South Africa’s major banks and the government are on a collision course over low-cost housing finance, with the banking sector appearing to backtrack on its R42-Â billion commitment in terms of the financial services charter.
The Mail & Guardian has learnt that the banks are demanding higher levels of state protection for the next 10 years against losses caused by defaulting bond holders.
Banking Association of South Africa (Basa) MD Cas Coovadia confirmed that the banks’ proposals include:
- A levy of 0,1% to 0,2% on the first R150Â 000 of all mortgages, to establish a loss limit fund. The government would administer the fund, which would reimburse banks losing more than 35% of their investments because of non-payment of bonds.
- Significant government underwriting of low-cost bonds, which would only be offered at a fixed rate to make them attractive investment options for the retirement and life assurance industry.
The Basa has warned that the banks will not enter the low-cost housing market unless such guarantees are given. Coovadia said these were “interim measures” until the housing market is stabilised.
“Until, together, we are able to address these issues the banks are unable to lend in this market,” said Coovadia. “Let’s accept that we do have a certain history; that there are certain distortions in the market.”
While the banking sector was prepared to carry the commercial risk, the government would have to underwrite “systemic losses”, such as householders not paying their bonds in protest against lack of municipal service delivery.
In response, the government may re-table the controversial Community Reinvestment (Housing) Bill.
The law, which set low-income bond quotas and banned red-lining, was withdrawn after banks committed R42-billion to low-cost housing finance by December 31 2008, in negotiations for a Financial Services Charter.
Documents in the possession of the M&G show that the government rejects the one-size-fits-all approach to low-cost mortgage products. It has also dismissed the banking sector’s proposals as “inappropriate” because they effectively transfer the cost and risk of low-cost housing finance to government. This is seen as contrary to the spirit of banks’ charter commitments.
The government insists that funding for a loss limit insurer must be provided by the banks. A levy on all bonds, the documents say, would compromise efforts to simplify the country’s tax regime.
Instead the government has offered the possibility of a public-private partnership as a conduit for mortgages, and promised to remove administrative and legislative obstacles to attracting private investment in the low-cost housing market.
That market is defined as comprising potential buyers with incomes of between R1 500 and R7 500.
The stand-off comes five months into negotiations over the details of a low-cost housing finance regime between Basa and a government team of housing and treasury officials.
Talks started after Minister of Housing Lindiwe Sisulu, the CEOs of the four big banks and Basa signed a memorandum of understanding on March 31 this year. In her May budget speech, Sisulu highlighted the banks’ commitment: “We are confident that the memorandum of understanding will benefit those who receive little or no government subsidy, including nurses, teachers and the police.”
Asked whether the banks were not backing away from their pledge, Coovadia said: “[the agreement] said nothing about how we would do this.”
The banks’ proposals strongly recall the Mortgage Indemnity Fund, set up in 1995 to insure banks lending in the low-income housing market.
Housing Ministry spokesperson Sandile Dikeni said it was premature to comment, as talks were continuing. “Government is happy to have vigorous conversations with the banking sector,” he said. A report on the talks is expected to be tabled before the board of the Financial Services Charter Council in November.