Frans Cronje writes on the fraught implications of EWC for borrowers and lenders

Last week, mortgage lending firm, SA Home Loans, took to social media to state that in the event of a client’s property being expropriated, the client would remain liable to settle the outstanding mortgage balance. Our enquiries suggest that firms across the financial services sector are taking a similar line. This underscores the deeply troubling moral, legal, and financial ramifications of the government’s expropriation without compensation (EWC) proposals.

This is, verbatim, what SA Home Loans had to say on Twitter:

‘In the event of expropriation, the bond payments would still remain owing to the mortgage lender. However, we understand that the rights of all parties will be considered in any expropriation processes and have no reason to believe that residential properties will be affected.’

Break that statement down into its component parts and consider them one at a time.

Whether bondholders could or should refund lenders in the event of an expropriation is becoming an area of contestation. The current draft of the Expropriation Bill of 2019 – which is likely to be enacted once the government has its EWC constitutional amendment in the bag – says that the mortgage bond will automatically be terminated on the date of expropriation, when ownership passes to the state. This means that the lender (a bank, for instance) can no longer foreclose on the property now that it is owned by the government.

However, the loan secured by the mortgage does not come to an end. Instead, the usual rule is that the expropriated owner must still pay the loan off to the bank. This, however, may be difficult for the owner to do where compensation is minimal and, in particular, where EWC applies.

If some compensation is payable, the Expropriation Bill directs that this should be apportioned between the borrower and his or her bank, according to the agreement reached between them. (If no agreement has been reached, the compensation will be paid to the Master of the High Court until such time as the dispute has been resolved.)

A similar situation applies under the current Expropriation Act of 1975, which also provides that the mortgage bond comes to an end on the date of expropriation. The critical difference, however, is that the compensation payable under the Act is market value, plus a further solatium. This amount will generally exceed the outstanding loan, making it relatively easy for the expropriated owner to pay what he or she still owes.

However, if EWC applies – or if the compensation paid is far below the amount of the outstanding loan – then many difficult issues arise.

The first complex question is whether, in the EWC situation, it is morally justified to compel the expropriated owner to pay the outstanding debt on the property that has been confiscated from him or her.

Expropriation is being held up by politicians, the government, policymakers and activists as a ‘social good’ and as a key means of bringing about redress, prosperity, and social cohesion, among other things. President Cyril Ramaphosa once suggested that EWC would bring about a Garden of Eden. Some business leaders have also gone on the record to say that they support the principle of expropriation.

If expropriation is a social good, and the country as a whole is thus set to benefit from it, then whatever costs are attached to any expropriation should be carried by the broader society and not by expropriated individuals. Hence, the costs of loans that remain outstanding following EWC expropriations should be carried by taxpayers.

At the same time, some politicians and activists argue that it is wrong to expect compensation to be paid for expropriated property as all land was improperly acquired – and has therefore improperly benefited those who have dealt in it. But that argument would apply just as much to banks and their shareholders as it does to individual home owners.

Political considerations are relevant, too. Some banks and other financial services institutions, including their directors, were instrumental in helping the Ramaphosa administration into power through their financial support, lobbying, and related activism. They strongly endorsed Mr Ramaphosa when he became president in February 2018, and repeatedly depicted him as a committed reformer who could be trusted to put the country on the right track.

The ‘Save South Africa’, ‘Vote Cyril’, ‘Make Cyril Strong’, and ‘CR17’ campaigns, supported and financed by many influential figures in business and their representatives, were probably sufficiently persuasive among middle-class voters to push the combined African National Congress (ANC)/Economic Freedom Fighters (EFF) share of the vote above the two-thirds level needed to force the EWC constitutional amendment through the National Assembly (the ANC/EFF collective vote came to stand at 68.3%). If the combined ANC/EFF vote had remained below two thirds, Mr Ramaphosa would still have been elected president – but the threat to property rights would have been much reduced.

Disturbingly, as late as 2019, many businesses, their directors, and the broader organised business community pressed ahead with campaigns for a bigger ANC share of the vote, what became popular as the ‘mandate threshold’ argument, even though the EWC risk was already writ large and the IRR and other organisations were loudly flagging the dangers of a two-thirds majority for the ANC and EFF. For those same institutions and people to stand back now and say that their clients alone must carry the EWC costs seems particularly unfair.

This brings us to the second part of the SA Home Loans’ statement: ‘that the interests of all parties will be considered’. Legally, this is very much what is envisaged under the 2019 Expropriation Bill. It also echoes what Section 25 of the Constitution presently requires.

