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

[Shadow]

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.

Shares are fungible, and the value of a share is instantly available as a market indicator. Contrary to your claim, margin calls do occur when the market indicator (i.e. the share price) drops.

Dwellings are unique, and the value of a dwelling is estimated based on the sale price of other dwellings in the general area. Unlike with shares, banks are unable to 'margin call' on residential property when the market indicator (i.e. median house price) drops. Residential property owners are protected by the NCCP Act.

This discussion has always been about whether banks can 'call in' or 'margin call' or repossess the homes of borrowers simply because general house prices happen to fall.

All this stuff about general property movements and the like is simply a distraction

I know you'd like to redefine it as a 'distraction' now that you've been forced to agree with me, but 'all this stuff about general property movements' was a key part of the OP, has been mentioned again many times during the thread, and is the core matter at the heart of this discussion. For example, see post 19, posted before you even joined the discussion...

Right, so something would have to happen to trigger a revaluation (for example, borrower knocks down the house etc). That's fine - I have no problem with that.

As mentioned in the OP, I'm actually talking about a situation where a lender just decides that a person's home is worth less because house prices in general have fallen, and then tries to take action against the borrower by claiming the borrower is in default because house prices in general have fallen.

Following my post above, you posted many times over several days to tell me how wrong and silly I was, only to turn around today and agree with me.

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

 

[VYBerlinaV8]

This discussion has always been about whether banks can 'call in' or 'margin call' or repossess the homes of borrowers simply because general house prices happen to fall.

The issue, then, seems to be whether general market falls constitute an actual fall of a specific property, being used as security for a loan.

For me, the real question is simply "can the bank ask for additional security in the event my LVR drops below a certain level"?

As investors, the questions we need to ask are:
1) What is the likelihood of this type of event occurring?
2) What are the consequences of this type of event occurring?
3) What options do I have for resolving such an issue?

Based on the discussion, I've formed 2 opinions:
1) I don't think a bank will 'margin-call' me for property loans while I make my repayments on time and can demonstrate sensible cashflow; and
2) The decision to buy investment property using standard residential P&I loans may well have provided mitigation of this risk.

Perhaps it would be helpful look at other places in the world (e.g. Nevada in the US) where there are a substantial number of loans that are 'underwater', and look at the behaviour of the banks there. Based on my own recent reading, it seems that banks are going out of there way NOT to margin-call (which will typically lead to foreclosure anyway).

Thoughts?

 

[Aaron_C]

I think Shadow is trying to argue a legal point rather than a practical point of view.

 

[VYBerlinaV8]

I think Shadow is trying to argue a legal point rather than a practical point of view.

I think you're probably right. I guess I'm just keen to find out what it really means for me.

 

[Shadow]

I think Shadow is trying to argue a legal point rather than a practical point of view.

Yes, the argument is mainly hypothetical as the situation is never actually going to arise in real life.

 

[MrCrumbpacker]

Yes, the argument is mainly hypothetical as the situation is never actually going to arise in real life.

After rereading some of these posts, it is still not entirely clear to me one way or the other.

For instance in the terms and conditions referred to in the first post, the bank has the right to call a valuation on your home at any time (presumably in a general market fall), and then margin call you?

Regardless of the legalities, I wouldn't put it past them exercising this if they thought it to their advantage.

 

[Shadow]

After rereading some of these posts, it is still not entirely clear to me one way or the other.

For instance in the terms and conditions referred to in the first post, the bank has the right to call a valuation on your home at any time (presumably in a general market fall), and then margin call you?

Regardless of the legalities, I wouldn't put it past them exercising this if they thought it to their advantage.

I don't believe so. My question to Treasury covered this point. I asked... '...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?'

The response... '...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.'

 

[MrCrumbpacker]

Interesting, I presume there aren't many interest only mortgages here, I know I used to have one years ago (endowment policy)

Still seems a bit of a mythbusterish grey area, don't know whether to call it 'feasible but unlikely', or 'unfeasible, likely to be challenged'.

I do believe banks will always move in their shareholders interest, and do whatever they feel they can get away with in these regards, which to be fair is their mandate.

 

[VYBerlinaV8]

I do believe banks will always move in their shareholders interest, and do whatever they feel they can get away with in these regards, which to be fair is their mandate.

This I agree with. The question, I guess, is whether margin-calling a residential property loan would be in the shareholders interest.

It's an intriguing question.

 

[Rolf Latham]

Yes, the argument is mainly hypothetical as the situation is never actually going to arise in real life.

Never ?

That's a looooooong time

Ta

Rolf

 

[Shadow]

Never ?

That's a looooooong time

Ta

Rolf

Figure of speech (obviously nothing lasts forever).

Perhaps one day a lender will try to enforce such a clause through the courts... it would be interesting to see the outcome.

 

[Terryw]

Figure of speech (obviously nothing lasts forever).

Perhaps one day a lender will try to enforce such a clause through the courts... it would be interesting to see the outcome.

i think you will find death may be considered a default too - no, please don't start another thread!

 

[Token Funder]

Shares are fungible, and the value of a share is instantly available as a market indicator. Contrary to your claim, margin calls do occur when the market indicator (i.e. the share price) drops.

You're squirming again.

