The Johannesburg Commercial Crimes Unit of the SA Police services called for an urgent meeting yesterday with Advocate Douglas Shaw following explosive new evidence alleging “serious fraud” by the Big Four banks over securitisation of home loans.

The police have asked Adv Shaw to supply further information and will then decide whether to brief the Public Prosecutor.

A team of researchers instructed by Adv Shaw investigated 600 bonds and found not a single one had been ceded to the new owners. What this points to, says Adv Shaw, is that the banks have been deceiving the courts and home owners about their securitisation activities in order to appear as if they are still the registered bond owners, when in fact they are not. This allows them to collect mortgage bond payments on behalf of the new owners and take judgment against defaulting borrowers, neither of which are legal where the bond is securitised (securitisation is the practice of bundling thousands of mortgages together and on-selling them to investors on the JSE).

In effect, the research suggests that what the banks have done is simply hide the fact that they have sold the bonds to new owners and carry on as if nothing has happened, and then lie in front of the court that they remain the registered owners of the mortgage bond. It was long suspected that this was the case, but now some real evidence has emerged.

The researchers expected to find at least 20% of the 600 bonds examined had been ceded, as this would chime with the banks’ own reported figures on securitisation. The fact that not a single bond had been recorded as having a new owners (which is what the cession actually means) has raised grave suspicions of fraud by the banks.

What this means is that many of the securitisation instruments traded through the JSE may be “empty shells” with no, or under-reported, underlying assets. The evidence also seems to suggest bondholders are being habitually lied to by the banks when they ask for evidence as to whether or not their loans have been securitised.

If so, this could prove to be one of the biggest banking frauds in South African history, according to one securitisation expert contacted for comment.

This could prove to be one of the biggest banking frauds in South African history

This follows an investigation headed by Adv Shaw into the shadowy practice of securitisation. Where loans have been securitised, the banks lose legal title to these loans. When questioned by bond holders, the banks typically deny their loans have been securitised or ceded to new owners, and demand the bondholder provide evidence, which is a virtual impossibility because of the secrecy surrounding this practice. The banks continue to act as collection agents for the new owners, which is expressly prohibited in terms of Section 78(g) of the Banks Act.

Ammunition for home owners under threat

A few years ago it was reckoned by the banks’ own figures that upwards of R30 billion in loans were securitised each month. This new research should provide ammunition for home owners under threat of losing their properties. When these matters come to court, the banks typically hold up the title deed and show no evidence of a cession as supposed proof that the loan has not been securitised. Now, it seems, we know why. The loans may have indeed been securitised, but the banks have not complied with the law by reflecting the cession in favour of the new owner on the Deeds registry. This allows them to sue the home owner in the bank’s name, rather than the new entity. In doing so, they are effectively committing fraud on the courts since they have no legal right to be there.

Adv Shaw said he decided to launch a project to test the banks’ honesty when it comes to securitisation, and what he found was shocking. “I’ve been arguing securitisation for years in the courts, and it disturbs me that the courts tend to take the banks at the word when they deny securitisation. So I decided to dig deeper and find the truth.”

A number of researchers instructed by Adv Shaw decided to test whether the banks had ceded their mortgage loans to new entities. Based on available evidence, 20% to 30% of all mortgage bonds in South Africa are securitised, which means these bonds should be ceded to the new owners and reflected as such in the Deeds register.

A sample of 600 bonds dating back to 2009 were searched, representing bonds issued by all four major banks. Not a single bond was reflected as having been ceded. The mortgage bonds selected were “traditional securitisations” rather than derivative-based, and are therefore supposed to reflect ownership of the underlying assets.

“Statistically, we thought we might find that 20% or even 10% of bonds had been ceded,” says Adv Shaw. “We found that not a single bond had been ceded.” A statistician has provided evidence that the chances of this occurring randomly are statistically negligible.

Is this important, and if so, what does it mean?

“It means that the new owners of the bonds have bought empty shells with no assets. We are increasing our sample size to validate the initial research, but on the face of it, the banks are guilty of committing serious fraud on the investors to whom they sold these mortgage bonds, and they are committing fraud on the bondholders.”

The SA Police Services were immediately notified and asked for an urgent meeting, which took place today. Further information has been requested and likely then be forwarded to the Public Prosecutor.

Says Shaw: “This is quite similar to numerous other frauds in the US, where banks played fast and loose with the law when it came to securitisation. The difference is there they were slapped with hefty fines. The banks in South Africa have been lying about the nature and extent of their securitisation for years, and they have been pulling the wool over the eyes of the courts.”

The JSE replied to questions sent to it by Acts Online (see the full response below):

“While the JSE ensures that adequate disclosure is made in respect of the securitisation scheme, it does not authenticate the underlying securities in the scheme. However agreements required in order to list these structures on the JSE include detail of the relevant assets, as well as security provided by the originator. That being said, if specific information is provided to the JSE demonstrating that there are no ‘assets’ within a particular structure, then we will certainly take this up with the issuer concerned. However, we do not believe this to be the case.”

