Some people (normally property bears) like to suggest that banks can 'call in' or 'margin call' or repossess the homes of borrowers who end up in negative equity simply because (through no fault of the borrower) house prices happen to fall/crash. They claim the banks can do this even if the borrower is keeping up with his repayments. One person has pointed to a statement in this CBA document to back up his claim. His document says...
Quote:
What we require from you for the loan to operate
3.5 Value of the Security
The value of and title to the Security Property must be to out reasonable satisfaction at all times during the term of the Contract. We may obtain a new valuation of any Security Property.
Default
9.1 When you could be in default
You are under default under the Contract if any of the following conditions apply:
(a) Overdue amount: You do not pay on time any amount payable under the contract
(b) Breach of contract: You do not keep to the other terms of the Contract or the terms of any Security
(c) Value or title unsatisfactory: We are not reasonably satisfied with the value of or the title to the Security Property or the Security over it will be inadequate security for the Loan in accordance with our usual prudent credit standards
It should be noted that the CBA document quoted above is not a contract - it is an information booklet about home loans, and therefore non-binding, and not a legal document. Clause (c) is there to cover circumstances where a revaluation is triggered for example due to the borrower knocking down the house. A general fall in house prices would not trigger a revaluation, and the CBA booklet doesn't claim that it would.
In fact, the NCCP Act 2009 actually makes it quite clear that banks can't 'margin call', or repossess, or force the sale of a residential property unless the borrower has defaulted on repayments and subsequently failed to comply with a request to remedy that default.
National Consumer Credit Protection Act 2009
Quote:
Division 2—Enforcement of credit contracts, mortgages and guarantees
88 Requirements to be met before credit provider can enforce credit contract or mortgage against defaulting debtor or mortgagor
Enforcement of credit contract
(1) A credit provider must not begin enforcement proceedings against a debtor in relation to a credit contract unless the debtor is in default under the credit contract and:
(a) the credit provider has given the debtor, and any guarantor, a default notice, complying with this section, allowing the debtor a period of at least 30 days from the date of the notice to remedy the default; and
(b) the default has not been remedied within that period.
Criminal penalty: 50 penalty units.
Enforcement of mortgage
(2) A credit provider must not begin enforcement proceedings against a mortgagor to recover payment of money due or take possession of, sell, appoint a receiver for or foreclose in relation to property subject to a mortgage, unless the mortgagor is in default under the mortgage and:
(a) the credit provider has given the mortgagor a default notice, complying with this section, allowing the mortgagor a period of at least 30 days from the date of the notice to remedy the default; and
(b) the default has not been remedied within that period.
Furthermore, ASIC stipulates the following conditions...
Quote:
http://www.hofinet.org/upload_docs/What_happens_if_my_mortgage_is_enforced_0121.pdfPosted Image
Note that these rulings applies to regulated loans. All PPOR (homeowner) mortgages are regulated. All IP (investment property) loans entered into since July 2010 are also regulated, with the exception of large property developer loans (loans for multiple properties values at greater than $5 million).
And regardless of the fact that banks have no legal right to take such action (repossession, forced sale etc) against homeowners who are not in default, it wouldn't be in the bank's interest to do so anyway. A loan is an asset to a bank. It would make no sense for a bank to repossess the home of a non-defaulting borrower and then force the sale of that home for less than the value of the loan. It wouldn't help the bank's balance sheet or financial position in any way.
Readers may also be interested in this discussion I had with Treasury on the matter...
Quote:
Hi,
I have a question about residential mortgages and the NCCP Act. I'm trying to determine exactly what protection a borrower has from a bank taking foreclosure action in an instance where the borrower continued to make all payments on time and adhered to all other provisions of the mortgage contract. My specific question is this...
Do lenders have the ability to foreclose, force the sale of, repossess, call in, demand a loan 'top up', 'margin call' or otherwise take action against a borrower simply because general house prices have fallen? If the mortgage contract includes a clause stating that a default occurs when the lender is not 'reasonably satisfied' with the value of the property, could the lender use this clause in the event of a general property crash to declare that the borrower has defaulted? Would the NCCP permit the lender to take action against the borrower in such a case?
For example, after taking out a mortgage, property values in the area fall to a point where the value of the property might be less than the originally agreed LVR, or fall to some other point where the lender is not 'satisfied' with the valuation. Does the lender have the right to then revalue the property, declare that the borrower has defaulted, and take action against the borrower?
