Foreclosure: new system on cards

HOMES that go under the hammer after being attached by creditors, although a tiny factor in the life of a bank, usually represent a huge financial and emotional blow to the consumer.

South African banks insist that sales in execution are resorted to only when all other avenues have been exhausted.

But this is challenged by a Johannesburg lawyer who has suggested better ways to tackle the issue.

“This is indeed the banks’ line, but it’s not true,” said Douglas Shaw, who said his research indicates that South Africa sells five times as many homes in execution per 100 000 bonds as the world average — and 20 times more than countries such as Denmark and Singapore, which are regarded as applying best practice.

South Africa does have a relatively high default rate on home loan repayments, but Shaw said this was not the reason for the high rate of sales in execution.

Quoting figures from market intelligence company Lightstone Property, Shaw said that 45 000 homes had been sold in execution over the past 10 years in South Africa.

He said houses were often sold for only 50% to 60% of their market value, which is low by international standards, even when accounting for outstanding rates and taxes on the property.

“Achieving the maximum value from a sale in execution is in our and the customer’s best interest,” said Marius Marais, CEO of FNB Housing Finance, who said poor recoveries on unpaid loans impacted on the bank’s loss ratios and provisioning requirements.

Fewer than 5% of nonperforming home loans went to a sale in execution each year, Marais said.

Standard Bank, which has the biggest share of mortgages among banks in South Africa at 33%, or 561 000 accounts, said that about 0.6% of the home loans it wrote off ended up in a sale in execution.

“We are very clear that sale in execution is ideally the last resort,” said Steven Barker, head of the bank’s home loans division.

Among the interventions undertaken by banks before a sale in execution are giving customers a payment holiday for a few months if they have been retrenched; restructuring the loan; or trying to sell the home on the open market with a willingness on the banks’ part to write down some of the shortfall.

Only then will banks seek an attachment order from a court. And that was generally in situations where clients were unwilling to cooperate or simply ignored the bank, said Barker and Marais.

But Shaw said: “Banks haven’t really tried everything.”

He said there were many more ways that banks could help their clients, such as refinancing a smaller home or allowing them to rent the home from the new owner on a longterm lease.

“The reason why people don’t talk to banks is because they only contact them to demand their money. If they said ‘We’ve got these eight options — let’s talk about how we can help you’, it would be a completely different system,” he said.

But this is not solely the banks’ problem. For example, sheriff’s auctions, where repossessed homes are sold, are not widely advertised and sheriffs are paid a fixed commission on the sale. Poor attendance at

The reason people don’t talk to banks is because they only contact them to demand their money

auctions and the lack of an incentive to secure the best price do little to drive sale prices higher.

The Rules Board for Courts of Law — a statutory body established to review and amend court rules subject to approval by the minister of justice — has proposed new rules to govern sales in execution of immovable property; these are expected to improve outcomes for homeowners.

The most significant of the proposed changes, according to deputy chief state law adviser Raj Daya, are an insistence on judicial oversight at the time when the property is declared executable, and the setting of a reserve price.

Judicial oversight will ensure that banks follow proper process, while the reserve price, to be set at the discretion of the judge according to guidelines, will prevent homes being sold for far below market value.

No rule changes regarding advertising of auctions or sheriff incentives have yet been finalised, but Daya said there was consensus that these needed to be considered.

Daya said he hoped the changes would be finalised by the end of the year and said they would go a long way to protecting consumers when it came to sales in execution of their homes.