An increasing number of would-be homeowners are finding their mortgage applications declined. Discounts on the prime lending rate are narrowing as banks start to feel the credit squeeze and fears are mounting as bad debts increase and property prices start to slide.
All this is bad news for home buyers, who are already finding the current interest rate environment impacting on the affordability of home ownership.
Saul Geffen, chief executive of mortgage originator ooba (formerly MortgageSA), says the number of mortgage refusals has grown rapidly. The average percentage of home loan applications declined jumped to 43%, up from 33%, of all applications in May 2007.
Ian Wason of mortgage broker Bond Busters says the banks are more risk-adverse and the discounts on the prime lending rate are getting smaller. “With the fall in house prices, lenders are reducing the values of their loans,” says Wason.
Two weeks ago Absa adjusted its credit lending policy, requiring customers to pay a deposit when buying a new home. Although Absa says the policy is to avoid over-indebtedness and to foster a savings culture, the reality is that banks are starting to protect their books and want a cushion should house prices fall further.
Owen Sorour, Standard Bank director of secured credit, says high loan to value (LTV) will definitely impact on the bank’s loss experience. In other words the higher the percentage of the loan compared with the property value, the more likely they will experience a default.
“If property price inflation slows and the environment deteriorates, it is prudent for a bank to become more conservative in both its lending policies and its exposure to higher LTV assets,” says Sorour.
He says the market, customer affordability and the economic outlook have deteriorated significantly the past 22 months and particularly the past nine months. As a result, banks have reviewed their risk appetite.
With a high chance of a further rate increase of 50 basis points next month and economists predicting a further 50 to 100 basis points later this year, existing borrowers might break under the pressure — and the last thing banks need is to take on more risk. At the same time, the securitisation market has crumbled.
Securitisation was increasingly becoming a cost-effective way for banks to raise capital to fund mortgages. Banks would package the mortgages and sell them on to institutions looking for annuity income. Although a relatively small industry compared with the US, the South African securitisation market allowed new entrants, and hence competition, into the market, such as SA Homeloans and Integer, which did not have the backing of a large deposit taker such as a bank.
Banks themselves have used securitisation to fund their home loans. Sorour says that, due to the deterioration in the external environment globally and the sub-prime crisis in the US, funding has become scarce and significantly more expensive in the South African market.
“The appetite to invest in securitisation vehicles also reduced to almost zero and most planned securitisations have been withdrawn in South Africa due to cost and lack of investors,” says Sorour.
As a result, banks need to manage the rates offered to customers to compensate for the increased funding costs. ooba’s research shows that the median rate below prime given by banks for the six months to May 2007 was 1,55%.
However, in April 2008 the median concession fell to 1,40%.
The middle market was the worst affected. Geffen says that the highest levels of bank declines are in three major categories — those with gross incomes between R10Â 000 and R20Â 000 a month, those applying for a loan amount between R250Â 000 and R500Â 000 and those looking to buy property in the R400Â 000 to R1-million price range.
However, despite less attractive rates in general, Geffen says it is still worth shopping around. The rates offered by the four major lenders vary by as much as 0,5% for the same home loan application. That could offset the next interest rate hike.
Banks also appear to have different lending requirements. Geffen says when an application is rejected by one bank it is often approved by another. ooba’s stats show that 40% of all the home loan applications declined by one bank are approved by the other banks to which it sends the application.
So although bank declines are up 10%, ooba has experienced only a 6% increase in declines given its ability to shop the loan to the other major lenders.
TIPS FOR BORROWERS
Shop around: If a bank offers you 50 basis points less than its competitors, it will provide you with a cushion against a further rate hike.
Look long term: Residential property is a long-term investment. Short-term price movements should not worry you.
Buy smaller: Buy a smaller property and put down a deposit. The resulting lower mortgage repayments will give you a cushion against further rate hikes.
You are also more likely to receive a better interest rate from the bank.
Rent first: Rent until you can afford a deposit and if you need a bigger home rather renovate than buy bigger.
Face the problem: If you already have a bond and are feeling the pinch, contact your bank to find a solution. Ignoring the problem will not make it go away.