Financial legal question-Any Lawyers out there?

[Lovey80]

Hello all,

I have heard the use of the phrase or term "the banks calling in loans" several times on this forum and in other economic newsletters/editorials in recent times. So I have to ask, while I am more than up to date with housing loans and other bank products, I am at a loss to have ever heard of a bank calling in a loan on a customer that is fulfilling his/her debt obligations set out in the contract. Nor have I seen it written in a housing loan contract... Maybe I have missed it? It would be my logic telling me that just as a bank can foreclose on your contract if you fail to fulfil the terms of the agreement, surely there is consumer protections stopping a bank screwing over customers because they have gambled and lost and now need to raise capital.

Would like to see some discussion on the subject.

Cheers

Chris

 

[Big A.D.]

Something I've seen happen a few times is the bank, as it is entitled to do under the terms of the loan contract, decreases the Loan-to-Value ratio they require on the property used as security. Basically they engineer a margin call by dropping the LVR from, say, 70% to 40% and you either have to stump up the 30% difference in cash or sell the property (or find another bank to refinance the loan with).

It's happened a lot in the hospitality industry over the last three years or so and it isn't really a "foreclosure" as such - the banks are quite nice about it, but they just make it clear that they can't (or won't) keep carrying such a high level of debt, even if you are making the repayments - banks can afford to carry a residential mortgage customer who's late paying back $2000/month but if your repayment is $50k/month the banks want to see business plans and projections and sales simulations and they pull the plug a lot earlier on. The size of the loans involved is millions or tens of millions of dollars so they represent sizable businesses that can't just be flogged off at auction next weekend, so people do get a reasonable amount of time to liquidate the property.

 

[Shaddam IV]

It happened in Sydney's west during the first phase of the GFC - People started receiving letters from their bank basically saying that "your housed is now valued at less that your outstanding mortgage balance. Please pay us $80,000.00 to cover the margin immediately".

 

[fishball]

It happened in Sydney's west during the first phase of the GFC - People started receiving letters from their bank basically saying that "your housed is now valued at less that your outstanding mortgage balance. Please pay us $80,000.00 to cover the margin immediately".

Interesting. There didn't seem to be a mass sell-off though so what happened?

You reckon most people managed to pay up just fine?

 

[jparrie]

It happened in Sydney's west during the first phase of the GFC - People started receiving letters from their bank basically saying that "your housed is now valued at less that your outstanding mortgage balance. Please pay us $80,000.00 to cover the margin immediately".

So is there a clause in the contract that say mortgagees must maintain whatever the minimum loan to valuation is?

Because if that is the case then there will be mass defaults when, or if, prices drop.

 

[Big A.D.]

It happened in Sydney's west during the first phase of the GFC - People started receiving letters from their bank basically saying that "your housed is now valued at less that your outstanding mortgage balance. Please pay us $80,000.00 to cover the margin immediately".

So is there a clause in the contract that say mortgagees must maintain whatever the minimum loan to valuation is?

Because if that is the case then there will be mass defaults when, or if, prices drop.

I don't know about residential mortgages but a lot of commercial loans include terms like "the lender may, at its discretion..." choose to enforce a particular LVR rate or adjust it i.e. they can force a margin call if they want, but they may well decide not to for a variety of reasons.

For residential mortgages, the banks have a collective interest in not forcing mass foreclosures because virtually their entire asset base is backed by residential property.

 

[jparrie]

For residential mortgages, the banks have a collective interest in not forcing mass foreclosures because virtually their entire asset base is backed by residential property.

That's exactly what I was referring to. Not saying Jonesy is making this stuff up, but I've never seen a clause like that in a residential mortgage contract, but then there is plenty of small print so I might have missed it.

 

[Shaddam IV]

It happened in Sydney's west during the first phase of the GFC - People started receiving letters from their bank basically saying that "your housed is now valued at less that your outstanding mortgage balance. Please pay us $80,000.00 to cover the margin immediately".

Interesting. There didn't seem to be a mass sell-off though so what happened?

You reckon most people managed to pay up just fine?

Don't know, I saw it in the newspapers at the time, a small article that was saying that banks were making margin calls on some home owners in the Mc Mansion belt of Sydney.