FNB goes back on its word

FNB goes back on its word

Posted on August 11th, 2008 Sue No comments

This morning I was lying in bed being woken by the good folks of Morning Live on SABC2. And all drowsiness dissapated at about 6:30 with an interview involving an FNB spokesman and the Banking Ombudsman of South Africa.

Apparently, First National Bank(FNB) is going to re-assess home loans that the bank had already approved a year or more ago. The home loans that will be reconsidered include about 2000 approved mortgages that have, after a period of a year or more, not yet been registered against the title deeds of the relevant properties. The bank plans to reassess the loan applicants’ credit based on the current credit assessment standards and their current debt load and general financial position.

The FNB spokesperson said that the bank came to this decision because the recent interest rate increases might make it very difficult for those home purchasers to honour the monthly mortgage bond repayments they will have to make.

So, what’s new FNB? Surely all your mortgage clients need to fork out more because of the high interest rates, do they not? But this guy makes it sound as if First National is actually doing these home loan grantees a huge favour in withdrawing their mortgage bond approvals. But in reality the bank is obviously trying to limit its own exposure in the current low value growth (read falling value), high interest rate real estate market. The bank is in effect pre-preemptively repossessing these people’s homes, without the nasty costs involved in a proper foreclosure.

The banking ombudsman’s response to this almost made me cheer out loud – right there in bed. His response was quite strongly worded. He gave his assurance to the FNB representative that he will (not might or probably would; he WILL) order FNB to pay for any damages those home purchasers or any other party might experience as a result of the banks re-assessment of mortgage bond approvals.

He is of the opinion that the question that should be asked is whether FNB SHOULD do this, not if they CAN do it. And I have to agree. Just from a public relations perspective, the damage done to FNB’s reputation, credibility and trust worthiness because of their decision to go back on their word is HUGE.

And if you consider all the financial losses that might arise from such a home loan approval re-assessment by FNB, one cannot help but wonder how the bank figured that it would be worth their while. In my opinion their exposure is bigger, not smaller, if they go back on their word and re-assess approved loans.

A re-assessment on different standards can very well mean that these approved home loans will now be refused, placing a whole lot of people (far more than the 2000 home loan applicants) in a moer of a considerable pickle.

Obviously these home purchasers will need to suddenly look for alternative accommodation, if they took occupation based on the bank’s approval of their home loan application. And knowing what buyers are like, I imagine that there will be a lot of them that will have gone and spent a pretty bundle on home repairs, alterations and/or home improvements before or shortly after moving into their new homes. They may very likely forfeit all of the money they spent.

Additionally, a buyer whose loan gets declined on re-assessment may lose the deposit he/she paid on the purchase of the house. I say this because the purchasers’ suspensive mortgage bond condition would have been fulfilled when the bank first approved the home loan. So, a binding contract to purchase came into being. If the buyers now cannot complete the sale, because of the re-assessment of their loan application, they will be in breach of the contract of sale.

The sellers would be well within their rights to take steps to remedy the breach of contract or collect compensation, for damages they may have suffered, from the purchasers. And the damages they could suffer may include the cancellations of home purchases they may have made on the binding contracts of sale established by the mortgage bond approvals from FNB. Oh, and don’t forget that sellers who “sold” their properties to these unfortunate FNB home loan applicants may be looking for new roofs over their heads too.

Next in line at the ombudsman’s office door would probably be the other banks. Yeah. Other banks may have granted mortgages based on the guarantee implied in a home loan approval. If their martgagees cannot honour their mortgage terms because of FNB’s decision to go back on their word, they might very well claim damages as well.

Oh, and let’s not forget the poor real estate agents. Times are tough in real estate land. And commissions become due as soon as a real estate agent causes a binding contract of sale to exist. So, real estate agents may be banging on the ombudsman’s door too. Really, FNB. Have you never heard that coming between an agent and his/her commission can be bad for your personal safety?

Now take into account that many real estate agents have taken to the bad habit of dipping into future commissions. A number of lenders bombard real estate agents with promotional offerings of their loan instruments that allow real estate agents to get an advance on commissions that have not become payable yet. So, when FNB cancel mortgage approvals, and in effect cancel the agents’ commissions, some folks may lose much more than the value of those commissions.

I almost forgot the poor mortgage bond originators. They also work on commission. Will FNB pay them their commissions too?

I think this plan to re-assess approved home loans is one of the most ill conceived ideas I’ve ever heard coming from a bank. I suggest that all the folks who get re-assessed go picket in front of First National Bank headquarters, singing: “How the hell can we believe you? How the hell can we believe you…”

I’d really love to see that on the 7 o’clock news.