Securitisation

In 2007 we spearheaded the issue of Chief Registrar’s Circular 12 of 2007, which allowed bondholders to cede mortgage bonds to insolvency remote special purpose vehicles (SPVs) on copies of mortgage bonds. The issue of this Circular was a first in South Africa as prior to its issuing, the original bond documents had to be lodged in the deeds office. This so-called “copy process” assisted various banks in having timely reached the registration deadlines of thousands of cessions of mortgage bonds. Circular 12 of 2007 was repealed by Chief Registrar’s Circular 11 of 2014, which provided for the continuation of the registration of cessions of mortgage bonds until 30 June 2016. During 2018, we brought a High Court application on behalf of two of the major banks in South Africa, which involved one of the first (if not the first) securitisation transactions entered in South Africa, obtaining groundbreaking relief regarding the vesting of mortgage bonds not ceded at the time. This court order was, in consultation with the office of the Chief Registrar of Deeds, amended in 2020. We are also attending to litigation matters on residential mortgages, which form part of the banks’ indemnity-guarantee structure referred to below.

Securitisation, in its simplest form, entails the pooling of a portfolio of income-producing assets which an entity like a bank (“Originator”) removes from its balance sheet by selling the same to an SPV (“Issuer”), who finances the purchase of the portfolio of pooled assets through the issue of interest-bearing commercial paper to investors (“Noteholders”), which commercial paper is backed by the relevant mortgages or other securities in the pool. Both the interest and capital repayments accrue to the Noteholders, and the interest payments are funded by the cash flows generated by the portfolio.

In most cases, the Originator continues to perform the administration, servicing, and management of the loans on behalf of the Issuer, collects payments from the borrowers under the underlying loan agreements at a fee, and pays the same over to the SPV. The terms of the administration of these loans, servicing, and management outsourcing arrangements between the Issuer and the Originator are formalized in commercial arms-length agreements. Any type of asset with a predictable cash flow can be structured into a portfolio supporting securitized debt.

Securitization transactions backed by residential or commercial mortgages are known as mortgage-backed securities, and non-mortgage-backed securities are generally known as asset-backed securities. Transactions specifically backed by residential mortgages are known as residential mortgage-backed securities.

Once a pool of assets is transferred to an SPV, the Originator retains no legal interest in such assets, and the assets are insolvency remote from the bankruptcy of the Originator. All rights and obligations of the underlying loan agreements and all risks are transferred to the SPV, and the Originator may not maintain any effective or indirect control over the loans transferred to the Issuer. An Originator’s servicing function, referred to above, does not constitute indirect control of the loans transferred to the Issuer.

Securitisation schemes have developed over the years, and many banks and other companies have implemented a guarantee-indemnity structure in the mortgage loan space, which in its simplest form entails the following:

• A borrower (“A”) enters into a loan agreement with Bank (“B”).
• As security for A’s obligations to B, a guarantor entity (“G”) issues a guarantee to B, guaranteeing A’s payment obligations to B.
• As security for G’s payment obligations to B under the guarantee:
  – A executes an indemnity indemnifying G against any liability should B call up its guarantee; and
  – A registers a mortgage bond over its property in favour of B for its obligations under the indemnity.

Once A defaults, B calls up its guarantee from G, who again demands payment from A under the indemnity. If A fails to pay, G issues summons against A on the indemnity and the mortgage bond. G pays over to B whatever it recovers from A.

We have teamed up with an industry expert with many years of experience in residential mortgage-backed securitisation transactions in the banking space, and you are more than welcome to contact us for any assistance.