Chris Fick & Associates

CF-A2bSecuritisation is becoming a huge issue all around the world. A case currently in front of the Grahamstown court has highlighted this practice among banks in South Africa.

Mr Davenport, an Eastern Cape farmer, took out a R3 million overdraft facility with Standard Bank with his farm serving as security. When the bank attempted to repossess his farm, Mr Davenport opposed the matter. He approached Virtual Velocity, an American company that does Securitisation Audits. Michael Carrigan, an auditor for the firm who has testified in more than 3000 cases in the US, found that Mr Davenport’s loan had most probably been on-sold to a bank in Taiwan. As such, Mr Davenport argues that the bank is no longer the holder of the mortgage loan and doesn’t have right to bring him to court.

While the court has reserved judgement in whether or not to allow the audit, the legal arguments pertaining to the on-selling deserve consideration. These audits are new to South Africa, so existing precedence comes from the US. Further to which, the US Supreme Court holds that it will not recognise any creditor who cannot produce the note alongside the mortgage.

The audit report shows how the securities certificates were divorced from the mortgage loan and ended up in the hands of the investors. The mortgage documents remained with the bank, the securities certificates ended up with the investors and the “borrower funds” ended up with the Land Bank of Taiwan.

Mr Carrigan’s affidavit for Mr Davenport says “The written agreement that created the Standard Bank/ Taipei CBO, Series 2006-1 is a ‘Pooling and Servicing Agreement’ (PSA), and is a matter of public record, available at the Securities and Exchange Commission (SEC). The Trust is also described in a ‘Prospectus Supplement,’ also available on the SEC website. The Trust by its terms set a “closing date” of on or about TBD (To Be Decided). The promissory note in this case became trust property in the requirement set forth in the PSA. The Trust agreement is filed under oath with the SEC. The acquisition of the assets of the subject of the Trust and the PSA are governed under law. In the view of the foregoing, any Assignment of the Mortgage executed after the Trust’s Closing Date would be a void act for the reason that it violated the express terms of the Trust instrument.”

In Carpenter v Longan 16 Wall 271,83 U.S. 271, 274 L.Ed. 313 (1872), the US Supreme Court stated “The note and mortgage are inseparable; the former as essential, the latter as an incident. An assignment of the note carries the mortgage with it, while assignment of the latter alone is a nullity.”

If this mirrors the position in South African law, then the mortgage and the note may not be separated, the result being that the mortgage would not be a legally enforceable instrument and that there can be no valid foreclosure on the homeowner’s property.

As per Mr Carrigan “In the event that the loan was sold, pooled and turned into a security, such event would indicate that the alleged holder can no longer claim that it is a real party of interest, as the original lender has been paid in full.”

“Further said, once the Note was converted into stock, or stock equivalent, that event would indicate that the Note is no longer a Note. If both the Note and the stock, or stock equivalent, exist at the same time, that is known as double dipping. Double dipping is a form or securities fraud. Once a loan has been securitised, which the aforementioned loan may have been done many times, that event would indicate that the loan forever loses its security component.”

Virtual Velocity has completed 4 audits in South Africa so far, and has been asked to do upwards of 50 more.

This story was initially reported at

Written by Richard Keeton

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