Banks, bonds & rip-offs

If you owe a bank R50 000 and cannot repay on time, you have a problem.  But if you owe a bank R1 billion and cannot pay, the bank has a problem.

This point has been made both by billionaire J. Paul Getty and economist John Maynard Keynes.  It highlights the fact that the wealthy are always privileged, especially when it comes to money.

And this certainly applies to debt where those with considerable assets and perhaps a well paid job can access cheaper credit than the poorly paid.  In many ways, and for most workers, it’s a case of the less you earn, the more you pay.  This applies particularly to access to credit and the rate of interest on borrowings.

Poorly paid workers cannot get loans from banks and have to pay higher rates at micro lenders or be forced into the clutches of the mashonisas, the loan sharks.  Wealthy individuals can even negotiate preferential interest rates on loans in a system where, even if you have no assets and no job, you still pay taxes through the now increased value added tax (VAT).

And should a working person fall on hard times and be unable to pay the mortgage (the bond) on a house, expect no mercy from the lender, in most cases, a bank.  This fact was underscored in March by a decision of the Pretoria High Court which ruled that banks could sell indebted homes at auction without a minimum (“reserve”) price.

This gives legal confirmation to the existing practice that anyone who defaults on bond payments can have ownership of their house taken over by the bank.  The house can then put it up for sale by auction and, without a reserve price, it may be sold for whatever is the final bid.

The case in March upheld the right of banks to behave in this way.  It involved a house valued at R470 000 and on which the defaulting owner still owed R370 000  in capital and interest.  It was sold for just R40 000.  This does not seem to make sense, even for the bank.

The reality is that a buyer bought a R470 000 house for R40 000, while the seller, the bank, was still owed R370 000 by the defaulting former homeowner.  The former homeowner now has a bad credit record, is therefore no longer “credit worthy” but is still liable, and will be pursued, for the money owed.

On a personal level, such cases — and there are many every year around the country —  are often very sad.  But they also open the way for corruption, something this column highlighted several years ago.

Then it was case of houses in a Western Cape township where the owners of homes valued at R30 000 who fell behind with their bond payments had these sold at auction for as little as R200.  There was invariably only one bidder, a local lawyer who, also invariably, went on to sell the same houses for R20 000 or more.

There was clearly collusion in this case and there may be collusion in others, only because such forced sales without reserve can be an easy way for unscrupulous individuals to make money.  Not that the banks are involved in such unethical and possibly illegal activity;  they take a “hands off” approach.  It is the sheriffs (or others) who execute the order to sell and who work together with the buyers.

Here is an area that needs the attention of unions and government.  Much more so than the current debate raging about land expropriation without compensation, an issue fully covered by Section 25 of South Africa’s Bill of Rights.