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).