South Africa’s largest banks could be facing a R60 billion claim related to their conduct in attaching and selling the homes of defaulting debtors at prices below market value.
About 100 000 homes have been repossessed by banks and sold in execution since 1994. It is estimated that 10% of these homes were sold for close to market value, with the remaining 90% sold below prevailing market values.
The former mortgage holders are still held liable for any outstanding home loan debt – without having any asset left to show for it. However, the banks are often only too happy to recoup whatever debts may still be outstanding on their books as quickly as possible – and selling the properties more cheaply ensures an expedited process.
South African banks are said to sell property five times more frequently than international norms and in some cases for only 50% of market value.
Advocate Douglas Shaw filed an application yesterday for direct access at the Constitutional Court on behalf of 219 people nationwide and “the country as a whole”.
It is to be argued that going through the three primary courts – magistrate’s courts, the high courts and the Supreme Court of Appeal – would be inappropriate as the case is being brought by people who are “exceptionally poor” and have been made even poorer by the actions of banks.
Court papers list Nedbank, Absa, FirstRand, Standard Bank, Changing Tides 17 – a trustee of the SA Home Loans Guarantee Trust – Investec, the National Credit Regulator, the South African Human Rights Commission, The Rules Board and the minister of justice and constitutional development as respondents.
The case seeks to establish whether the current law of sale in execution – whereby properties are sold at a public auction held by a sheriff of the court – is unconstitutional.
For a sale in execution to take place, a bank must obtain a court order to attach and sell the property to recover home loan repayments that are in arrears.
Shaw argues that this process is not constitutionally sound in that it allows properties to be sold for less than their market value, “which is against the rights to property and housing” as defined by the constitution.
Shaw’s papers said: “The average house price in today’s money is about R1 million and the average discount that properties have been sold for appears to be around 50% of market price. Thus, the damage done to these 100 000 people is R50 billion.”
The maximum damages that could be awarded if every person affected since 1994 joined the claim would be R60 billion, equivalent to around a year’s income generated by the big four banks.
Shaw argues the high court should not issue an execution order if the loan can be rescheduled, if there is sufficient equity to allow for the resolution of payments in arrears or if the property can be rented out and proceeds used to cover repayments.
The papers refer to one case where a bank attached and sold a property thought to have been financed by a R300 000 loan, when the actual loan amount was only R30 000.
“Despite this being drawn to their attention, they went ahead and sold the property. They sold it for R236 000 when it was worth R700 000 at the time,” the papers state.
“It is now common cause and the bank admitted it did so wrongfully. No compensation has been forthcoming from the bank to date. This is typical of bank ethics (or lack thereof). Even when there is a clear bank mistake, it is necessary to sue them in order to recover the funds. Most people do not have the resources. Therefore, regulation is necessary.”
The applicants also want the court to order that no debt shall be reclaimable from a creditor when a property is sold for less than the value of the bond. The case also seeks to hold the banks and home loan providers liable when they sell properties at prices far below their market value.
“Banks are liable in delict (or tort) in all other countries studied for selling property for less than it is worth. It would be strange, with our constitution, if we were the only country where banks could act with impunity regardless of the damage done,” the papers state.
The applicants also want the director of public prosecutions to look into the liability of the directors of each respondent bank for “knowingly selling properties for less than their value after the constitution was introduced”.
Representatives from FNB and Standard Bank have told Moneyweb allegations would be reviewed and addressed once tabled before a court. Nedbank confirmed it had seen a draft version. It would defend the matter.
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