Affidavits

One of the researchers briefed by Adv Shaw, Norman Morgan, who investigated 50 mortgage bonds issued by Absa, deposed in an affidavit: “I have read the Absa accounts in which they aver that they have securitised a large percentage (about 20% to 40%) of their mortgage loans and I was therefore expecting that 6 to 12 (30% of the 20%-40%) of the deeds that I pulled would have bonds properly registered in the name of the securitised entities that they use.

“I was therefore extremely shocked and surprised to find that none of the 50 bonds that I drew on Windeed (an on-line deed search facility) were registered to any of Absa’s securitised entities.

“I understand that other people in the same position as myself have done similar searches on Windeed for the properties around their home and have also found no bonds registered to Absa’s securitised entities.

“It is therefore established on the balance of probabilities and indeed beyond reasonable doubt that the bank is deceiving the courts on a massive scale by claiming that a deeds registry search showing that the bank is the owner of the bond is in evidence and that the bank still owns the bond.

“It is thus evident that the bank is knowingly repossessing 20-40% of the time when it has no locus standi to do so.

“It is therefore evident that the bank is committing a systematic fraud on the court by securitising bonds and then failing to come in the name of the new entity.”

Other banks are likewise accused of the same practice by researchers briefed by Adv Shaw.

The fact that your bond is not ceded in the Deeds registry means nothing. This likely can no longer be used by the banks to rebut claims of securitisation.

Expert statistician Garth Zeitsman investigated the research data and deposed in an affidavit: “I have studied this matter in detail and my expert opinion is as follows: The probabilities indicate that the banks do not in general register their bonds with the deeds registry. They are thus knowingly attempting to deceive the judges who hear cases when they support their contention that a particular bond is not securitised by reference to the deeds registry. They would be aware that they have not, in fact, properly registered their securitised bonds there. They would also then be aware that providing an entry from the deeds registry would prove nothing.”

Not only does this mean many investors may have bought securitisation instruments that are legally suspect, they may also be technically worth less than reported – if anything at all. The research provides powerful new ammunition to bondholders who suspect they have been victims of fraud by the banks.

Hundreds of thousands of South Africans have come to learn about securitisation over the last few years due to a media campaign that was carried, in the most part, through social media and the internet. The mainstream press largely ignored the issue.

Each year more than 10,000 South Africans are hit with summary judgments and stripped of their homes by the banks after defaulting on their loans. What many thousands of customers have been trying to find out from the banks is whether their loans have been securitised. They are generally brushed off with a blanket denial, or the banks insist the customer provides proof, on the legal basis that “he who avers must provide proof.” But Adv Shaw counters this by arguing that he who hides evidence inherits the burden of proof.

Game changer

This is certainly a game changer for those arguing the securitisation defence, since they can now buttress their arguments with the new research. It puts the banks on the back foot.

If a mortgage bond is securitised, the law requires the banks:

·         To inform the bondholder of the change in ownership (under the National Credit Act)
·         To cede the mortgage bond to the new owner at the Deeds office, and
·         Section 79 of the Banks Act prohibits the banks from assuming the role of collection agent for the new owner.

It has long been suspected that the banks have been conducting securitisation in secret and in doing so are in wilful violation of several statutes.

This latest research increases pressure on government and the National Credit Regular to establish a registry in terms of section 69 of the National Credit Act (NCA). “This is required to provide investors with confidence and to clear up uncertainty about whether or not they actually have any backing for their investments,” says Adv Shaw.

Those Absa fires again

Of all the banks, Absa is unique in claiming that many of its original mortgage bond documents, along with electronic copies, were destroyed in a fire at the Docufile storage facility in 2009. As we reported previously, it has been able to obtain summary judgment and repossess countless homes without the original documents. Absa has been able to do this by placing unsigned “standard agreements” before the court, claiming these were identical to the ones signed by the defendants. Adv Shaw challenged this story by holding up several different Absa agreements in the South Gauteng High Court, some with 11 clauses and others with more than 100, arguing that it was impossible for the bank to pass off an unsigned agreement as the same as the ones signed by the banks’ customers. Last year Judge Sutherland of the South Gauteng High Court refused Absa’s attempt to take summary judgment against two home owners who allegedly defaulted on their loans, Kevin Jenzen and James Grobbelaar, and ordered the bank to present proper documentation should it wish to pursue the matter. He referred the matter to trial. This now stands as a crucial precedent for others in the same situation.

Greece to freeze home repossessions

Interestingly, as Greece debates whether to stay or leave the EU, the new left-leaning Greek government is playing tough over home repossessions. According to Fortune magazine, “Greek PM Alexis Tsipras vowed to roll back deregulation of the labor market, one of the main reforms of the bailout. He also said he will present a new bill stopping banks from foreclosing on loans against primary residences, according to the Greek newspaper Kathimerini. (Eurozone officials grumble privately that the government is already pressuring the banks to be too easy on their bad loans.)”

