This article first appeared in Moneyweb.
A full bench of the Johannesburg High Court sat last week to deliberate on how and when reserve prices should be applied before repossessed homes are sold at sheriffs’ auctions. The three judges presiding in the case wanted to know why the banks habitually arrive in court without proper paperwork and expect to be given judgments against clients in arrears.
For several legal and human rights groups admitted as friends of the court, this is a pivotal case to decide whether the banks’ right to recover a loan supersedes constitutional protections to dignity and property.
Things did not go well for the banks, who were berated by the judges for arriving in court without proper paperwork, expecting the courts to grant judgments against clients who were behind on their mortgage payments. This follows a number of cases where homes were repossessed by banks for as little as R10 and then on-sold at auction for a substantial profit, leaving the defaulting client with a shortfall to the bank.
The judges wanted to know why the banks habitually arrived in court expecting a sale in execution judgment (allowing the property to be sold at auction) without sufficient information to allow the courts to make an informed decision, such as whether the home was a primary or secondary residence, who lived in the house, and what steps the bank had taken to reach an accommodation to allow the customer time to catch up on the arrears. The banks have repeatedly insisted they apply for sale in execution orders only as a last resort.
Gauteng judge president Dunstan Mlambo ordered a full bench of the High Court to decide on four cases involving Standard Bank and Absa. The full bench of three judges was asked to decide on several issues, including the setting of reserve prices to avoid homes being sold at auction for a pittance, and whether banks should be awarded a money judgment at the same time as a sale in execution (SiE) order.
Advocate Steven Budlender appeared for Standard Bank and advocate Wim Trengrove for Absa. The banks argued that reserve prices should only be set by judges in exceptional circumstances, and want the court to split the awarding of the money judgment from the sale in execution order. Budlender argued that the reason for this was that once a money judgment was awarded against a defaulting client, this placed pressure on the client to catch up on arrears. Experience shows that very few homes in arrears end up being sold at sheriffs’ auctions, usually because defaulting clients reach an accommodation with the banks.
The arguments in court were largely technical, but several legal and human rights groups admitted as friends of the court seem baffled by the banks’ insistence on splitting the money judgment from the SiE order. It would save them time and money if both were granted at the same time. One observer suggests the banks are putting up a faux fight by insisting on reserve prices only in exceptional circumstances, and on terms decided by themselves. He says what they really want is a money judgment since this triggers a financial benefit to the banks in terms of credit default swaps. These are a type of insurance policy which protect bondholders against default. A large percentage of mortgage bonds in SA are securitised, meaning they are packaged into a bond and on-sold to investors. This point was not argued in court.
The banks’ counsel was further grilled by the full bench on their defective paperwork when approaching the court, resulting in a large percentage of cases being postponed. The banks attempted to remedy this by filing supplementary affidavits in the four cases mentioned above and to address the issues raised by Mlambo.
Justice Wepener, one of the three judges presiding in the case, repeatedly emphasised that if the banks came to court with all of the relevant facts in the first place, there would be no need to postpone or later seek an execution order. He said the banks seldom place all the facts necessary for the courts to decide whether to grant an execution order or to set a reserve price.
Advocate Alfred Cockrell, representing Legal Resources Centre and Lungelo Lethu Human Rights Foundation (LLHRF), argued that the default position of the courts should be to set a reserve price because not to do so would be detrimental to debtors. He referred to a supplementary affidavit from economist Dr Sean Muller pointing out the misalignment of incentives between banks and debtors when it comes to setting reserve prices. The banks’ sole interest was to recover their outstanding debt and no more, hence it should be up to the courts – and not the banks – to determine when and how the reserve price should be set.
In its papers before the court, LLHRF challenged the banks’ claims that sale in execution was used only as a last resort, and only after exhaustive efforts were made to reach an accommodation with clients in arrears. LLHRF cited several cases where homeowners were evicted without being notified that legal action had been taken against them. The first they knew of the judgments against them was when the new owners arrived to claim the properties they had purchased at auction. It argues that the setting of a reserve price is a key safeguard against a debtor’s investment being completely lost since experience shows once a home is sold at auction, there is little to nothing left for the dispossessed homeowner after legal and other costs are deducted.
King Sibiya, head of the LLHRF, says evictions are currently running “at the same volume as during the apartheid era.”
The SA Communist Party (SACP) weighed in on the case, throwing its support behind LLHRF, arguing that we are witnessing “the beginning of the biggest series of legal actions in SA since 1994.”
It is calling for a moratorium on all evictions, “during which time there must be a full-scale commission of inquiry into all aspects of evictions and housing fraud.
“The SACP fully supports the Lungelo Lethu Human Rights Foundation in fighting the horrors of eviction. There has been much justified criticism of corruption within the public sector. The SACP asserts that we need a thorough investigation into corruption in the private sector, in particular, the financial sector,” it said in a statement.
“Lungelo Lethu has proved that housing fraud is being perpetrated by syndicates which include the four major banks, estate agents and others involved in ‘property development’ together with some municipal housing officials and members of the police force and the legal profession.”
Judgment was reserved in the case.