In other words, the borrower is keeping up with their repayments, has not breached any other conditions of the contract, and the only issue is that the bank decides it is no longer 'satisfied' with the value of the property because house prices happen to have fallen. Is the borrower protected by the NCCP?
Thanks for your advice in this matter.
Regards.
xxxx xxxxxxxxx
Treasury response...
Quote:
Dear Mr xxxxxxxxx
Thank you for your inquiry.
We understand that some lenders will require the borrower to reduce their liability to a specified amount to reduce their risk exposure where property values fall. However, this is restricted to lines of credit or interest only loans where the principal is not required to be reduced until the end of the contract.
We are not aware of any normal ‘principal and interest’ home loans where the lender has the right to sell a property simply because property values fall. However, a provision of this type, if included, could infringe the unfair contracts terms legislation in the Australian Consumer Law.
We trust that this information is of assistance to you.
Consumer Credit Unit
Retail Investor Division
The Treasury, Langton Crescent, Parkes ACT 2600
Note that when Treasury refers to 'interest only loans where the principal is not required to be reduced until the end of the contract', they are talking about commercial or developer type loans there, where the principal must be repaid, usually in full, at the end of the term. Normal property investor IO loans just roll over to P&I, or get extended as IO at the end of the term.
Anyone who wishes to verify this response can contact Treasury themselves.
The email address I used was ConsumerCredit@TREASURY.GOV.AU
Further information and debate about this topic can be found here... NCCP Act 2009: Lenders not permitted to 'call in' loans unless borrower is in default
The NCCP Act does cover normal property investor loans...
http://www.asic.gov.au/asic/asic.nsf/byheadline/Does+the+new+credit+regime+apply%3FQuote:
Investment lending for residential property
If the loan is to a natural person, and the credit is provided wholly or predominantly to
purchase, renovate or improve residential property for investment purposes, then the loan is
regulated under the National Credit Act, and the credit provider needs to be registered and
licensed. ‘Residential property’ is defined in the National Credit Act and includes land on
which a dwelling is or will be affixed predominantly for residential purposes.
However it should be noted that large property developer loans are exempt (loans for multiple properties valued at greater than $5 million)...
Quote:
http://www.comlaw.gov.au/Details/F2011C0003565C Residential investment property loans — exemption from Code
The Code does not apply to the provision of credit if:
(a) the credit is provided for the purpose of investment in residential property; and
(b) the credit is not provided for the purpose of investment in a single residence; and
(c) the total amount if the credit provided, or to be provided, is more than $5 000 000.
(Note: the words 'and' above mean all three clauses (a), (b), and (c), must apply for the exemption to apply)
Quote:
http://www.finder.com.au/home-loansRegulated Home Loans
The majority of types of home loans or applications as a general rule are regulated under the NCCP Act. The rules of these can be quite complicated but a loan will usually be regulated if it falls under certain conditions.
These conditions include the fact that the home loans are issued to actual individuals and not companies; that the loans are being made for domestic or household purposes or to purchase or renovate the home or even to refinance the home. A charge is to be made for the credit and this must be done in the course of a business. Most standard home loans due to these conditions are regulated with the exception of those that are made to companies and those that are used to invest in commercial property. These exceptions may provide for more loan options.
Quote:
http://www.homeloanexperts.com.au/home-loan-articles/nccp-act/Which home loans are regulated?
As a general rule, almost all home loan types & applications are regulated under the Act. The rules for this are complicated, however a loan is likely to be regulated if it meets the following conditions:
The borrower is natural person; and
The credit is provided wholly or predominately;
For personal, domestic or household purposes; or
To purchase, renovate of improve residential property for investment purposes; or
To refinance credit that has been provided wholly or predominately to purchase, renovate or improve residential property for investment purposes; and
A charge is made for providing the credit; and
The credit provider provides the credit in the course of a business.
This means that most standard home loans are regulated under the Act. The main exceptions are:
Loans in the name of a company (i.e. not to a “natural person”).
Loans used predominantly to invest in commercial property, shares or a business.
There may be more flexible lending products available for these loan types, where no form of income verification is required. These are known as a no doc loan.
Posted 7 Feb 2012, 09:23 PM · 7 comments
Comment by Rastus2, 7 Feb 2012, 09:45 PM
What about the unregulated mortgages that exist ? are they vulnerable ?
I believe most (all ?) IP mortgages taken out prior to the 1 July 2010 NCCP Act 2009 were unregulated. That is a lot of 'exceptions' to your claim is it not ?
