Affordable housing: Less income, less default

New research commissioned by FinMark Trust, in association with credit consultants Eighty20, suggests that banks may well be overestimating the risk of default among households typically earning less than R8000/month.

The study reveals that, in contrast to popular opinion, the affordable housing market poses a lower risk of mortgage default than its more affluent counterparts.

Kecia Rust, head of FinMark’s housing finance division, says the aim of the study was to track the performance of the home loans originated between 2004 and 2008 by the four major banks in terms of the financial services charter.

Though banks originated a total of R44,8bn in mortgage finance to households earning R1400-R7999/month in the five-year period — comfortably exceeding the charter target of R42bn — no data has been provided on the performance of these loans until now.
The Eighty20 study shows a noticeable increase in defaults in the broader home loan market since 2004. The percentage of non performing loans (in arrears for more than three months) of all active mortgage loans hit 9,4% in January this year. In the charter target portfolio, however, the figure for mortgage arrears was lower, at 7,6%.

“Though the same pattern of deterioration is visible with respect to loans granted to lower-income earners, this segment of banks’ mortgage books hasn’t reached a level [of default] similar to the overall market,” says Rust.

Eighty20’s mortgage performance data appears to lend some credence to human settlements minister Tokyo Sexwale’s view that banks are charging too much to lower-income home buyers. At the annual conference of the African Union for Housing Finance in Sandton last week, Sexwale urged banks to lower their interest rate margins on mortgage products aimed at the lower end of the housing market. “It doesn’t make sense for banks to be trying to make money out of the poor,” he said.

Sexwale referred to government’s proposed R1bn mortgage guarantee fund, saying his ministry is in talks with the Banking Association of SA to find the best way to implement the programme . He said the fund, which will reimburse banks in cases of default, should encourage them to increase their lending to the so- called gap market. The latter can generally afford to buy houses priced from R100000 to R250000, with a household monthly income of R3500-R10000.

It’s not clear when government’s R1bn guarantee fund will be implemented, but Pierre Venter, the Banking Association’s GM of banking and financial services, says the process could take 12-18 months to finalise.

Though the guarantee fund is welcome , Venter doubts it will help close the affordability gap.
“Government’s guarantee may well mitigate banks’ cost of risk somewhat, but it doesn’t mean that pricing will be aggressively reduced. I will be surprised if banks shave more than 1%-2% off their overall interest rate charges.”

Besides, says Venter, access to credit is no longer the key issue.
“The fact that banks exceeded the charter lending targets in the five years to end-2008 and have since continued to generate home loans to the tune of R4bn/year to the gap market shows that they are more than willing to lend to lower-income households.”

The greater problem, says Venter, is that there’s very little, if any, stock available priced below R250000. To afford that, a family needs to earn around R10000/month.

Rust says that leaves a substantial 20% of all SA households out in the cold. The latter earn too much to qualify for a government-subsidised house but not enough to afford the most basic of entry-level homes.
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