Dear Mr Banker...

Private Property South Africa
Property Professional

Key property experts were asked to share their queries and concerns about new bank trading terms.

With a great deal of back and forth, as well as much debate and contention in the real estate industry concerning the granting of home loans by the country’s financial institutions, the industry at large is feeling more than a degree of frustration. Key property experts were asked to share their queries and concerns, and we turned to the banks to enquire as to what their new trading terms are, how they feel about the industry and its players – including origination – and what is going on regarding the current lack of lending.

Adrian Goslett, RE/MAX assistant regional director: “We understand that increased lending will come as the global liquidity situation rectifies, and look forward to the resumption of responsible lending and the introduction of creative lending products by our banks. In the interim we, at RE/MAX, will continue to put buyers and sellers together using creative financing and working with our banks and lending institutions in the best way possible given the current circumstances.

We believe that home ownership will provide the cornerstone in developing wealth creation for a large portion of the South African population. This same group, with limited access to capital resources, is reliant on lenders to facilitate this process and, in so doing, stimulate the economy. We urge the banking industry to take this into consideration when they next meet to decide or revise their policies.”

For Lew Geffen, Chairman and Co-Owner of Lew Geffen Sotheby’s International, “all the banks in past years have been irresponsible in their lending policies”. He believes the banks themselves created the bubble which spurred the excessive growth over 2006 and 2007 “equalling some 34% and the following year 20%”.

“This created a bloat of 54% in two years, and had it not been for the banks that, in some cases, were lending costs at 108% of value, the market would never have reached such ‘irrational exuberance’. Then to top it all, the moment that the banks realised that the market was due for a huge plunge, they introduced loan-to-value equity which, in fact, exacerbated the decline in house prices. That old adage comes to mind: The banks will give you umbrellas in the sun and take them away when it’s raining.”

Linda Erasmus, CEO of Fine & Country had the following to say to the banks: “You and I had a relationship, a very good one indeed. I have supplied you with the applications for finance from hundreds, if not thousands, of my clients, and you were always pleased to assist. In fact, you were so worried that I would take the business somewhere else that you employed staff to dine and wine me and offer bonuses for higher volumes of bond business. For 24 years you have given me and my clients advice. You do not want to educate me anymore on how to qualify the client; you simply act as if you are not in the business of lending money anymore. Do you still want to do business with me?”

Deon Lessing, Betterbond marketing director: “As an originator, the value proposition is to get the best deal for our clients, both the estate agent and the buyer. “If there is no bond, there is no sale, but currently getting a bond is a minefield, and the requirements from the banks are onerous. You need a specialist originator now more than ever.”

He goes on to say that while the company is still receiving a lot of submissions, there are few approvals – with only around 50% of home loan submissions approved and granted.

“To get a grant is not just a simple submission - it is a lot of work and arbitration to eventually get it through. The lending criteria are very strict and also often change, so we have to be on top of things.” Lessing adds he is also concerned about Standard Bank currently not accepting business from originators. “This causes frustration among estate agents as they cannot follow the normal origination route for Standard Bank clients. Standard Bank buyers are also left out as they now have to find their own way. We hope that this will soon be resolved so as to relieve the tension that is building up.”

Martin Schultheiss, CEO of Harcourts Africa, is concerned that there have been high decline rates from the banks in general – which from ‘some lenders’ is as high as 90% plus. “This means that the banks regard the huge majority of potential borrowers as bad risks. Surely this can’t be so, but then what is the reason for such a blanket approach?” he asks.

“As a global group, Harcourts International is seeing a more differential approach in other countries, with banks taking care of their creditworthy customers even though they have tightened up on bad lending. Would it not be possible to do that here, and make the lending criteria very clear so that consumers can be made aware of exactly what is required of them if they wish to obtain a home loan?”

Schultheiss also notes that in Australia they have introduced special grants to assist the first-time homebuyer with accessing finance and being able to secure property, and asks if there not an opportunity for this in South Africa?

He concludes by saying: “We currently have to sell a house twice, on average, to be able to find a buyer who can get finance. This means that among others, people who are in financial distress are not easily able to sell their properties. Are the banks not worried that this will lead to them getting a much bigger number of repossessed properties on their books which they have to secure, maintain, and try to resell?”

Is attitude everything?

Kura Chihota, executive director of Leapfrog, wants to know, “why the banks have had a ‘change of heart’ at a time when most consumers needed the most help?”

“Don’t the banks also have a social responsibility towards clients, and instead of clamping down on home loans, need to come up with innovative solutions to assist beleaguered consumers who are their very reason for existence?” he asks.

Chihota points out that as a home loan is the last debt a consumer typically defaults on, the banks should view lending into the space as a safe bet. “Instead,” he says, “it seems that banks are far more lenient on credit card debt which is generally more risky.” He goes on to ask, “How many people do you believe have a 30% deposit saved up for property transactions? With the banks unwilling to come to the party, and other consumers equally cash strapped, to whom should buyers turn to obtain a deposit?”

