An ostrich farmer from Grahamstown has thrown the local court into a spin by apparently proving that his mortgage loan with Standard Bank has been on-sold to an investor in Taiwan. This is the first time a securitisation audit has been presented in a SA court. On the basis of the evidence presented, the farmer says Standard Bank has no right to be in court.
Ash Davenport, a 63 year-old ostrich farmer from outside Grahamstown in the Eastern Cape, may be about to make history in his effort to stave off attempts by Standard Bank to take possession of his 3,260ha farm over a R3 million loan he took out seven years ago.
Last week he threw the Grahamstown High Court into a spin when his attorney, Bev Carruthers of Port Elizabeth, plonked a securitisation audit in front of the judge. The securitisation audit suggests that his mortgage loan has been on-sold to a Taiwanese bank and is no longer owned by Standard Bank. That being the case, Standard Bank has no right to be in court. More than that, the audit suggests the bank has securitised (or on-sold) his bond for R5 million, not the R3 million he supposedly signed for.
The court reserved judgment as to whether to allow the audit to be presented as new evidence in a case that has been dragging on for close to seven years.
“I intend to fight this all the way,” says Davenport. “These banks have been getting away with this nonsense for too long. I had to pay R17,000 for the audit but it was worth it, since it provides proof that the bank has in fact been securitising mortgage loans and then coming after property owners when they have no right to.”
Securitisation audits are a new development in South Africa, but are common in the US. They effectively carry the same weight as a financial opinion by a company’s auditor, though the banks are trying to dismiss them as hearsay.
Standard Bank attempted to discredit the audit by Michael Carrigan, a certified mortgage securitisation auditor in the US, who managed to track the chain of title for Davenport’s mortgage bond all the way to Taiwan. The bank referred to Carrigan’s evidence as “speculative at best” and claimed he did not have a grasp of South African law. It then reiterated that his loan had not been securitised.
Carrigan also provided a second audit for another Grahamstown resident, Jay Brown (not his real name), apparently proving that his Standard Bank mortgage loan had ended up with a bank in Thailand. Brown is also defending his property against repossession by the bank.
Bear in mind that the bank in both cases has denied – as all the major banks have done in thousands of other similar cases – that it had not securitised these mortgage bonds. Brown went one step further, by settling his debt to the bank by way of a promissory note of his own – similar to a cheque or bank note – which he claimed is legally permissible in terms of the Bills of Exchange Act.
This is a rather interesting defence first developed in SA by the late John Joubert, who insisted that individuals should issue their own promissory notes in settlement of debts, just as the banks concoct money out of thin air on their computer terminals. Standard Bank has refused to accept Brown’s promissory note.
Davenport has taken a more traditional route, arguing his case based on whatever evidence he can get his hands on. He asked Standard Bank to produce a “wet ink” copy of his mortgage bond and what was produced looked a little strange. The lines, the type face and the signatures did not line up with another copy he had. To all intents and purposes, it looked as if the documents were manufactured after the event, according to Davenport. Like someone had literally cut and pasted sections from one document, pasted them onto another, and then made a photocopy. This made him even more suspicious, even more certain that his mortgage bond had been securitised and the bank was hiding something.
So how did Davenport end up in this position?
The first thing to understand is that he is an eastern Cape farmer with a sharp tongue who doesn’t take kindly to bankers in suits coming to take away a farm that he and his family have been working since 1956. At one time he was the Eastern Cape’s most prominent ostrich farmer. He was exporting his ostrich meat to Europe and making a decent living. In 2004, the Avian flu scare hit SA. A government vet (Davenport calls him a “prick”) was sent down from Pretoria to inspect his birds, and with a wave of his pencil decided they should all be slaughtered.
“What these pricks don’t understand is that the ostriches develop antibodies to the Avian flu virus. Once they have had Avian flu and survived, they are immune against the disease. They will never get it again. So what the vet was picking up was the antibodies, and on this basis he decided my entire flock should be slaughtered.”
Davenport’s trouble all started when a government vet ordered his entire flock of ostriches to be slaughtered, even though the birds were healthy and had no signs of Avian flu. His business destroyed, he was forced to approach the bank for a loan
Overnight, Davenport’s business was destroyed. He was forced to approach Standard Bank and ask for a R3 million overdraft facility. The bank agreed, provided he put up the farm as security. But this R3 million was getting him nowhere. He swallowed his pride and approached the bank a second time asking for additional credit facilities that would allow him to rebuild his business.
This is when the bank started to get alarmed. When Davenport drew down his facility to R2,6 million to pay his monthly wages and running costs, the bank suddenly froze all his accounts.
Then came the summons for repayment of the loan. Davenport knew nothing about the law, so he sent the summons on to a lawyer friend who did nothing with it. Then the bank got a default judgment against him.
Trouble arrives in the form of a summons
Now he was in trouble. The bank was about to put his farm up on auction for R4 million, when Davenport reckons it is worth R60 million. His mechanic put him in touch with a DIY lawyer who somehow managed to stop the sale at auction.
