Financially stressed homeowners should always engage their banks before forced foreclosures
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Between April and June last year, 1.6 million South Africans applied for mortgage payment holidays from their banks. While this provided some form of temporary relief, it is now costing them, on average, an additional R12 900 a month due to having to pay up on interest accrued, pushing many South Africans further into financial difficulty as they battle to pay their bills. Given almost half have used up all of their savings since the start of the pandemic - as per a recent Debt Rescue survey - and 28% did not have any savings to start with – the risk of a home foreclosure is possible if payments are in arrears for 90 days or more.
Legal expert, PJ Veldhuizen, a Commercial Litigation Specialist and consultant from boutique law firm, Reynolds Attorneys renders some advice to struggling home owners.
Fortunately it is in neither your or the banks’ interest to repossess a home, and all efforts should be made to find a viable payment solution through mediation efforts. A repossession is a last resort.
As a first step, you are advised to contact your bank as soon as you know you will have financial issues in future. Given 34% of South Africans lost their jobs, 22% were retrenched and 17% received a pay cut (Debt Rescue April 2020) planning ahead is a must, and a call to a creditor to negotiate terms is essential. “Burying your head in the sand is not an option. The problem won’t magically resolve itself, so it is key to engage with the bank upfront to ensure that expectations are managed and met,” says Veldhuizen.
Once the bank is aware of your situation they can work with you to reach new terms such as:
- Ring-fencing old debt
- Extending the terms of the mortgage
- Allowing you to pay a reduced percentage of your instalments for a set period
- Restructuring of the loan
- Helping you sell your property through “quick sale” marketing
This said, the loan needs to be paid back at some point, so these measures are not in perpetuity and the property will eventually be sold in execution if you cannot settle the loan. This will also mean that your credit record will be compromised, which will affect your ability to access further credit in future as well as the ability to rent an alternative property.
“It is wise for you to be proactive and sell your home, either via an estate agent or an auction process before the bank gets involved. This allows you to put the house on the market at a fair market price. If it gets to the point of having a forced-sale auction, homes may sell for less than their value, which leaves you in a position where you are responsible for any balance remaining after the sale. This should be avoided at all costs,” says Veldhuizen.
In recent years, there have been changes to how banks can sell homes if they are foreclosed. This follows a claim made by Lungelo Lethu Human Rights Foundation against the major banks for R60-billion. It claims that its clients’ homes were put on the market up to 17% less than their value which resulted in unjust sales. While the case continues, new steps in the form of R 36A of the Uniform Rules of Court (Uniform Rules) have been put in place that includes the introduction of a reserve price by the courts for a sale in execution. This means that the latter sets a minimum price for the sale of the house on auction (although there are no guidelines to how this price is determined); the bank does not set the price.
While this provides some protection for homeowners, there are still many grey areas with regards to its implementation. This includes the reserve price not taking into account other factors such as transfer costs, holding or insurance fees, sheriff fees, legal practitioners’ fees, etc. The reserve price is usually set in line with market value or forced sale value of the property, which somewhat paradoxically makes it difficult to sell at an auction. If the house does not sell at the court set reserve price, the matter then returns back to court for a reconsideration of the price. This is detrimental to both the homeowner and the creditor as legal costs continue to mount, the house itself could deteriorate during that time and there could also be a lack of interest in the property if it’s on the market for too long.
With the true extent and length of the pandemic still unknown, it is anticipated that more homeowners will come into financial difficulty and need to take steps to manage their financial situation. As it stands, over 100 000 homes have been repossessed since the introduction of the Constitution in 1994.
“The banks came to the party in the second quarter of last year with payment holidays, but that could not last forever. While the current restrictions have been somewhat modified, there are still rising cases of Covid-19 in certain provinces and certain sectors, such as retail, hospitality and tourism, and their extensive supply chains, will remain muted. There are also those in the areas affected by the riots to consider. People in these segments are at a high risk of having their financial standing compromised and will likely need to cut their budgets to make ends meet. If they can’t find ways to meet their creditors’ obligations they will have little to no choice but to make the hard decision to engage their banks, or better yet, sell their home and move to a smaller property, or rent. They could also make a plan to pay back some of their debt by selling some of their possessions, or even by starting a side-hustle to make some extra money (something that 38% of people have done).
“They key is to engage with your bank early. A court process is expensive and lengthy, and this has been amplified by the fact that the courts have been overburdened due to Covid, having been closed for a few months last year and also being open some days and others not. All costs are for the defendant’s pocket which makes this a very expensive route to take. Further, if the man in the street takes on the banks, it is usually not going to go in their favour as the latter has exponentially more financial means than an individual and let’s face it, the Agreements signed give them the rights to recover the monies they have lent you – they also have shareholders to answer to and are not charitable institutions.
If you find yourself in financially straitened times and cannot negotiate directly with the credit provider, finding a skilled, accredited and trained dispute resolution specialist such as at Reynolds Attorneys is key to managing this process,” concludes Veldhuizen.