Are the consumers to blame?

Banks maintain there are fewer transactions because consumers are no longer buying, other general unaffordability, and consumer behaviour per se. Chihota says growing show house attendance points to the opposite. “Isn’t the fact that buyers simply cannot obtain mortgage financing from banks the real reason for the decline in transactions?”

The risk adverse attitude of South Africa’s banks – not the recession – is the main reason why the housing market is still so sluggish, says Tony Clarke, MD of Rawson Properties. “Look, the demand for housing is there – but the finance is not.”

“With a record number of bad debts, repossessions and mortgage loan readjustments, it’s not at all surprising that people are now shying away from risk. Keeping a close eye on the job and credit market, they know only too well how many people are losing their salaries and how many are dangerously in debt. In the circumstances, it is understandable that their goal now is to avoid any further losses and to rebuild profits – and we who develop and market property are not unsympathetic to that,” he says.

“However, the consensus of opinion now in the property marketing sector is that it is time the banks came back to the party, took a more lenient view and did their bit to revive the market by accepting buyers with stable jobs and good credit records.”

Clarke added that this plea is not unreasonable, “because the banks have to accept some of the responsibility for the current predicament in which the housing sector finds itself. If the banks are to retain any credibility now,” said Clarke, “they must now show a change in attitude.”

Comment from the credit controllers

In response to the above situation, only two of South Africa’s four leading financial institutions were prepared to comment.

Clive van Horen, managing executive of Secure Lending at Nedbank, says the home loans businesses of the four main banks moved from a combined after-tax profit of R3-billion in 2007 to a combined loss of R2-billion in 2008 - a swing of R5-billion in one year. And it’s given this, he says, that, “it’s not surprising that banks are being more cautious.”

Rob Katz, Standard Bank’s director of Home Loans says it is commercially and systemically necessary that South African banks configure lending practices in line with deteriorating economic conditions, especially heightened employment risks.

“Regard must be given to the natural deleveraging process underway among households. The combination of near-record high absolute indebtedness and reduced households’ purchasing power has reduced aggregate credit demand.”

He goes on to say that this deleveraging process is typical during episodes echoing the current climate and it must run its course in the interests of long-term financial health.

“When credit extension takes place on non-commercial terms, banks may place their regulatory capital at risk due to credit losses. This can result in systemic risk and credit markets shutting down as in the US and Western Europe,” Katz notes.

Customers’ credit records count

Van Horen says Nedbank has maintained a relatively steady presence in the home loans market and continues to lend to credit-worthy home buyers.

We have tightened our credit policy over the last year as a result of higher defaults by customers, declining house prices and the prospect of job losses,” he says.

He goes on to say that the bank recognises that tighter lending policies make it more difficult for buyers to get finance, especially if their credit record is not strong, and that this in turn can place house prices under pressure. “However,” he says, “there is a delicate balance to be struck, because it would be irresponsible for any bank not to adjust its lending policies in circumstances such as those we face.”

“Nobody anticipated the rapid downturn in the global and local economy which has placed many consumers under pressure and caused a rapid increase in bad debts.”

“In Nedbank’s case, we continue to lend to clients who have the minimum deposit, a good credit record, and can demonstrate an ability to afford their home loan,” van Horen concludes.

How do ‘loan-to-values’ fit in?

Katz says that loan-to-values (LTVs) are a measure to manage credit risk in mortgage lending. “LTVs introduce equity by the buyer and thereby reduce risk for the bank and improve the bank’s security, namely on the unbonded value in the property.

“Potential further declines in house prices will reduce our security,” he says. “For Standard Bank customers, the bank has additional credit information such as the history of the customer, ‘true’ disposable income, internal credit risk scores, behavioural risk scores, debt payment profiles, and the like, and is hence in a position to better understand and assess the customer risk profile. As such, the bank is able to be less stringent on the LTV criterion for Standard Bank customers while still generating economically viable business.”

Katz says LTV introduction will impact on first-time home buyers but that Standard Bank is not freezing applications from this segment, which remains an important focus area. “LTV restrictions are more appropriate in periods where economic growth is slowing,” he says, “or, as in South Africa, where residential property prices have declined and may even decline further. This is a standard practice in the developed markets of the UK, Australia and SA.”

He says demand has been affected by reduced confidence by property buyers and increasing pressure on affordability, which has reduced the appetite of property buyers - leading to curbed activity.

While reduced credit supply may contribute to lower demand for properties, we need to continue being responsible in protecting our depositors’ and shareholders’ funds – especially in the current broad economic conditions.”

The final word

At the end of the day it appears that the banks are protecting themselves. It is also evident that the situation is not likely to improve in the near future, or at least until the market shows extensive positive growth.
Those who are used to easy access to credit are understandably frustrated by the process, but at this point, is there any middle – or even common ground?

Article courtesy of Property Professional Magazine.

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