1. Legal Quotes“Nothing comes easy in life. Even Santa comes with a clause.” [Christmas proverb]“With Congress, every time they make a joke, it’s a law;

Collation and Adiation

1. Legal Quotes“Laws are spider webs through which big flies pass and little ones get caught.” [Honore de Balzac] “The more corrupt the state, the

1. Legal Quotes
“If spending thousands on a law degree and losing my soul in the process isn’t enough commitment to a legal career, I don’t know what is.” [unknown]
“The holocaust was legal, slavery was legal, segregation was legal. If you use the State as a metric for ethics, you’ll end up disappointed.” [unknown]
“Something isn’t proper simply because it’s permissible, nor is it ethical just because it’s legal.” [Frank Reagan]

2. Legal shorts
The attorney, on cross-examining me in court, seemed irritated when I answered his question ‘Where were you between 4 and 6?’ with “Kindergarten.”
Using latin phrases to sound smart is my modus operandi.

3. Inspiring quotes
“Attitude is the difference between an ordeal and an adventure.” [Bob Bitchin] “Some people are so poor, all they have is money.” [Jack Kerouac]
“The price of anything is the amount of life you exchange for it.” [Henry David Thoreau]

4. Securitisation of South African mortgage bonds- the biggest bank fraud in SA history?
It has long been suspected that South African banks have been conducting securitisation in secret and in doing so are in wilful violation of several statutes. “Securitisation” is defined as “the taking of (an) illiquid asset/s and transforming it into a security by way of financial engineering.” A typical example of this is the bundling of thousands of mortgages together and on-selling them to investors.

It is estimated that 20% of all South African mortgages are securitised, which means that these bonds should be ceded to the new owners and reflected as such in the relevant Deeds Registry.

A team of researchers has recently sampled 600 bonds mortgaged to ABSA, Nedbank, FNB and Standard Bank and found that between 120 and 200 of these mortgages had been securitised and on-sold to third parties. Not one of these bonds was reflected as having changed ownership.

Banks use securitisation as a means of moving non-performing loans (“NPL’s”) off of their balance sheets to window-dress their financial statements. This is done by freeing up capital which is tied up in these NPLs, so that cash can be utilised for a new batch of lending to bank clients.

The process is as follows:

  1. The bank sets up a company referred to as an “SPV” (Special Purpose Vehicle) [Section 72 read with Section 1 of the Banks Act precludes a bank from participating in any business wherein it may unduly influence and/or place at risk its providential requirements or burden its liquidity requirements – so an SPV cannot be a division or associated entity of the bank and must be an independent juristic entity];
  2. The bank batches and “sells” (cedes) certain of its assets to this SPV;
  3. Asset management companies and pools of investors (through hedge funds, unit trusts, etc.) which want to earn a better rate on their investments than what is offered by the local money market acquire the assets of the SPV.

It appears to be a win-win for the banks and the investors, in that the investors are not at risk (they are covered by various insurance policies and credit default swaps) and earn a higher rate of interest on the purchased assets, and the bank has generated cash for new business, whilst at the same time off-loading NPL’s. On the other hand, if the home owner defaults, the bank will get judgment, sell the house at auction for a fraction of its value, and then pursue the defaulter for the shortfall.

As stated above, this is unlawful. The bank has in fact been paid in respect of the security – any amounts recovered would constitute undue enrichment (in that the same asset would have been sold twice). This is known as “double dipping”, which is fraud.

When a mortgage bond is securitised, the law requires the banks:

  • to inform the bondholder of the change in ownership (under the National Credit Act)
  • to cede the mortgage bond to the new owner at the Deeds office, and
  • Section 78(g) of the Banks Act prohibits the banks from assuming the role of collection agent for the new owner.

It appears that the banks have been deceiving both the courts and home owners about their securitisation activities in order to appear as if they are still the registered bond owners, when in fact they are not. This allows them to collect mortgage bond payments on behalf of the new owners and take judgment against defaulting borrowers, neither of which are legal where the bond is securitised.

The point is where loans have been securitised, the banks lose legal title to these loans (see section 4 (2) a and b of the Government Gazette on Securitisation Schemes). Regulation 35 of the Banks Act covers the sale of a loan to a third party by way of securitisation. A debt on-sold to an “SPV” is considered a sale (not a cession) under which the full entitlement, rights and obligations are conveyed to the purchaser. The bank thus has no locus standi to enforce the terms of the mortgage agreement as the bank has already been paid in full. Legally, the mortgage has lost its security component. It follows that the right to foreclose through the mortgage is also lost. Any argument that the bank is acting as “the agent” in collecting any debt under the mortgage bond on behalf of the new owner is also negated by section 78(g) of the Banks Act (see above).

The banks may argue that even if the loan is securitised, it can simply re-cede the loan back from the SPV and continue with the normal collections process. This is legally incorrect as you cannot reverse an outright sale with a simple cession.

The problem is that Regulation 35 of the Banks Act protects the banks somewhat in that they are not obliged to disclose “off-balance sheet items” to the general public. The brings into clarity the question of proof of securitisation, should the bank come to court and hold up the title deed and the lack of evidence of cession of the mortgage bond as supposed proof that the loan has not been securitised.

One way to try to prove that a securitisation has in fact occurred, is by way of a “securitisation audit”, which involves interrogating multiple databases in SA and overseas to track the movement of mortgage loans and the associated mortgage “notes”. Securitisation audits are a relatively new development here, but are common in the US. They effectively carry the same weight as a financial opinion by a company’s auditor, though the banks are trying to dismiss them as hearsay.

The issue of securitisation is an explosive topic at the moment. One way to avoid any potential problem is not to default on your mortgage loan.