Should we be surprised at all by news of skulduggery at Auction Alliance? The response by the banking industry to the recession, embracing pre-attachment (extra-judicial) sales in partnership with Auction Alliance, may yet in years to come be known as their own Information Scandal.
At these “voluntary” pre-attachment sales, the brainchild of Rael Levitt, properties are sold privately by Auction Alliance on behalf of the owner, without revealing the background role of the bank.
The closest thing to a pre-attachment sale is known in the US as short sale. In a short sale the buyer approaches the bank with an offer to purchase a distressed property at a price that covers the outstanding mortgage. The buyer is able to do so only because the owner had informed the buyer how much was still owed on the mortgage.
This privileged and confidential information is highly prized by property speculators. A short sale is also voluntary in that neither the bank nor an agent of the bank approaches the distressed owner to advise participation in a pre-attachment sale.
Pre-attachment sales (sometimes referred to as quick sales or rapid auctions) are quite different in South Africa. During a pre-attachment sale in South Africa, the bank’s partner, for instance Auction Alliance, intervenes on behalf of the bank and puts subtle, yet real, pressure on the distressed owner to sell the property privately, rather than face a sheriff sale.
In the US such a practice may in certain instances be illegal, especially if other options are not brought to the owner’s attention. Options such as debt review, referral to mediation and negotiating a repayment plan, as prescribed by the National Credit Act, spring to mind.
Distressed banks nevertheless fell in love with Levitt’s approach. The incentives were strong. It reduces legal costs, shortens the turnaround time from default to recovery, and reduces the number of properties in possession, which affects their credit rating with the Reserve Bank.
In South African law banks owe no duty of care to their clients to do anything to see that distressed properties are sold for one cent more than the outstanding mortgages, thanks to a 2008 ruling by the Supreme Court of Appeal in Nedcor Bank vs SDR Investment Holdings. This ruling has allowed industry players to throw caution and integrity to the wind when it comes to recovering on outstanding mortgages.
It is unfortunate that the appeal court was not alive to the fact that its precedent would open the door for auctioneers, bank employees, estate agents and property speculators to manipulate the outcome of auctions, armed with valuable information on balances outstanding on the mortgages of distressed homeowners.
Distressed owners, vulnerable to the sales pitch of Auction Alliance, are no doubt unaware that there is no duty on banks or their agents to ensure that their properties are sold for more than the outstanding mortgages. So while the fear of God is put into them about sheriff sales, soothing words are whispered about the benefits of a pre-attachment sale.
Paradoxically the real victims of the skulduggery at Auction Alliance are not irresponsible homeowners with little equity in their homes, but responsible homeowners who recently lost their jobs or fell sick, and are prevented by the National Credit Act from using the equity in their homes to raise bridging finance. Any property speculator worth his salt targets these responsible homeowners with equity in their homes, with the knowledge that the bank is only really interested in recovering the outstanding mortgage.
Pre-attachment sales and the deepening recession have since 2009 helped drive down the market value of many distressed properties, to the extent that the market value of many more properties are now less than their outstanding mortgages. This has put huge pressure on Auction Alliance to get better prices, especially for the banks, resulting in the scandal of sending bogus bidders to auctions.
The banks’ embrace of pre-attachment sales reveals a lack of creativity in tackling the problem of rising impairment costs, also known as non-performing debt. While properly regulated pre-attachment sales have a place, they are not the only solution.
Foreclosure mediation has benefits. Firstly, the benefit of innovation when parties explore mutually beneficial solutions, and secondly the benefit of lowering the risk of fraud and collusion between bank employees and property speculators.
It is perhaps time for the banking industry to stop paying lip service to section 129 of the National Credit Act, to choose mediation over predation by speculators, and assist the mediation industry to develop a mediation programme. This will go a long way towards restoring trust and confidence between bank and client.
Jacques Joubert is a commercial mediator and independent mediation analyst.
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