Section 25 now stipulates that the expropriation of property must be accompanied by the payment of ‘just and equitable’ compensation. The compensation payable must also strike ‘an equitable balance’ between the public interest in land reform and the interests of the expropriated owner. The section also gives the courts the task of deciding on the amount of compensation in the light of these criteria. However, the ANC now wants to exclude the courts from such decision-making. It will presumably seek to change the Draft Constitution Eighteenth Amendment Bill of 2019 – which is now open for public comment until 29 February – to achieve this.

The ANC is adept at using policy ‘incrementalism’ or policy ‘creep’ to achieve its long-term goals. It is particularly skilled at stepping back at times from demands it has made in order to lull society into a false sense of security. Before long, however, the organisation will renew that same demand, or shift to another that is equally or more damaging.

We in the IRR have tracked this process with regards to EWC for over a decade and the pattern is unmistakable. What the ANC’s latest demand clearly shows is that the ruling party is pushing for a new property rights dispensation in which officials (its deployed cadres) will decide who has access to property and on what terms. The present ‘just and equitable’ regime is thus on the way out. So, too, is the current emphasis on the need to balance societal interests against those of affected individuals.

A third stance taken by SA Home Loans is that they have no reason to believe that residential properties will be seized. This suggests that they are out of touch on EWC developments.

For some time now, various political leaders have said that land reform efforts will be focused on both rural and urban areas. Many of these leaders are in the EFF, but the EFF is ideologically allied to the ANC and often gives voice to goals the ANC in fact shares. A formal ANC/EFF alliance could also be concluded over the next decade – and discussions about this are ongoing. Consider the EFF as the sharp tip of the EWC spear, with the ‘more moderate’ ANC as the shaft. But even that supposed difference is becoming less evident.

That urban homes are in the EWC firing line is also now clear from the wording of the Draft Constitution Amendment Bill. This states that both land ‘and the improvements thereon’ may be expropriated for ‘nil’ compensation. ‘Improvements’ clearly include houses (and other structures) in both rural and urban areas.

Some observers continue to maintain that land reform is restricted to rural property, but this is simply not the case, as many politicians and policy makers have made clear with reference to urban housing inequalities and shortages. The government has also been very critical of what it terms a ‘lack of transformation’ in the property sector generally and catching urban property in the broader EWC net will provide the government and the ANC with significant leverage over all players in the urban property industry, from developers to owners, banks, other lenders, estate agents, and insurers. Consider further how many state-capture suspects remain in that government and the dots to where this may lead connect themselves.

Let us return to SA Home Loans’ position that their clients must go on servicing bonds for many years to come for assets they no longer own. Two points are central here. The first is that if banks do not recoup the money they have loaned, they will betray their fiduciary obligations to depositors and their businesses are likely to collapse. Let banks and other mortgage lenders start going under and you precipitate a chain of events that may culminate in a collapse of the entire banking sector. Second, the agreements that banks have signed with their clients must retain their binding legal force if the rule of law is not also to collapse.

At the same time, financial institutions are operating in an economy in which regulators have significant discretionary powers. Many thus understandably fear the consequences of getting on the wrong side of the political equation. But if any of them think they can circumvent all these pressures by throwing their clients under the EWC bus, they are quite wrong.

Banks and other lending institutions will, of course, battle to survive if substantial debts by many expropriated owners remain unpaid. However, they also cannot realistically put debt collectors on to those hapless individuals who fall victim to EWC. Expropriated property owners will be deeply traumatised and in severe financial distress. Many will have been financially ruined. They’re not just going to go back to work the next morning, move into new homes, and carry on with their lives as if nothing had happened.

If some expropriated owners still possess other assets, will SA Home Loans try to seize these – in a wave of secondary asset seizures? Imagine the headline, ‘SA lender forces family onto the streets’, with accompanying pictures of hapless children, suitcases in hand, with nowhere to go. Yet this is exactly the situation that SA Home Loans and other lenders will face.

Secondary seizures of this kind will also tip the economy into even deeper distress and send asset values plummeting across the economy. Who would ever again buy property in South Africa? Who would take out a mortgage loan? The property market would soon be in freefall, with owners seeking to cash out and salvage what money they could. Lenders perhaps have yet to understand the enormity of the catastrophe that is likely to unfold.

Given these many troubling legal, moral, and practical realities, SA Home Loans would have done better to warn against the enormous risks that EWC poses to the entire society; stress its own commitment to publicly opposing all pending EWC laws; emphasize its willingness, in the event of its clients facing the uncompensated expropriation of the properties they own, to do all in its power to recoup the amount of their outstanding loans from the government of South Africa – the institution that has brought about the crisis; and, lastly, to admit what is now apparent, that should the constitutional amendment and Expropriation Bill be passed by Parliament as the ANC envisages then South Africa will come to stand at the edge of an abyss from which its economy may not recover for a very long time.

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This article first appeared on the IRR’s Daily Friend website.