The long awaited upturn is here, evidenced by a loosening in home loan lending criteria from the banks. Deposits may well become a thing of the past instead of the 100% home loan, which has made a comeback for certain clients that meet the criteria. In addition, the four major banks have renewed their contracts with mortgage originators, which bodes well for the future success of the industry as a whole. A recent Ernst & Young survey indicated the net percentage of local banks applying stricter lending criteria for businesses declined from 87% in the first quarter to 72% in the second quarter. A further decline to 61% was expected in the third quarter. Dr Prieur du Plessis, executive chairman of Plexus Group - an independent investment house, said that for households, the net percentage of local banks applying stricter lending criteria dropped a mere 1% - from 86% in the first quarter to 85% in the second quarter. This figure is expected to be 75% for the third quarter. “A lowering of lending criteria is usually closely linked to the Reserve Bank’s repo rate,” said Du Plessis. “However, the sharp cuts in the Reserve Bank’s rate have had little effect on banks’ lending criteria until now.” Defaults by borrowers decrease when interest rates fall and the benefit is passed on to them. But du Plessis said that households are currently struggling so much they are inclined rather to incur debt. “Although recent Reserve Bank statistics reflect that credit card usage continues to decline, loans and advances by commercial banks have increased,” he noted. “The lowering of lending standards will undoubtedly have a positive effect on consumer sentiment. It should also confirm the bottoming of house prices.” Feedback from the facilitators Commenting on the South African banking industry’s attitude towards mortgage originators in the country, Deon Lessing of Betterbond, South Africa’s largest originator, says that due to the worldwide recession, mortgage originators were obliged to lower commission structures in order for their contracts with banks to be renewed. Business models had to be realigned in order to remain profitable. Overall, Lessing is of the opinion that the role of the mortgage originator will never become extinct. “The fact that all Betterbond’s mortgage origination contracts have been renewed shows that South African banks value the quality of service we provide,” he said. Mortgage originators are structured in such a way as to successfully facilitate and streamline the home loan application process. “We have some of the best technology and systems in place, enabling us to easily meet clients’ and banks’ specific needs,” said Lessing, adding that, more than ever, banks are geared to accept bonds via the mortgage origination channel. Lessing, however, noted that liquidity is still tight; therefore banks’ interest rate discounts on loan or credit products will remain low. He said that the financial institutions are recognising the return of value to property. “This is evident by the reassessment of loan-to-value ratios and the granting of 100% home loans.” Saul Geffen, CEO of ooba said that the main contributor to the significant drop in average deposits as a percentage of purchase price is a result of the shift in banks’ lending criteria to lower deposit requirements, with all four big banks now offering 100% loans. States Geffen: “The improved appetite to lend will support the increased demand for property as transaction volumes continue to pick up.” He said one of the biggest drivers of a market recovery is bank lending and noted a marked improvement in competitiveness between the banks over the past five months and an increase in approval rates. “Banks are now targeting non-bank clients and rate concessions are becoming more aggressive.” Bond Choice CEO Richard Gray said they welcome the more relaxed bank lending criteria. “It is one of the key pieces in the puzzle needed to ensure a recovery of the property market. There is a huge demand for home finance and any relaxing of lending criteria by the banks will help meet the demand.” Bond Choice expects the banks to still be conservative in their lending policies, and believe that loans without any deposit from the home loan client will not be commonplace. “Most clients will need to still be able to pay a small deposit,” Gray said. The basics from the banks Standard Bank has recently increased its risk acceptance rate in its Home Loan and Credit Card divisions. The changes made to Standard Bank’s risk appetite have been specifically designed to benefit first-time entrants into the housing and general credit markets. Peter Schlebusch, Chief Executive, Personal and Business Banking, Standard Bank South Africa, said: “It is important that we support and provide access to finance to the lower end of the economic spectrum. People in this sector have been hardest hit by higher inflation, job losses and the general slowdown in the economy. Standard Bank is committed to providing access to finance and financial services to the low-income market, while continuing to focus on prudent risk, capital and liquidity management.” FNB chief executive Michael Jordaan has forecast improved economic conditions in 2010 and a relatively slow recovery; quite unlike the explosive growth that took place in 2005 and 2006. The residential property market is likely to remain subdued for some time to come," added Jordaan. Clive van Horen, Head of Secured Lending said: “We believe that the outlook for house prices has improved enough for us to relax our deposit requirements. For low-risk clients – both existing Nedbank clients and clients who are new to the bank – we will lend up to 100% of the purchase price of their new homes. In general, though, we continue to believe that putting down a 5 – 10% deposit is good practice for both the client and the bank, and therefore we will continue to encourage clients to do likewise.” Luthando Vutula, Managing Executive of Absa Home Loans, said the turn in the economic cycle is becoming evident and as such, they need to review their customer offerings. “Although the South African economy still finds itself in recession after contracting for three consecutive quarters up to mid-2009, it is important to note that to date, the interest rates have been reduced by 500 basis points since December 2008 and are projected to drop by a further 50 basis points later in the year. “Essentially, this means that consumers are experiencing relief, and with lower inflation and household payments there should be a notable reduction in loans in arrears. In light of this, and a slight improvement in property market, our loan-to-value caps will be aligned with the prevailing market conditions.” Vutula said it is important to note that the normal lending criteria will still be taken into account. While many may be surprised at the quick comeback of the 100% bond, the general consensus is that home loan criteria has been adjusted in line with current market trends and is expected to boost the property market activity. The banks, however, are still keeping an eagle eye on credit, and promote responsible debt management among customers.
What the banks are offering: