This is a brief summary of a discussion I have been having on another forum, and I thought some members here might be interested or have additional insight on this topic (especially the brokers here, and other people from the banking industry).
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...
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. Clause (c) is actually there to cover circumstances where a revaluation is triggered, for example due to the borrower knocking down the house. A general fall in house prices would not trigger a revaluation, and the CBA booklet doesn't even claim that it would.
In fact, the NCCP Act 2009 actually makes it quite clear that 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
Furthermore, ASIC stipulates the following conditions...
And regardless of the fact that banks have no legal right to take such action (repossession, forced sale etc) against homeowners who are not in default, it wouldn't be in the bank's interest to do so anyway. A loan is an asset to a bank. It would make no sense for a bank to repossess the home of a non-defaulting borrower and then force the sale of that home for less than the value of the loan. It wouldn't help the bank's balance sheet or financial position in any way.
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...
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.
Default
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
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. Clause (c) is actually there to cover circumstances where a revaluation is triggered, for example due to the borrower knocking down the house. A general fall in house prices would not trigger a revaluation, and the CBA booklet doesn't even claim that it would.
In fact, the NCCP Act 2009 actually makes it quite clear that 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
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.
Furthermore, ASIC stipulates the following conditions...
And regardless of the fact that banks have no legal right to take such action (repossession, forced sale etc) against homeowners who are not in default, it wouldn't be in the bank's interest to do so anyway. A loan is an asset to a bank. It would make no sense for a bank to repossess the home of a non-defaulting borrower and then force the sale of that home for less than the value of the loan. It wouldn't help the bank's balance sheet or financial position in any way.