Tuesday, February 7, 2012

Debunking Shadow: Property Margin Calls

Unfortunately the best of us get things wrong at times. On this occasion we will look at the suggestion from long term Bulltroll Shadow, that banks can't margin call residential property. Recently on the APF troll nest Shadow posted the following:
Just clearing up a bear myth here for once and for all. 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

Note that these provisions did also apply prior to 2009, under the Uniform Consumer Credit Code (UCCC).

So bad luck bears... banks will not be calling in these loans even if there is a huge crash and prices fall 60% as predicted by some US 'analysts'.

You will also note that despite the 40% crashes in the USA and Ireland, banks didn't force sales for borrowers who are not in default.

Even if they were allowed to, it wouldn't be in their interests to do so.
He quoted the following from the NCCP as evidence that the banks can't recall a loan:
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.

92 Acceleration clauses

(1) For the purposes of this Part, an acceleration clause is a term of a credit contract or mortgage providing that:

(a) on the occurrence or non-occurrence of a particular event, the credit provider becomes entitled to immediate payment of all, or a part, of an amount under the contract that would not otherwise have been immediately payable; or

(b) whether or not on the occurrence or non-occurrence of a particular event, the credit provider has a discretion to require repayment of the amount of credit otherwise than by repayments fixed, or determined on a basis stated, in the contract;

but does not include any such term in a credit contract or mortgage that is an on demand facility.

(2) An on demand facility is a credit contract or mortgage under which:

(a) the total amount outstanding under the contract or mortgage is repayable at any time on demand by the credit provider; and

(b) there is no agreement, arrangement or understanding between the credit provider and the debtor or mortgagor that repayment will only be demanded on the occurrence or non-occurrence of a particular event.

93 Requirements to be met before credit provider can enforce an acceleration clause

(1) An acceleration clause is to operate only if the debtor or mortgagor is in default under the credit contract or mortgage and:

(a) the credit provider has given to the debtor and any guarantor, or to the mortgagor, a default notice under section 88; and

(b) the default notice contains an additional statement of the manner in which the liabilities of the debtor or mortgagor under the contract or mortgage would be affected by the operation of the acceleration clause and also of the amount required to pay out the contract (as accelerated); and

(c) the default has not been remedied within the period specified in the default notice (unless the credit provider believes on reasonable grounds that the default is not capable of being remedied).

(2) However, a credit provider is not required to give a default notice under section 88 or to wait until the period specified in the default notice has elapsed before bringing an acceleration clause into operation, if:

(a) the credit provider believes on reasonable grounds that it was induced by fraud on the part of the debtor or mortgagor to enter into the contract or mortgage; or

(b) the credit provider has made reasonable attempts to locate the debtor or mortgagor but without success; or

(c) the court authorises the credit provider not to do so; or

(d) the credit provider believes on reasonable grounds that the debtor or mortgagor has removed or disposed of mortgaged goods under a mortgage related to the credit contract or the mortgage concerned, or intends to remove or dispose of mortgaged goods, without the credit provider's permission or that urgent action is necessary to protect the goods.

(3) This section is in addition to any provision of any other law relating to the enforcement of real property mortgages and does not prevent the issue of notices to defaulting mortgagors under other legislation.
What Shadow doesn't seem to realise is that a borrower can be in default on their loan without being behind on their repayments. Where Shadow says "the banks can't margin call unless the borrower has defaulted on repayments", the reality is the borrower only has to be "in default under their credit contract". So what constitutes default on a (mortgage) credit contract?

I covered this over 12 months ago on Somersoft Property Forums (Link). The pages have changed a little from when I posted, but here is a link to the relevant CBA Mortgage T&C Document (Australia's largest home lender):

From page 28 (section 3.5):
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.
From page 34 (section 9.1):
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
Continues up to (h)
So (in simpler terms) to be in default under the conditions of a CBA mortgage the value of your property only has to fall to a value that the CBA deems unsatisfactory relative to your loan. Furthermore the CBA can at anytime request a valuation of your property to ensure it meets their requirements. If they find you in default (property value insufficient) they can provide notification and request that you fix the default (in this example request you make a payment to reduce the size of the mortgage aka MARGIN CALL). You will be provided with at least 30 days to fix the default.

I'm not expecting a crash of the magnitude that Shadow outlines in his post (40-60%), I do agree with him that it would not be in the interests of the bank (in most situations) to foreclose on a property where a borrower is keeping up with repayments, however the fact remains that mortgage contracts do contain the terms required to facilitate a property margin call.

All the above is my own understanding (from reading the relevant documentation). It would be quite ironic if I was wrong, but happy to hear from those with opposing views (with evidence which contradicts the above).


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  1. This sounds similar to the situation in the UK where it is a little known fact that you can receive a margin call if the value of your property goes down.
    In practice however it is only applied is situations where the banks are concerned that you have done something to reduce the value of the property (e.g. failing to maintain it). There have been no large scale margin calls during the current UK property crash.

  2. I'm under 40 but I've been told that during the 80's this did happen. One must consider that banks have a LVR and conditiona attached to their credit too.

    Also consider that you need a LVR to refinance too, so you may be left paying way too much when there is much better interest rates available.

  3. This did happen a bit in the early 90's, and it was mainly CBA that was doing it. They needed to rip as much cash back onto the books as they were close to going under in 91/92.

  4. The only examples I have heard have been "on the grapevine". Anyone here know if there were print articles that covered the previous mortgage being called in (and where I could source them)?

  5. Common practice for CBA is to allow mortgage-holders to fall into arrears and milking them for all their worth, and only defaulting them when equity has run out.