Comment by Shadow, 7 Feb 2012, 09:52 PM
The rules also existed prior to the 2009 NCCP Act.
Before the NCCP, the relevant legislation was the UCCC.
I have three IP loans, all taken out prior to 2010. None of them have a clause that would allow the bank to take any action just because house prices fall.
There may be a few unregulated residential loans out there, but the numbers would be tiny compared to regulated loans.
Comment by Rastus2, 9 Feb 2012, 06:03 PM
How many is a few Shadow ?
3 ? 10 ? 1,000 ? 10,000 ? 20,000 ? (wow a few might be a lot eh ?)
In truth any unregulated mortgage that still exists may fall into this category.
Thus, your blog (and forum thread's) original claim is incorrect...
Banks can, indeed, claim you are in default for some mortgages (by their definition of default) and demand your LVR be returned to a level *they* consider appropriate.
You can fix your blog's error by adding that regulated mortgages are safe, but un-regulated mortgages may be under threat of this bank action. (As bears have pointed out previously)
Comment by Shadow, 9 Feb 2012, 09:50 PM
The blog already says that.
Comment by Shadow, 15 Sep 2012, 07:05 PM
Readers may also be interested in this discussion I had with Treasury on the matter...
Quote:
Hi,
I have a question about residential mortgages and the NCCP Act. I'm trying to determine exactly what protection a borrower has from a bank taking foreclosure action in an instance where the borrower continued to make all payments on time and adhered to all other provisions of the mortgage contract. My specific question is this...
Do lenders have the ability to foreclose, force the sale of, repossess, call in, demand a loan 'top up', 'margin call' or otherwise take action against a borrower simply because general house prices have fallen? If the mortgage contract includes a clause stating that a default occurs when the lender is not 'reasonably satisfied' with the value of the property, could the lender use this clause in the event of a general property crash to declare that the borrower has defaulted? Would the NCCP permit the lender to take action against the borrower in such a case?
For example, after taking out a mortgage, property values in the area fall to a point where the value of the property might be less than the originally agreed LVR, or fall to some other point where the lender is not 'satisfied' with the valuation. Does the lender have the right to then revalue the property, declare that the borrower has defaulted, and take action against the borrower?
In other words, the borrower is keeping up with their repayments, has not breached any other conditions of the contract, and the only issue is that the bank decides it is no longer 'satisfied' with the value of the property because house prices happen to have fallen. Is the borrower protected by the NCCP?
Thanks for your advice in this matter.
Regards.
xxxx xxxxxxxxx
Treasury response...
Quote:
Dear Mr xxxxxxxxx
Thank you for your inquiry.
We understand that some lenders will require the borrower to reduce their liability to a specified amount to reduce their risk exposure where property values fall. However, this is restricted to lines of credit or interest only loans where the principal is not required to be reduced until the end of the contract.
We are not aware of any normal ‘principal and interest’ home loans where the lender has the right to sell a property simply because property values fall. However, a provision of this type, if included, could infringe the unfair contracts terms legislation in the Australian Consumer Law.
We trust that this information is of assistance to you.
Consumer Credit Unit
Retail Investor Division
The Treasury, Langton Crescent, Parkes ACT 2600
Anyone who wishes to verify this response can contact Treasury themselves.
The email address I used was ConsumerCredit@TREASURY.GOV.AU
Comment by Andrew Judd, 1 Feb 2013, 06:22 PM
If you have a loan in the name of a trust does that mean it is not loaned to a natural person?
Comment by Shadow, 20 Feb 2013, 08:05 AM
The NCCP Act does cover normal property investor loans...
http://www.asic.gov.au/asic/asic.nsf/byheadline/Does+the+new+credit+regime+apply%3FQuote:
Investment lending for residential property
With the new coverage of investment lending for residential property, are loans to property developers caught?
Most property development is done through companies. Loans to companies are not subject
to the new credit regime. Only loans to natural persons and strata corporations are caught.
If the loan is to a natural person, and the credit is provided wholly or predominantly to
purchase, renovate or improve residential property for investment purposes, then the loan is
regulated under the National Credit Act, and the credit provider needs to be registered and
licensed. ‘Residential property’ is defined in the National Credit Act and includes land on
which a dwelling is or will be affixed predominantly for residential purposes.
Therefore, a loan to a natural person to buy land and build residential dwellings on it will
generally be caught. This is true even if that person borrows on a number of occasions to
develop a number of properties.