Margin calls occur if the drop in value of a given share breaches the LVR. Market movements in other shares or indices don't result in a call.

Equally, drops in median prices of a given suburb don't create a breach of the loan terms we have seen. However, a drop in the value of given property can.

Therefore, margin calls can occur under the loan agreements we have seen.

Dwellings are unique, and the value of a dwelling is estimated based on the sale price of other dwellings in the general area. Unlike with shares, banks are unable to 'margin call' on residential property when the market indicator (i.e. median house price) drops.

A margin call isn't triggered by movements in a broad measure of value. It is triggered by the valuation of the specific asset securing the debt.

You're trying to compare the market valuation of an individual share with movements in a mathematical estimate.

They ain't the same thing.

Residential property owners are protected by the NCCP Act.

Yes they are. It doesn't mean they can breach the terms of their contract.

This discussion has always been about whether banks can 'call in' or 'margin call' or repossess the homes of borrowers simply because general house prices happen to fall.

That particular mangling of terms may be where you started but you have subsequently asserted a whole bunch more which has been shown to be incorrect, including, but not limited to, the non-existence of contractual terms that have not only been shown to exist, bu exist for at least two lenders and more than one in five of all Resi mortgages in Australia.

I know you'd like to redefine it as a 'distraction' now that you've been forced to agree with me, but 'all this stuff about general property movements' was a key part of the OP, has been mentioned again many times during the thread, and is the core matter at the heart of this discussion. For example, see post 19, posted before you even joined the discussion...



Following my post above, you posted many times over several days to tell me how wrong and silly I was, only to turn around today and agree with me.

The very fact that you continue to argue the ING and CBA TsandCs are not contractual terms remains support for the proposition you are both wrong and silly.

 

[willair]

Figure of speech (obviously nothing lasts forever).

Perhaps one day a lender will try to enforce such a clause through the courts... it would be interesting to see the outcome.

Sometimes it's better to just give up while your ahead..

 

[Shadow]

The very fact that you continue to argue the ING and CBA TsandCs are not contractual terms

You know very well that I never argued that those are not contractual terms.

In fact I clearly said that lenders can stick whatever clauses they want into a contract (if they put something in a contract it becomes a contractual term).

I then pointed out that such clauses are not necessarily enforceable in the manner being discussed here (a point you now agree with me on).

I also asked you to advise whether every single T&C in the CBA booklet was present in every single loan contract, and that no other clauses (aside from those in the booklet) existed in every loan contract. You failed to provide a copy of an actual contract, and also failed to respond to the question about whether every single T&C in the booklet was present in every single loan contract (obviously because the answer is 'no'). I have personally viewed actual CBA and Westpac regulated loan contracts, and those clauses did not exist.

But I get what you're doing here... make up a statement, attribute it to me, and then argue against that statement.

I guess that's easier for you than just conceding that I was right...

remains support for the proposition you are both wrong and silly.

Resorting to ad hominem attacks when soundly defeated in the debate is typical of your debating style, but I'm not really interested in being drawn into your childish slanging match.

You agree with me that lenders can't make a margin call just because the market drops, you agree that banks can't just repossess property, or 'margin call' borrowers because of a general fall in house prices, and you also agree with me that any attempt to use a clause in that manner may well be illegal.

Unless you've got something new or useful to add to this discussion, I won't humour any more of your petty attempts to drag me into a pedantic round of nitpicking and claiming I said things I didn't say in your desperate effort to score points and save face here.

 

[Terryw]

You know very well that I never argued that those are not contractual terms.
.

I think you described them above somewhere as not being part of the contract.

 

[Shadow]

I think you described them above somewhere as not being part of the contract.

What I actually said was that the CBA information booklet contains various T&Cs that may apply across a broad range of loans, and I asked to see an actual contract that included those T&Cs. I also asked TF to advise whether every single T&C in the booklet was present in every single loan contract, and that no other clauses (aside from those in the booklet) existed in every loan contract.

I did not, as TF falsely claims... 'argue the ING and CBA TsandCs are not contractual terms'

TF failed to provide a copy of an actual contract, and also failed to respond to the question about whether every single T&C in the booklet was present in every single loan contract (obviously because the answer is 'no'). I have personally viewed actual CBA and Westpac regulated loan contracts, and those clauses did not exist.

 

[Terryw]

The CBA T&C document linked earlier describes itself as loan information 'booklet' aimed at helping customers select a loan product. It is not an actual mortgage contract. It may include T&Cs that apply across a broad range of loans, and not every clause in the booklet would exist in every loan contract.

What about this?

 

[hobo-jo]

You know very well that I never argued that those are not contractual terms.

This is what you said in the very first post of this thread:

It should be noted that the CBA document quoted above is not a contract - it is just an information booklet about home loans, and therefore non-binding, and not a legal document.

[EDIT] Snap.

Now you could try and argue (pettily) that the booklet in itself is not a contract (by itself), but if a borrower has signed a contract subject to the terms and conditions in the booklet then it both forms part of the contractual documents and is legally binding.

 

[Terryw]

Thanks TF, but that's not actually a mortgage contract. It describes itself as an information 'booklet' designed to help customers decide which consumer lending products best suit their needs.

And this??