NCCP Act 2009: Lenders not permitted to 'call in' loans unless borrower is in default

[Token Funder]

Your straw clutching, ad hominem abuse, and pedantic petty nitpicking are of no interest to me.

If you dislike the response from Treasury, email them yourself and word your question however you like.

Not willing to post the question you asked.

Fair enough.

Noted.

 

[Shadow]

Not willing to post the question you asked.

Fair enough.

Noted.

Notwithstanding the fact that you have failed to answer every question I asked you, and failed to post an actual mortgage contract with such T&Cs included, and abused me constantly throughout this discussion, here is the question I asked to Treasury. Unlike you, I have nothing to hide here...

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

Their response...

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.

 

[Terryw]

Coincidently, from today's Sydney Morning Herald

CBA acquired BankWest on the cheap at the height of the financial meltdown in October 2008 and promptly called in a slew of loans from east coast property developers who are now seeking to coalesce in a class action to sue the bank for unfairly calling in their loans.

http://www.smh.com.au/business/rba-kept-bankwest-alive-20120212-1szsz.html

I know it concerns developers and not the NCCP but it may still be of interest.

 

[freddie]

Fault is irrelevant.

Under the CBA and ING terms, if the value of your security drops to a point they are not comfortable, they have the right to have you tip in more cash or add more security. Inability to do this would lead to a default An unremedied default gives rise to a right of repossession.

Whether they would enforce those rights is a different question.

The rights unquestionably exist.

Your last statement is false. The inclusion of a contract clause not having legality bestows no "rights" on the lender whatsoever. The Treasury have clearly indicated that such clauses could be in breach of the law. As such, to say that such rights "unquestionably exist" is quite illogical.

It is interesting that you yourself don't even claim to have such clauses in your contracts and refer to something quite different - "but have others which provide signficant rights if the security property is messed with, including if it is not well maintained." The issue of the buyer's actions reducing the value is an entirely different matter. A strawman.

 

[Token Funder]

Notwithstanding the fact that you have failed to answer every question I asked you, and failed to post an actual mortgage contract with such T&Cs included, and abused me constantly throughout this discussion, here is the question I asked to Treasury. Unlike you, I have nothing to hide here...



Their response...

The Tand Cs are part of the contract. Seriously, if you don't think they are part of the contract, what exactly do you think they are?

As expected your question is loaded.

A fairly simple question would be:

Does the NCCP preclude a contractual term requiring a borrower to reduce their borrowings or add further security in the event the value of the existing security drops below a level set by the lender?

Please find attached some examples.

Of course, the alternative approach would be to insert bits about general house price falls and people meeting all their provisions and whatnot.


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.


Their reply amounts to:

• we haven't seen one.
• btw, all lines of credit (which are regulated by the NCCCP...notice you haven't yet picked up oin that little morsel) include these sorts of things.
• defaulting someone just because property values fall might be a problem.
• what this means for circumstances where such a clause does exist and an indivdual security value drops we just don't comment on.

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

 

[BearTrap]

You are making yourself look sillier than is necessary.

you are the person looks "silly' now !

 

[greedy2000]

Their response...


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.

My interpretation of this is that if you have an interest only loan on an Investment Property, a bank can request an additional repayment on your loan similar to a margin call on a margin loan.

Which could possibly affect anyone with an investment property as they are generally all financed with Interest only loans.

How bad would this be? well lets say you have a $500,000 property initially funded by a 90% LVR loan (so a $450,000 loan) if the property drops dramatically to $400,000 (20% drop) the bank may request you make a lump sum repayment into your home loan to bring the loan back to a 90% LVR. so in this case you'd have to stump up $90,000. to bring the LVR back down to 90%.

So if you don't have that $90,000 sitting around you'd potentially have to sell it and make a loss. Redrawing equity elsewhere to fund it at that stage may also prove difficult as all your other properties may have fallen by 20% or so.

In reality would a bank do this? probably not as it would make a problem worse. But I could see them doing this to investors who have a number of highly geared properties.

Just because they have done something before doesn't mean that when the ***** hits the fan they won't enforce some of these contractual clauses.

 

[Shadow]

Of course, the alternative approach would be to insert bits about general house price falls and people meeting all their provisions and whatnot.

That wouldn't be the 'alternative approach' - that would be the correct approach, because that is what we are discussing.

I find your straw-clutching very amusing.

'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.'

 

[Token Funder]

Your last statement is false. The inclusion of a contract clause not having legality bestows no "rights" on the lender whatsoever. The Treasury have clearly indicated that such clauses could be in breach of the law. As such, to say that such rights "unquestionably exist" is quite illogical.

It is interesting that you yourself don't even claim to have such clauses in your contracts and refer to something quite different - "but have others which provide signficant rights if the security property is messed with, including if it is not well maintained." The issue of the buyer's actions reducing the value is an entirely different matter. A strawman.

There is no evidence that the ING/CBA clauses are illegal.

In these very same clauses exist in every Line of Credit I have ever seen and LOCs are subject to the very same NCCP quote regularly but ignorantly on this thread.

And given I have used that very clause in the last 12 months I can say the right exists with a high degree of confidence.

A clause of the type inferred by Shad in his Treasury request creating a default out of "general" movement in property values may well be, given they would impose a collective movement in values on a specific property, but that's not what the ING/CBA conditions set out.

