There are few things as devastating as losing your home because you cannot pay your debt. But if this cannot be avoided, you'd certainly prefer that your property is sold for the best price possible. Then you can hopefully settle your debts and perhaps have enough money left to start over with.
This ideal should now become a stronger possibility for South Africans who struggle to pay back their home loans. A new law, which is due to come into effect shortly, will for the first time enable courts to set a "reserve price" (minimum price) at which the residential property of a defaulting owner should be auctioned off.
Until now many South Africans have lost their properties to speculators who snap them up at prices that are far below market value. But to sell someone's home for an unreasonably low price is a violation of their constitutional housing and property rights - not to mention the negative impact on their dignity and social wellbeing.
In a paper that looked at a case where a home valued at R81 000 was sold at auction for only R10, I argued that a sale like this would be unconstitutional. I also argued that our law regarding auctions are in drastic need of change due to loopholes like this.
The upcoming amendment of the court rules promises to close the loopholes.
This is an important development that brings South Africa into line with international best practice. For example, German law already prescribes certain set minimums at which the property must be auctioned.
Introducing similar rules in South Africa means that the country's home owners and in particular bond holders will be better protected when faced with financial difficulties. It is estimated that South Africa has about 6.1 million formal homes. About 30% of them are bonded. Reliable figures are hard to come by but some estimates suggest that thousands of homes are repossessed and auctioned in South Africa each year.
The upcoming amendments include a number of things that relate to the auctioning of homes by creditors. The most important change will be that a court will be able to set a minimum price at which the bidding must start, taking into consideration a number of factors: such as the market value of the property, the amount owed in taxes and levies, and the amount owed to the bank.
A constitutional matter
Section 26 of South Africa's constitution protects people from being evicted from their homes without a court order and without a good reason based on all the facts of the case. This right also protects citizens against the unjustified loss of a home when one has defaulted on a mortgage payment.
This basically means that the bank should not be able to automatically repossess a home of a defaulting client. Instead the court must balance the interests of the bank and the debtor and then determine if selling the home is the best solution.
For example, if the outstanding home loan debt is very low or if the financed person is behind with only a couple of instalments, loss of the home should not be allowed easily. Alternatives should be considered to settle the debt.
The National Credit Act of 2005 is helpful because it protects struggling debtors in several ways. A defaulting mortgage debtor can for instance apply for debt review and then possibly receive a new, more affordable payment plan. But this Act doesn't provide protection during the actual sale of the debtor's home. So the new court rules come as a welcome addition to close the loopholes.
The need for change
Despite the constitutional provisions and the National Credit Act, there have been some loopholes that were exploited by unscrupulous operators.
The major loophole was that after the court has ruled that the property should be auctioned, it could be sold for whatever the highest offer might be. Banks could set a minimum price. But banks tended to set a low minimum price, just enough to cover their claims.
A bank could even decide to auction the house without a minimum price if no one was willing to buy it at the set minimum. The owner of the property could not insist on a minimum price.
As a result, it often happened that speculators would snatch up properties for ridiculously low amounts at poorly attended auctions and then sell them on the private market for huge profits. The owner then suffers a massive loss because he or she must still pay the remaining debt, while someone else profits from the true value of the property.
Recently 225 former homeowners tried to sue the banks for the losses they suffered when their homes were sold for ridiculously low amounts. They lodged a R60 billion law suit with the country's Constitutional Court. The suit set out to claim damages suffered from repossessions undertaken by South Africa's big banks. The respondents were Nedbank, Absa, FirstRand Bank (FNB's parent company) and Standard Bank. The applicants claimed that they were abused by banks who sold their properties far below their market values after they defaulted on their mortgages. The suit was lodged with the Constitutional Court because applicants believed that the abuse was a constitutional matter.
But the court disagreed and declined to hear the case, mostly for procedural reasons.
More can be done
The amendment of court rules in themselves should certainly close the gaps exploited by unscrupulous operators. But there will be a need for complementary action to make the new rules even more efficient. The system should for example ensure that auctions are better advertised and better attended.
It's not clear how the wrongs of the past can be corrected, but at least the new rules are a big step in the right direction to ensure justice in the auction industry going forward.