contracts and legal framework on the JSE in a manner which they are aware is not legal as they knowingly create shell investment schemes. They are structuring in a manner which directly contravenes numerous banking and credit act subsections/clauses and they are structuring in a manner such that properties are not transferred at the deeds office to the entity to whom credit agreements and the physical assets have been ceded to. The sole purpose being so that if a customer defaults the bank can approach the courts and pretend to be legal creditor. They are knowingly advising banks to create shell investment schemes.
Surely the local law societies are aware of this practice or they need to start introducing formal education and study into these matters.
The Law Society has requested a meeting with Darier over the matter. We'll keep you posted.
Adv Douglas Shaw comments as follows on Darier's points to Standard Bank above:
A securitisation IS a cession, which is what is necessary to shift the ownership of the asset, the asset being the bond, a real security right.
Its not a mere cession €in debit€ť which might not involve the change in ownership, but it is a cession. Thus it must show up in the deeds registry.
Securitisation has not been banned in the US.Â
Point 7 is a very good one!
Point 8, not so sure!
If (the bank) recedes it back then both must show in the Deeds registry .
I’’d be happy to attend that meeting with the law society.
FNB valued Mike Russwurm's house in Johannesburg at R1,4m just a few years before he fell into arrears. It then went and sold his house at auction for R10,000. Yes, you read that right - R10,000. That's less than 1% of what the bank originally valued it at. Here's what happened.
We hear a lot of shocking stories about banking misbehavior, but this ones a corker.
Mike Russwurm took out a mortgage bond with FNB in 2007 to finance improvements to his home in Albertville in the west of Johannesburg. The bank valued the property at R1,4 million and happily granted the mortgage bond.
Everything went fine in the first few years but in 2011 the economic downturn hit and he fell behind on his payments. The bank despatched the valuations team for another look, and this time they knocked the value down to R500,000.
The matter was handed over to the banks legal department, which obtained judgment in the South Gauteng High Court for the full loan amount of about R780,000.
The next step was to sell the house at auction. Fearing he and his family would be tossed onto the street, Russwurm scrambled to catch up on the arrears. He made bulk payments of R55,000, two payments of R7,000 and offered a further R85,000 to clear the arrears. Unable to come up with the full R85,000, he offered instead R73,000, which was just R12,000 short of what he needed to pay to clear his arrears.
Not good enough, said the bank. The auction would go ahead.
On the day of the auction one bidder made an offer for R450,000, but he supposedly â€“ by the bankâ€s version of events â€“ mistakenly assumed he was bidding for four stands rather than one. When he realised his mistake, he walked away from the sale. The property was then sold for R280,000 to a bidder who could not come up with the required deposit, so the sale was cancelled.
Enter the lucky bidder who walked off with the deal of a lifetime.
The house was instead sold for €“ wait for it â€“ R10,000.
So let’s summarise whats gone on here. In the space of five years the bank’s valuation for the property dropped from R1,4 million to R500,000, and in the end it was happy to accept R10,000. Russwurm understandably smells a rat. Several legal advisors contacted by Acts Online say that Russwurm's story is by no means unique. Some homes end up being sold at auction for peanuts.
Even allowing for this purported drop in value (and we are in possession of evidence from industry insiders claiming the banks lean on valuers to depress the value of properties ahead of sheriffs auctions), FNB was prepared to accept the absurd price of R10,000 at auction when Russwurm was prepared to pay R73,000.
Sounds like a reasonable offer, right?
Russwurm shot off a bunch of questions to the bank asking why it was prepared to accept a bid of R10,000 when he was willing to pay R73,000.
This is the reply he got from Randheer Maharaj, manager for legal collections at FNB.
The conditions of the sale as read by the sheriff at any auction state that if any disputes arise about any bid, the property will again be put up for auction. In this instance there where (sic) two disputes resulting in the property being auctioned three times in one day.€ť
In conclusion, the property was sold due to default on the credit agreement.
Maharaj then goes on to heap dirt on Russwurm for failing to keep to his payment arrangements. He shows no sense of shame or outrage over the measly R10,000 the bank accepted for a property which just five years previously it valued at R1,4 million.
Once the property has registered in the name of the purchaser the Bank will contact you for payment of the shortfall amount derived from the sale of your property,€ť concludes Maharaj.
As we previously reported, South Africa is in the Stone Age when it comes to home repossessions. Most European and North American regimes ban this kind of behaviour outright. Repossessed homes in these countries must be sold at prices which bear some resemblance to market values. Not SA. This is because the High Court rules prohibit the setting of a reserve price on assets going under sale in execution, something the NCR is attempting to challenge in the High Court.
Up to 13,000 homes are sold in execution each year in SA. Research by Advocate Douglas Shaw shows they are generally sold for about a third of their market value, which is a massive transfer of wealth from the have-nots to the haves. And bear in mind that nearly one in two of the 20 million South Africans with credit have black marks against their names. That's a crisis by any definition, the blame for which cannot be placed entirely at the feet of the consumer. That’s reckless lending.
In case you think Russwurm’s case is the worst on record (and it is pretty disgusting), personal insolvency practitioner Tony Webbstock informs us he is aware of cases where houses have been sold for as little as R10.
It has long been suspected that criminal consortiums are operating out of the sheriffs offices. The SA Communist Party wants an investigation into the matter of home repossessions. Meantime, we understand that the National Credit Regulator is about to launch a case against the banks to stop them selling repossessed homes at auction without a reserve price.
SA researchers make startling allegations of securitisation fraud