Do I still owe on my bond if my home is repossessed?
There have been a number of stories over the past few months where homeowners in financial distress have had their homes sold on auction for a mere fraction of what they are worth. In some instances, these clients’ homes have been repossessed by the lending financial institutions and sold on auction for R100!
While each case is unique, and this is in no way representative of how every sale in execution results when the distressed homeowner’s home lands on the auction floor, the question of what happens after the Sheriff has hit the gavel and shouted “Sold!” remains.
How often does it happen that the full outstanding bond amount is covered at the auction? What happens to the homeowner if the auction sale does not cover the full bond amount? And why is there no reserve price set when a sale in execution is conducted?
We felt the best place to start would be with the four large commercial banks. We sent a number of pointed questions to each bank and received responses only from Nedbank and Absa.
Again, it is important to note that while there are extreme and questionable cases out there where defaulting homeowners have had their houses sold for a pittance, every bank has a duty to lend responsibly and to do its very best to minimise its own and its clients’ losses.
According to both Absa and Nedbank, very often when a home is sold on auction the amount paid for it does not end up covering the full outstanding bond amount, and the homeowner is left with an outstanding shortfall which they remain liable for.
“An auction process is a forced sale in execution process where cost components such as municipal rates and taxes or body corporate levies must be settled by the purchaser as well as the Sheriff’s commission,” says Thozama Mochadibane, head of Customer Delight at Nedbank Home Loans. “This gets factored into the price the purchaser at this auction is willing to pay for the property. In many cases there remains a shortfall amount which the client is still liable for but we have experienced matters where the property presented sufficient equity resulting in the full bond amount being cleared with a refund paid back to the client.”
These auxiliary costs are one of the reasons why a Magistrate or High Court Judge may decide not to set a reserve price as it could discourage potential buyers from bidding on the property.
“The Amended Court Rules have an allowance for the Magistrate or High Court Judge not to set a reserve price where they deem it appropriate,” says Mbuyiselo Khumalo, head of Absa Retail Home Loans and Structured Mortgages: Collections. “The Judge can interpret the setting of a reserve as a factor than can dissuade bidders from pursuing the heavily encumbered property at the sale in execution. The property being sold by the Sheriff is sold by auction and therefore sold to the highest bidder. By the very nature of the forced sale, in most instances with the property carrying high auxiliary costs owing to the customer’s financial distress, it is seldom that the full outstanding bond amount is recovered at the Sheriff’s auction.”
Financially distressed homeowners who have had their homes sold in execution at a Sheriff’s auction are in fact still liable to pay off the outstanding amount. How this is arranged has a lot to do with the bank itself. For example, Absa forgoes the interest on the shortfall to assist the client with paying off the outstanding amount quicker.
“Some of the terms and conditions [of the loan] will remain, however there is no interest accruing on the shortfall,” says Absa’s Khumalo. “In addition to stopping the interest, Absa is also open to entering into repayment and settlement arrangements to facilitate the process of the customers extracting themselves from the bad debt and rehabilitating their credit record.”
Every financial institution must comply with various regulatory notices prior to instituting the foreclosure process. On average, foreclosure proceedings are instituted after the account is 90 days and more in arrears, though the matter can be rehabilitated at any time prior to the property being sold at a sale in execution.
“In most instances, the foreclosure process will begin once the account reaches cumulative 180 days outstanding payments,” says Absa’s Khumalo, noting that in instances where the customer’s home loan account has a history of arrears, and has been through the foreclosure process before, the process may start at 90 days outstanding payments. “The reason being that the foreclose process can be used as a mechanism to minimise the losses and erosion of value of the distressed security.
“Should the distressed situation of the customer and their home loan reach the stage of 90 or 180 days, whichever is applicable, the customer will receive a letter of demand, which places the customer in default. At this stage, the bank would proceed with formal legal action which is regulated by the Rules of the Court in which the time periods are stipulated.”
Most banks are able to assist their clients with selling their properties through private and bank-assisted sales. According to Absa’s Khumalo, the bank “has consistently realised higher recovery amounts through private and bank-assisted sales”.
“It is for this reason that Absa encourages distressed customers, who do not have the ability to rehabilitate their accounts (even with the bank’s help to restructure the repayments to make them more affordable), to explore private or bank-assisted sales,” he says. “Absa regards the Sheriff’s auction as an absolute point of last resort.”
Over and above the in-house rehabilitation assistance Nedbank offers its clients, the bank has Restructure and Nedbank Assisted Sales (NAS) programmes.
“NAS assists clients who voluntarily wish to sell their properties through estate agents, discounting a portion of the shortfall (if any) and not adversely listing clients – this has helped clients avoid foreclosure, giving them a fresh start,” says Nedbank’s Mochadibane, noting that the programme also assists clients in appropriately valuing their home, appointing estate agents to handle the sale and limits the burden of any residual shortfall. “Since 2009, the bank has restructured more than 30,000 home loans, allowing the affected families to retain their homes. Through NAS, a further 4,400 clients managed to avoid foreclosure which usually results in an unfortunate financial loss – both for the homeowner and the bank.
“These homeowners invariably end up with a bad credit record, which makes it difficult for them to get back on their feet financially.”
No aspiring home buyer wants to think about the possibility of not being able to pay off their home loan, and to see their home sell on the action floor for less than they owe, but this is why they need to go into the property purchase process with their eyes wide open. There can be few experiences more stressful than having your home sold from under you, only to still owe on that loan months after moving out and battling ahead with a tarnished credit record.