 

[Shadow]

defaulting someone just because property values fall might be a problem

A clause of the type inferred by Shad in his Treasury request creating a default out of "general" movement in property values may well be [illegal], given they would impose a collective movement in values on a specific property

Um... exactly. That's what this discussion is about.

Thank you for finally agreeing with me.

 

[Bigtone]

My interpretation of this is that if you have an interest only loan on an Investment Property, a bank can request an additional repayment on your loan similar to a margin call on a margin loan.

Which could possibly affect anyone with an investment property as they are generally all financed with Interest only loans.

They are not talking about normal interest only loans that automatically revert to p & I they are talking about lines of credit and balloon type deals which are interest only and then payment required in full such as those often granted to developers , interest only loans for normal IP investors are excluded from that.

 

[hobo-jo]

Um... exactly. That's what this discussion is about.

Thank you for finally agreeing with me.

You are just twisting the argument because it hasn't gone your way.

It was never about whether general house price falls could be used to margin call on a specific property.

If that was the case then you should have argued from the outset that the CBA T&C specifically points to the valuation of the single property (secured by the agreement) and not a general market decline hence wasn't relative to the argument you were making.

Your games are pathetic Shadow.

 

[Shadow]

It was never about whether general house price falls could be used to margin call on a specific property

Go back and read the OP. Especially this bit...

'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...'

Do you realise that you have just admitted that you don't even know what this discussion is about.

 

[DEC]

You are just twisting the argument because it hasn't gone your way.

I'm sure many are thinking the same of you

 

[hobo-jo]

As I said pathetic.

You've been proven wrong on the NCCP. You've been proven wrong and shown there are T&Cs which contain the clause. You've been proven wrong by the Treasury no less after having made the bold statement that "Banks can't 'margin call', or repossess, or force the sale of a residential property unless the borrower has defaulted on repayments". Now you resort to some pedantic wording in your earlier posts...

 

[Shadow]

Now you resort to some pedantic wording in your earlier posts...

The wording is in my very first post, it has been there from the beginning of the discussion, and has been repeated many times throughout the thread. This discussion is about whether general house price falls alone could be used to margin call on property. Frankly, the fact that you missed this critical point doesn't really surprise me...

 

[Token Funder]

The wording is in my very first post, it has been there from the beginning of the discussion, and has been repeated many times throughout the thread. This discussion is about whether general house price falls alone could be used to margin call on property. Frankly, the fact that you missed this critical point doesn't really surprise me...

This getting genuinely amusing.

You can't make a margin call on a margin loan simply because the market drops. You do so when the value of the specific security you hold against a given loan drops below a given LVR.

So, margin call = value of borrower's actual security dropping, not notional market movement.

ING and CBA's contractual terms relate to value of borrower's actual security dropping not notional market movement.

Therefore, ING/CBA terms = margin call.

Unless, of course, you wish to maintain the fiction that the documents supplied by ING/CBA detailing the terms and conditions of their loans are not documents dealing the terms and conditions of their loans.

Which I presume you do.

 

[Shadow]

This getting genuinely amusing.

It certainly is. My initial statement was 'Some people 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 house prices happen to fall.'

I followed this with links and research to demonstrate banks can't just 'margin call' property owners simply because house prices fall.

There followed almost 200 posts including many from Token Funder telling me how wrong/silly/pathetic etc I am.

And here is Token Funder's conclusion after almost 200 posts...

You can't make a margin call on a margin loan simply because the market drops

defaulting someone just because property values fall might be a problem

A clause of the type inferred by Shad in his Treasury request creating a default out of "general" movement in property values may well be [illegal], given they would impose a collective movement in values on a specific property

Thank you, and goodnight.

 

[Terryw]

It certainly is.

My initial statement was 'Some people 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 house prices happen to fall.'


Thank you, and goodnight.

Coincidently, from today's Sydney Morning Herald

Quote:

CBA acquired BankWest on the cheap at the height of the financial meltdown in October 2008 and promptly called in a slew of loans from east coast property developers who are now seeking to coalesce in a class action to sue the bank for unfairly calling in their loans.

http://www.smh.com.au/business/rba-k...212-1szsz.html

I know it concerns developers and not the NCCP but it may still be of interest.

 

[Token Funder]

It certainly is. My initial statement was 'Some people 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 house prices happen to fall.'

I followed this with links and research to demonstrate banks can't just 'margin call' property owners simply because house prices fall.

There followed almost 200 posts including many from Token Funder telling me how wrong/silly/pathetic etc I am.

And here is Token Funder's conclusion after almost 200 posts...



Thank you, and goodnight.

You say a margin call in property can't occur, yet you continue to use an incorrect definiton of margin call in the equities space.

You now use that incorrect understaning to redefine your assertion.

I'm pointing out that a margin call, as occurs with loans against equities, only occurs when the price of the shares securing the debt drop, not because some market indicator drops.

If the ASX drops, but my shares don't...no margin call.

Therefore, a margin call is when a specific security drops.

Therefore, the equivalent of a margin call in property would be when my specific property value drops in value and triggers a default.

Which is a condition of (at least) ING and CBA.

All this stuff about general property movements and the like is simply a distraction the flows from your original misunderstanding of what a margin call is.

Well, one of them, anyway.