Take care of your most valuable asset
A primary residence remains the single largest investment that the average South African makes. A practically financial goal is to ensure one's house is paid for before entering retirement. It always amazes FAnews Online how easily people will gamble with such an important 'savings' tool.
The Pretoria News reported recently on another property 'scam' unravelling in the High Court. Reverse Mortgage Company (RMC) is apparently unable to account for as much as R200 million it allegedly fleeced from 400 homeowners. The company was placed in provisional liquidation on 9 October 2007.
An elaborate con
RMC is the latest in a succession of companies to offer debt consolidation opportunities to struggling consumers. And unfortunately it seems to share their rather questionable financial motives too. FAnews readers may recall that Rudco Financial Services (which ran foul of the National Credit Regulator recently) punted similar services.
Initial investigations show that RMC convinced homeowners to sell their homes to a shelf company for the full property value. This transaction would be financed by way of a conventional bond secured from a traditional lending institution. Shares in the shelf company were supposed to be placed in a family trust of which the homeowner was the main beneficiary. To overcome possible poor credit records, the bond would be secured by RMC 'jockeys' who were creditworthy.
It is difficult to establish exactly what went wrong. It appears RMC used the newly obtained mortgage money to settle the homeowners existing bond and other debts. An amount equal to 12 months mortgage was retained in trust to assist the homeowner should they not be able to make mortgage payments in the year. Home owners then had to pay a monthly mortgage payment to RMC.
The court action indicates that RMC was not paying these mortgage amounts to the lending institutions, instead using such funds to finance its month to month operating costs.
Typical warning signs
This scheme exhibits many of the typical warning signs investors should be on the lookout for before committing to a transaction. The first is that it operates a confusing and complicated structure. If you cannot understand the transactions or the reason for the transactions you should at the very least approach an independent party for advice.
Homeowners should also realise that trusts are an extremely complex financial instrument. They can be costly depending on the type of trust and circumstances of the individual. In our experience, trusts are more commonly used as a financial tool by wealth individuals seeking more efficient tax structures rather than people struggling with debt on the other end of the scale.
The second warning sign is the change in 'ownership' of the asset. As tempting as it might be to allow someone else to apply for finance on your behalf you should under no circumstances sign your assets away. Individuals using RMC have signed their properties to a shelf company, and end up paying bond instalments on properties that they no longer 'own' apart from still occupying the premises.
Take responsibility for your debts
And the final warning sign is that instead of taking more control of their financial situation, these homeowners are less in charge than before. We suggest that in the event you approach a third party to make debt repayments on your behalf, you religiously check that these payments are being made.
In other words telephone your bank, vehicle finance company or retail credit account on a monthly basis or draw regular statements to make sure the debt consolidator is performing as promised. Ignoring financial problems is what led you to the debt consolidator in the first place.
Editor's thoughts:
We recently ran a story about a home loan finance company called Rudco. The company offered a 6% per annum interest rate on new or transferred mortgage loans. Yesterday one of our readers telephoned to ask about a company called Total Investment Solutions, which mirrors Rudco's product offering. Consumers must approach these too-good-to-be-true opportunities with the utmost caution. Have you had any concerning dealings with a debt consolidator or bond originator? Send your story to [email protected]