This is likely to set an international precedent that could quickly sweep the world as the latest financial crisis deepens.

The JSE replies:

The JSE sent the following reply to questions posed by Acts Online on the above findings.

In South Africa, securitisations are regulated according to the securitisation regulations issued under the Banks Act 94 of 1990 (the Banks Act). These regulations were published under Government Notice 2, in the Government Gazette 30628 of 1 January 2008 (the Securitisation Notice). The Securitisation Notice regulates the corporate status, ownership and control of the issuer SPV, and the issue of commercial paper by the issuer SPV.

Securitisations are therefore regulated by the Registrar of Banks under the Banks Act. The prior approval of the South African Reserve Bank (SARB) must be obtained before the issuer SPV can issue commercial paper in a securitisation. Thus, the creation of securitisation schemes are regulated by the Registrar of Banks.

In your email, you refer to a legal obligation to cede bonds to the new owners at the Deeds registry. Such a requirement is not included in the Listings Requirement and as a result we are not best placed to comment on this.

The JSE’s jurisdiction relates to the listing of the instruments that were created, in accordance with the securitisation regulations mentioned above. This is done through the JSE Debt Listing Requirements (the Debt Requirements). While the JSE does not regulate the creation of securitisation schemes, the exchange ensures that adequate disclosure is made in respect of the securitisation scheme.

The Debt Requirements provide for the minimum disclosure which investors and their professional advisers would reasonably require so that they can make an informed assessment of the nature and state of the issuer’s business. The Debt Requirements contain the rules and procedures governing new applications and the ongoing obligations of new and existing issuers. Section 6 of the Debt Requirements makes specific provision for listing of instruments issued by a securitisation SPV, requiring requires disclosure of the (i) underlying assets, (ii) details of the securitisation scheme and (iii) a description of the sale and transfer of the assets or assignment of any rights in the assets to the applicant issuer.

While the JSE ensures that adequate disclosure is made in respect of the securitisation scheme, it does not authenticate the underlying securities in the scheme. However agreements required in order to list these structures on the JSE include detail of the relevant assets, as well as security provided by the originator. That being said, if specific information is provided to the JSE demonstrating that there are no “assets” within a particular structure, then we will certainly take this up with the issuer concerned. However, we do not believe this to be the case.

Securitisation expert comments on Adv Shaw’s findings

A securitisation expert, formerly with one of the Big Four banks comments:

My gut-feeling tells me that the banks are using securitisation as a means of moving non-performing loans (NPLs) off of their balance sheets and thus window-dressing their financial statements.  This is done by freeing up capital which is tied up in these NPLs, so that cash can be utilised for a new batch of lending to bank clients.

The process is as follows:

·         The bank sets up a company referred to as its SPV (Special Purpose Vehicle) to facilitate the transaction; it then batches and “sells” (cedes) selections of its assets to this SPV.
·         This SPV is then a company with assets but no financing
·         Enter asset management companies and pools of investors’ cash (be it through hedge funds, unit trusts, etc.) which want to earn a better rate on their investments than what is offered by the local money market.  Obviously, if the investment is asset-backed (the old adage “safe as houses” applies), then these investors aren’t even venturing significant additional risks for this increased return.

Now, the problem comes in … What if the loans continue to be non-performing? Who has the jurisdiction to enforce debt recovery?  The client did not enter into an agreement with the SPV.  Nor was the client aware that the bond had been ceded.  The bank has potentially set up the SPV and the offer to investors with the assurance that they will remain in charge of the administrative duties of the loans in the SPV (probably at a considerable fee). This is an arguable transgression of Section 78(g) of the Banks Act.

And this is probably why the bank still appears as the bondholder on the properties that have been ceded (the discovery of Adv. Shaw’s team therefore does not surprise me). This is so the bank continues to appear as the bondholder and that everything is still under control.

But, once the loans are in default, how can they sue?  They are no longer a party to the contract … or as the courts have stated so eloquently: they have no locus standi.

So, now they’re in a tight spot. They have to perform on their contracts with the SPV and the investors owning the bonds, but legally they can’t.  Hence excuses and litigation without documentation.

R30 billion a month (in securitisation) sounds a bit much. But, what I’m wondering (given competitors in the industry buying from each other, such as SA Home Loans buying from Standard Bank) is what the Competition Commission will think.  I am rather certain that no bank will disclose on its financial statements that an SPV or any other organisation owns some of its bonds. That makes it fraudulent towards investors owning Bank shares (and regulators). This also implicates their auditors to a large extent.

I welcome the involvement of the Commercial Crimes unit, and I wish to be part of the investigation.

To contact Adv Shaw’s research group, please contact appointments@bankinglawadvisor.co.za.

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