  6. "mortgage-holders to fall into arrears and milking them for all their worth, and only defaulting them when equity has run out"

    This is quite true as a variant of it happened to me. But what the bank/Gadens do is run the recovery fees and penalty interest up to the value of the property and then sell. If they then have a loss, they claim it on the LMI.

  7. The other tricky area is with Lines of Credit because the rules are quite different and they can simply reduce the limit - just as if it were an overdraft. Many LOCs are only for a 5 year term-another little piece of fine print that most people dont notice. At the end of 5 years, they have to roll the facility - again just like an overdraft.

    The other thing they can do is reduce the limit to the current principle, so if you have made payments and got ahead on the theory that you will "redraw" if you ever need to in an emergency say, now - no more limit. All of these things have happened to me in the last 2 years and I eventually lost my house... which they sold at loss of 800k to the person who was about to buy it from me...

  8. BB you need to go and check the latest on this thread at APF - I am afraid the information you have posted above is wrong, and have proven it with copies of the relevant clauses from an actual NCCC compliant regulated mortgage document.

  9. " posted above is wrong".

    Not true. In fact this very section of law is currently being tested in the courts at the moment.

  10. Sydneyite, I am wading through a lot of crap in that thread, what exactly am I looking for?

    If you are referring to your scans... what age are the loan docs? I looked at my old loan contract and it's completely different to yours again. I'd imagine all the banks have different clauses and conditions. So some may have a "margin call clause" and some may not.

    If you are referring to Shadows post that the CBA PDF is only an informational booklet, he is wrong. It says there in print that the booklet contains "the terms which govern this product". Of course it would be used in tandem with further specific loan documentation and you would likely sign in the contract that you have read and accepted the T&C booklet.

    Regardless someone can live in their PPOR and still have an unregulated home loan over the property depending on the circumstances. So in these cases even by your contract someone could receive a margin call to pay down some of their loan.

    Where exactly was I wrong?

  11. I'm reading that APF thread and it seems every PPOR loan in Australia, plus any IP loans taken out since 2010 are regulated by the NCCP Act. Bullion Baron, your scenario might apply to some unregulated loans, but there wouldn't be too many of those around any more I don't think. Shadow's point is essentially correct for almost all mortgages (with just a few exceptions).

  12. There is nothing in the NCCP (which has been quoted by Shadow) that conflicts with the CBA clauses, so regulated by the NCCP or not it doesn't make a difference. Not every mortgage over a PPOR is regulated.

  13. The NCCP DOES NOT say that banks can't 'margin call' a loan. I don't know why people keep going on about this. The NCCP simply states all the things the banks can and can't do in the event of a default on the credit contract. The NCCP DOES NOT define a default to only be missing payments. The CBA loan T&C quite clearly states a number of ways a loan can be in default, including the value not being sufficient. Stop thinking the NCCP says you banks can't do it, they can. They just have to go through all those procedures outlined in the NCCP.

  14. Also what most borrowers aren't aware of, is that if they sign any doc (usually a tick the boxes clause) that say that they are using funds for investment purposes, then they may not realise that they nullify the application of the Consumer Credit Act provisions. On the day, when signing the docs, you don't get much choice. It's either tick or no loan. However, when you lose your house because of incorrect documents issued, one gets a deep appreciation of the protections of the Act!

    Again a small trap that means anyone who has a LOC will be exposed to this problem. The banks prefer that borrowers sign contracts where the Act doesn't apply and have all sorts of ways of achieving this.

    CBA has I understand already redrafted its T&Cs as a result of the CoA proceeding but this will only further strengthen their hand in taking possession to sell as mortgagee. And provided that the LMI insurers don't go belly up, Banks have a great incentive to take possession asap before the mass of re-pos hit the market in the next years. Remember the asset the banks hold on their books is the debt - not the house. Thus if house values decline banks are exposed only if they lose money on the recovery process - which in the early stages, whilst the LMI policies are still functioning, they won't. This of course is all further complicated by the securitisation issue.

  15. "I'm reading that APF thread and it seems every PPOR loan in Australia, plus any IP loans taken out since 2010 are regulated by the NCCP Act."

    This is SO not so. See my comments about the TICK THE BOX clauses which specifically nullify the Act. Many people will find out to their cost that they have given up their protections. Almost certainly any one who has a split loan facility where the second is a drawable facility (LOC) may be in this situation

  16. Also, the people with negative equity, that have the ability to reduce the debt will just do so, they won't risk the fight in the courts, they'll just do it. And those with negative equity that can't reduce the debt aren't going to be able to fight the banks. The banks are large and powerful with deep pockets. The negative equity owners with no money will just be out on the streets.

  17. The CBA document linked doesn't seem to be a contract, it's more of a generic information guide about loan products. Have you seen any actual contracts that include a clause allowing banks to take action due to fall in property value alone? I've been looking at my contracts from Westpac and CBA, but there is no such clause in there. My loans are for an investment property and my place of residence, both purchased over ten years ago.

  18. Hi Steven, it's not an "information guide", it is part of the terms and conditions that govern the loan. Normally when signing a contract there would be a clause saying something like "You have read, understood and agree with the Terms and Conditions booklet provided by the lender", this is that booklet.

  19. It describes itself as an information "booklet" to help customers decide on a loan product. It probably includes lots of T&Cs applicable across lots of different loan products but not all T&Cs would apply to all loans. A contract must specify clauses within the signed contract itself in order for a clause to be legally binding. Would you happen to have a real contract with those type of clauses included. I checked mine and they aren't there, one of mine is a Commonwealth loan, and I know I didn't agree to any T&C like that.

  20. If you continue to make up names and stories Shadow I will simply close off the comments (again).

    It describes itself as the both an information booklet and the booklet which contains the terms which govern the loan products. You are right not all T&C apply to all the loans.