The bank came back with a second summons. This time he decided he should probably get a proper lawyer, which was when he met Bev Carruthers in Port Elizabeth, who had two days to prepare for his case in the Grahamstown High Court. Carruthers stood before the judge saying she had only just been briefed, and asked for a postponement – which she got.
At the time she knew nothing about securitisation, but Davenport had been reading the material on the New Economic Rights Alliance website and was convinced that his mortgage bond – which the bank alleges had been pledged as security against his R3 million overdraft – had been securitised. The problem with this defence is that the banks, supported by the courts, demand that the borrower provide proof of this. Of course this is impossible. This is analogous to a thief who has made off with your wallet. You catch him after he has disposed of the wallet and he then demands that you provide proof of the whereabouts of the wallet to prove his guilt. Insane, sure, but the courts are buying this.
Then Davenport and Carruthers were introduced to Virtual Velocity, a company that had just started offering securitisation audits in SA. This involves interrogating multiple databases in SA and overseas to track the movement of mortgage loans and the associated mortgage “notes”.
The US-based auditor, Carrigan, is considered a world expert in securitisation, and has testified in close to 3,000 cases in US courts. In both the Davenport and Brown audits, he presented screen shots from the Bloomberg database showing where the “notes” got divorced from the “loans” and where they both ended up.
In his affidavit for Davenport, he testified that the loan ended up with a Special Purpose Vehicle known as Standard Bank of South Africa/ Taipei CBO, Series 2006-1. This is an entirely different legal entity to Standard Bank itself.
The audit shows that Davenport’s mortgage loan has probably ended up in Taiwan
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 Standard Bank, the securities certificates ended up with the investors and the “borrower funds” ended up with the Land Bank of Taiwan. Carrigan claims in his affidavit, once the Mortgage loan and “note” are divorced from each other, the purported creditor loses all legal right to approach the borrower, and is in fact committing fraud.
The audit – as is the case with any audit, financial or otherwise – is not definitive, but it casts sufficient doubt on Standard Bank’s assertions that the mortgage has not been securitised.
Should Davenport win this round, his matter will go to trial and then the bank will be asked to explain why his loan appears on the Bloomberg database as being owned by a bank in Taiwan. And why Brown’s mortgage loan appears in Thailand.
This, alongside the recent discovery by Adv Douglas Shaw that banks are able to hide their securitisation activities by not reflecting the new owner’s name at the Deeds office, makes for a very interesting battle looming for the banks.
It only takes one case to win, like Davenport’s, and the whole house of cards comes tumbling down. Then come the class action suits.
What Carrigan’s affidavit says
This is a bit technical, but worth repeating here for those following the securitisation argument. Notice how the courts in the US do not recognise any creditor who cannot produce the note alongside the mortgage. And how banks doing this are actually “double dipping” – taking payment twice – which is a fraud. Judges in SA need to start paying attention to this and haul bank executives into court to get to the bottom of this securitisation hall of mirrors.
Carrigan’s affidavit for Ash Davenport says: “The written agreement that created the Standard Bank of South Africa/ Taipei CBO, Series 2006-1 is a ‘Pooling and Servicing Agreement’ (PSA), and is a matter of public record, available on the website of the Securities 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 compliance with the requirement set forth in the PSA. The Trust agreement is filed under oath with the Securities and Exchange Commission. The acquisition of the assets of the subject Trust and the PSA are governed under the law.
“In view of the foregoing, any Assignment of 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, 21 L.Ed. 313 (1872), the U.S. 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.’”
“By statute, assignment of the mortgage carries with it the assignment of the debt. Indeed, in the event that a mortgage loan somehow separates interests of the note and the Mortgage, with the Mortgage lying with some independent entity, the mortgage may become unenforceable. The practical effect of splitting the Mortgage from the promissory note is to make it impossible for the holder of the note to foreclose, unless the holder of the Mortgage is the agent of the holder of the note. Without the agency relationship, the person holding only the trust will never experience default because only the holder of the note is entitled to payment of the underlying obligation. The mortgage loan becomes ineffectual when the note holder did not also hold the Mortgage.”
“Generally, if the Mortgage and the Note are not together with the same entity, there can be no legal enforcement of the Note. The Mortgage enforces the Note and provides the capability for the lender to foreclose on the property. Thus, if the Mortgage and the Note are separated, foreclosure legally cannot occur. The Note cannot be enforced by the Mortgage if each contains a different mortgagee/beneficiary; and, if the Mortgage is not itself a legally enforceable instrument, there can be no valid foreclosure on the homeowners’ property.”
“No Entity can be a creditor if they do not hold/own the asset in question (i.e. the NOTE and/or the property); a Mortgage Pass Through Trust (i.e. R.E.M.I.C., as defined in Title 26, Subtitle A, Chapter 1, Subchapter M, Part II §§ 850-862) cannot hold assets, for if they do, their tax exempt status is violated and the Trust itself is void ab initio. This is an indication that either the Trust has either voided its intended Tax Free Status, or the asset is not in fact owned by it.
“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 a 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 of securities fraud.
“Once a loan has been securitized, which the aforementioned loan may have been done many times, that event would indicate that the loan forever loses its security component (i.e., the Mortgage), and the right to foreclose through the Mortgage is forever lost.”