Banks tighten purse strings

Homes can no longer be used as ATMs

Finweek English Edition - - Openers - JOAN MULLER joanm@fin­

THE DAYS OF US­ING the ac­cess fa­cil­ity on your mort­gage as a handy cash cow to fi­nance hol­i­days and other dis­cre­tionary spending ap­pear to be over. Some banks no longer al­low clients to bor­row willy-nilly from re­paid cap­i­tal – or built-up eq­uity, as it’s re­ferred to – on their mort­gage ac­counts.

Banks have un­til re­cently been very ag­gres­sive in their mort­gage lend­ing on the back of a four-year prop­erty boom, which saw the value of to­tal mort­gage lend­ing in South Africa al­most triple be­tween July 2004 and July 2008: from R368bn to R923bn (SA Re­serve Bank fig­ures).

How­ever, the in­tro­duc­tion of SA’s Na­tional Credit Act (NCA) – cou­pled to fall­ing house prices, ris­ing in­ter­est rates, grow­ing mort­gage de­fault risk and fears about the global fi­nan­cial cri­sis – are clearly forc­ing banks to adopt more strin­gent mort­gage lend­ing poli­cies.

Absa Home Loans, SA’s big­gest mort­gage lender with a R220bn book, last week in­formed clients the terms of its Flex­iRe- serve fa­cil­ity would be amended in a bid to “pre­vent cus­tomers from go­ing fur­ther into debt and risk los­ing their homes”.

Gavin Op­per­man, group ex­ec­u­tive at Absa’s se­cured lend­ing divi­sion, says in the past clients could au­to­mat­i­cally with­draw the re­paid cap­i­tal in their mort­gage through the Flex­iRe­serve fa­cil­ity. For ex­am­ple, if some­one orig­i­nally bor­rowed R1m from the bank to buy a house and five years later had paid off R100 000 they could re-bor­row that R100 000 with no ques­tions asked.

Op­per­man says that from now on clients who want to with­draw any re­paid cap­i­tal (or eq­uity) in their mort­gage will have to ap­ply to do so. Applications for those re-ad­vances on ex­ist­ing mortgages will be sub­ject to the lend­ing cri­te­ria in­tro­duced by the NCA.

Op­per­man says when clients bor­row against their ex­ist­ing mortgages, the out­stand­ing bal­ance on that ac­count would ob­vi­ously in­crease, ne­ces­si­tat­ing a rise in monthly mort­gage re­pay­ments. “That means the bank has to make a new in­come as­sess­ment to de­ter­mine if the client can af­ford the higher monthly in­stal­ment.”

Op­per­man says Absa felt that al­low­ing ac­cess to the dif­fer­ence be­tween the orig­i­nal loans granted and the out­stand­ing bal­ance without a val­i­da­tion of the prop­erty’s value and new af­ford­abil­ity tests, in­creases the risk for both the clients and the bank.

Op­per­man stresses the amend­ment to Absa’s Flex­iRe­serve fa­cil­ity doesn’t ap­ply to clients who have de­posited their own sur­plus cash into their mort­gage. In other words, clients who have de­posited R50 000 of their own funds into their mortgages be­cause they want to use the ac­count as a sav­ings ve­hi­cle will still have au­to­matic ac­cess to that cash. Says Op­per­man: “In that case no­body needs to ap­ply to with­draw funds, as it’s the clients’ own funds.”

Last week Stan­dard Bank is­sued a state­ment say­ing it hasn’t changed its ac­cess mort­gage pol­icy. How­ever, it states: “As a re­spon­si­ble lender, Stan­dard Bank will con­tinue to re­view the ac­cess bond fa­cil­i­ties of those cus­tomers who are in ar­rears with home loan pay­ments.”

Pramod Mo­han­lal, divi­sional GM at Ned­bank home loans, says clients looking to ac­cess eq­uity in their mortgages have al­ways had to ap­ply for those ad­di­tional funds, with Ned­bank car­ry­ing out a new credit as­sess­ment of the client and the prop­erty.

“But for clients who have paid sur­plus funds into their mort­gage ac­counts and are ahead of pay­ment sched­ules, there are cur­rently no with­drawal re­stric­tions,” says Mo­han­lal.

Clamp­ing down on bor­row­ing against ac­cess mortgages isn’t the only way banks are try­ing to pro­tect them­selves against the risk of ris­ing mort­gage de­faults. First Na­tional Bank caused quite a stir in Au­gust when it an­nounced it would re-as­sess mort­gage applications ap­proved in prin­ci­ple more than a year ago but hadn’t yet been reg­is­tered. That ap­plies mostly to clients who bought prop­erty off-plan and are still wait­ing to take trans­fer.

At the time, FNB said the bank’s in­ten­tion was to en­sure clients could still af­ford to re­pay the mortgages ap­plied for to pre­vent an over-in­debt­ed­ness po­si­tion.

Banks are also re­quir­ing big­ger de­posits from new home­buy­ers. Saul Gef­fen, CEO of mort­gage orig­i­na­tor ooba (for­merly Mort­gageSA), says its re­search shows the av­er­age de­posit re­quired by banks on new mort­gage applications had risen from 12,2% to 18,6% in the 12 months to Septem­ber 2008.

In­dus­try play­ers say al­though SA’s banks don’t yet face the same bad debt risk as many mort­gage lenders in the US and Bri­tain do, ar­rears in lo­cal mort­gage books are ris­ing sharply off a low base.

Al­though the SA Re­serve Bank hasn’t pub­lished of­fi­cial fig­ures on non-per­form­ing mortgages since De­cem­ber 2007, Al­liance Group CEO Rael Le­vitt main­tains mort­gage de­faults have in­creased ten­fold over the 12 months to end-Septem­ber 2008. Le­vitt says Al­liance’s re­search showed an es­ti­mated 70 000 South Africans are cur­rently in mort­gage ar­rears for two months or more.

No more easy money. Gavin Op­per­man

70 000 SA home­own­ers in ar­rears. Rael Le­vitt

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