Mortgage industry numbers up, but challenges persist
The mortgage industry reached LE 514 million ($89.4 million) in contracts as of June 2006, up from LE 15.8 million ($2.7 million) recorded in June 2005, Mortgage Finance Authority (MFA) Chairman Osama Saleh announced Tuesday along with Minister of Investment Mahmoud Moheiddin in a round-table discussion held for lenders, property developers and media.
The sector has seen little activity since the passage of the Mortgage Finance Law of 2001 mainly because of high lending rates and property registration fees and lack of cooperation between lending institutions and property development companies. In 2005, Moheiddin vowed to activate the system by implementing a series of reforms that he now says are producing results.
We have over half a billion pounds in loans out so the wheel is starting to turn, says Moheiddin. We are not satisfied, but now it s time for the ministry to take a step back and allow the established lending institutions to do their work.
In the past year, MFA kicked off a widely visible print and broadcast media campaign, established a mortgage hotline and Web site, all largely aimed at low income individuals seeking to purchase their own homes. The Ministry of Investment further helped by pushing through legislation to reduce the property registration fee from 12 percent to 3 percent, or a maximum of LE 2,000.
Still, problems persist for the same low-income individuals targeted by the media campaign since the market s lending interest rate has stayed in the 12-14 percent range. The law s limitation on the maximum monthly payment of 25 percent of a low-income individual s monthly income, which determines the maximum amount they can finance, has also limited demand for mortgage finance. The law defines low-income individuals as ones earning LE 750 per month ($130) for singles and LE 1,000 per month ($170) for married couples.
Accordingly, an individual earning LE 750 per month can borrow a maximum of LE 16,000 ($2,780) on a 20-year mortgage. At a 13 percent interest rate, he will have paid LE 45,000 ($7,830) by the end of his loan term.
Moheiddin defends the system, citing the progress that has been made, and admitting that more still needs to be done. He says competition in the growing mortgage market will naturally reduce the gap between the lending rate and the discount rate, now set by the Central Bank (CB) at 8.5 percent.
Today, the cost of financing is better than it was, Moheiddin says. Some people are waiting for [the lending rate] to go below 10 percent but there s no guarantee that it will. It s something that we have to accept as a result of the stability CB has accomplished. The financial policies implemented by CB have led to stability in the market and have enabled banks to finance property at much lower rates.
Developers, on the other hand, complain the lack of a 20-year interest rate index puts them at risk of not knowing what rates might look like over the next two decades. Meanwhile, repossession procedures, in cases of three consecutive missed payments, remain sketchy and culturally unacceptable, which, they say puts them at greater risk.
Moheiddin declined to comment on the interest rate issue, saying the government should not interfere with CB decision-making. As for repossession, he says a recent World Bank study shows the implementation of current procedures should take nine to 12 months, well within the normally acceptable timeframe of two years.
Still, no repossession cases have been reported so far, according to Saleh of MFA.
Coldwell Banker Operations Manager Lena Fawzy agrees. She says she believes the government has done its role in kick-starting the system and making it accessible to low-income individuals by establishing the Mortgage Subsidy Fund. The fund provides individuals and married couples with annual incomes ranging from LE 12,000 to LE 18,000 with a 15 percent subsidy, not to exceed LE 10,000, on total home value in selected projects. All projects are located in new developments outside Cairo such as El-Shorouk, New Cairo and 6th of October city.
We see the mortgage industry as the future of the country, says Fawzy. And there s a general sense that interest rates will go down in the near future as demand increases for mortgage finance.
By the end of 2007, Moheiddin says the goal is for total lending to reach 5 percent of GDP or LE 20 billion to LE 30 billion ($3.5 billion to $5.2 billion). One major obstacle that must be tackled, he says, is getting property developers to cooperate with lenders.
Property development companies are not qualified to finance, he says. They must start dealing with lending institutions. Otherwise, the law allows for the minister to give them direct orders to do so. They need to give the bread to its baker; and now the baker is here.