No room for reckless lending

Private Property South Africa
Antoinette McDonald & Angelique Arde

There’s a great scene in TheLion King when one hyena utters the name of the mighty Mufasa. And when he does, the other hyenas shiver and shriek: “Oooh! Say it again: Mufasa! Mufasa! Mufasa!”

The hyenas know that Mufusa has all the power and if they don’t submit to him, they’re in deep trouble.

It’s a bit like the collective response to the National Credit Act (NCA) and the banks in the present climate.

No one would deny the worthiness of the NCA or the necessity for prudent lending, because these measures are to protect us all. But, in reality, they have confined lenders and borrowers and the market just isn’t what it used to be. For first-time buyers, it’s practically impenetrable.

Recently, financial institutions have come under fire for their resistance to lending in this market. But they say the criticism leveled at them is unjustified. They can’t be blamed for the state of the economy. In fact, we would be worse off were it not for our highly regulated system of banking. They’ve saved us from ourselves is their argument.

Furthermore, banks are businesses, and they have to make a profit.

Economist Doret Els from Efficient Group explains: “At the moment they’re protecting themselves and managing their risk, which is good for our economy. The international markets are in a state and that’s got a lot to do with their banks. South Africa, on the other hand, is in a better position.”

Standard Bank

Peter Schlebush, the CEO of personal and business banking for Standard Bank in South Africa, says that customers who appealed to banks to employ “creative” measures to lending had to be reminded that the sub-prime mortgage crisis in the US was probably the result of “creative” banking.

“Either you can afford something or you can’t.”

Standard Bank was more likely to lend to existing clients, Schlebush said, because the bank knew its customers and their ability to service loans. His advice to aspirant home owners was to save and be realistic about what they could afford.

“As a bank our first responsibility is to protect our depositors. That’s why we’ve been cautious about extending credit and why we’re asking for bigger deposits. We’re worried about the underlying property prices and the greater risk of job losses, so we’re being circumspect.”

Schlebush says Standard Bank is receiving about half the home loan applications that it received a year ago.

It isn’t alone.

Absa

Absa Bank has the lion’s share of the home loan market (30.7%), but over the past financial year the bank lost 0.4% of market share in respect of mortgages. Absa attributed this loss to the introduction of more stringent credit criteria.

Luthando Vutula, the head of Home Loans at Absa, says that lending criteria is consistent across banks, which is why Absa is differentiating itself in this market by way of value propositions. “These days consumers are more concerned about value-add than about price. The big issues in banking at the moment are convenience and assess to finance. It’s more about these things than it is about rates.”

In a bid to enhance its offering to clients with home loans and to attract new borrowers, Absa recently launched “HomeBuy”, a portal for home owners, home buyers and those planning to build, renovate or sell their homes. The site offers a directory of a multitude of products and services that are home-related.

Vutula says that Absa is very much in the business of providing “affordable” home loans. Absa defines “affordable housing” as any dwelling under R400 000. The bank has R9bn worth of business in this segment of the market. “This year we’re going to be marketing aggressively in townships. We’re talking to government in the hope of partnering with them on some big housing projects.”

He says Absa still gives 110% bonds on the “My Home” product, though the bank is trying to increase the income threshold from R7500 to R15000. Currently, to qualify for this type of loan you need to earn between R1500 and R7500 a month.

Nedbank

Pramod Mohanlal, the general manager of customer management at Nedbank Home Loans, says the current climate has necessitated a review of lending criteria, with a view to preventing reckless borrowing and reckless lending.

Buyers now require a deposit of 10-15% plus funds for transfer and bond registration costs, he says. But, one estate agent told Private Property: “Banks say no business is good business at the moment.”

FNB property economist John Loos says estate agents are being unfair. According to the South African Reserve Bank home loans in the last year were R271 billion. “That’s hardly ‘no business’. Admittedly it is down from a year earlier when the figure was R368 billion. But the banks’ credit policies are in response to the market. Banks are price takers, not price makers.”

Loos says banks have to take into account a range of factors when setting credit policy.

FNB

FNB’s Property Barometer survey cites banks’ stringent lending policies as negatively impacting on the housing market’s performance.

“But banks have their own risk considerations to make which often differ from those of a long-term property investor, and these deserve mention.”

Loos says the following factors have to be considered in lending:

A substantial portion of all loan defaults occurs in the early stages of the loan, within one to two years after the bond has been taken out.

When a loan defaults shortly after commencement, its loan-to-value ratio is normally still relatively high. This is a significantly worse situation for the bank to be in, compared with a loan defaulting some years down the line. This is because further down the line a more significant portion of capital has been repaid and there has normally been some capital growth in the house, thereby reducing the loan-to-value ratio significantly.

At the moment banks are staring at widespread near-term house-price decline.

“From the reasons mentioned, it’s obvious that, unlike many property investors who are in the game with a long-term horizon (and are often happy to hold their stock and wait it out), banks have to focus very strongly on the near term, and strategies that mitigate risk in the near term. This is because the loss in the case of default is likely to be more severe on a loan that defaults shortly after commencement as opposed to one that defaults further down the track, when the loan-to-value has normally declined significantly.”

Loos says the risk of default also declines as the loan ages and the repayment-to-income ratio declines.

Market recovery

He says FNB anticipates a mild market recovery as interest rates are cut.

But, there are long-term financial pressures in the global economy and there is an oversupply in the housing market, so it will be some time before demand gets back into balance with supply in order to end price deflation. “Banks, therefore, need to consider the risk that loan-to-value ratios can actually rise in the near term due to house price deflation, implying significant losses on loans that default early in their term. Hence, the recent reduction in loan-to-value ratio limits on loans granted.”

Loos says banks are also aware of job cuts and flagging exports, which contribute to the risk of people defaulting on home loans. “The overwhelming majority of agents still believe that incomes have got far behind house prices, and indeed in such troubled economic times it is realistic to believe that affordability is still an issue for a still financially stressed financial sector.”

Loos says sound lending principles dictate that banks consider affordability, and although lower interest rates should improve this situation in the coming months, “it would appear that we’re not out of the woods yet.”

He adds that while stringent lending criteria of banks as a group can contribute to a poorly performing property market, it’s important to remember that South African banks operate in a competitive situation and don’t co-ordinate efforts.

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