Downturn is levelling out

If you are sitting at a dinner party with 10 people, it is likely that one of them is in serious financial difficulty and may even be struggling to hold on to his or her home.

On average, across all types of lending, at least 10% of loans are either in default or at risk of default. A non-performing loan is one where a customer has failed to make a payment for the past three months and legal action is being taken.

This applies on average to about 6% to 8% of home loans, vehicle and assets finance, personal loans and credit cards.
However, if you add the number of loans that are at risk of going into default, that figure rises above 10% in many cases.

Last week Standard Bank shared some of its figures on non-performing loans with the media. This is normally highly sensitive information which banks do not make public, for competitive reasons, but Standard wanted to illustrate why banks have been so cautious to lend.

Although figures from other banks are not available Standard Bank’s figures act as a good proxy. At present, 34 500 customers have defaulted on R22-billion worth of home loans. According to the banks, it is the middle-income earner with a home loan of between R500 000 and R1,5-million who is the most distressed customer.

High levels of distress
This is clear evidence that South African consumers are in dire straits. Although South Africa faced excessively high interest rates in the late 1990s, followed by a recession in the early 2000s, FNB chief executive Michael Jordaan says the distress the bank is seeing in the residential home-loan market is the highest in recorded history, partly due to higher exposure to debt.

Debt as a percentage of disposable income at 76% is the highest ever and far higher than the 50% ratio in the late 1990s. In addition, property values have fallen substantially and the property market is very weak, Jordaan says. So property owners have not been able to sell their houses easily to settle their debts.

Signs of improvement
But Standard Bank’s figures did show that there are signs of improvement. Credit-card debt tends to be a lead indicator and there has been an improvement in the bad-debt ratio since September last year. Peter Schlebusch, the head of personal and business banking at Standard Bank, says this indicates that we are coming to the bottom of the downturn. Jordaan says FNB figures show that property hit its low in April and FNB has seen an increase in property market activity with approval rates and volumes increasing. This, combined with banks’ moves to loosen lending criteria, should see stability return to the property market.

Repossessions
Despite the high levels of stress, the number of repossessions has been far lower than it was in the late 1990s.

Banks are working more closely with clients to try and restructure home-loan payments rather than to repossess. Of the 44 000 customers who went into default Standard Bank was able to restructure the loans of 37 400, worth R27-billion.

The bank was unable to assist in 15% of cases, and has taken action on 1624 properties since January, with 1200 houses sold and 422 in the bank’s possession. Standard Bank’s total home-loan book is R250-billion and it has 500 000 customers.

Part of this strategy of not holding repossessed homes involves assisting home owners to sell their properties.

However, this is not a quick fix and those with home loans need to be aware that they are still liable for the outstanding debt if the sale of the house does not cover the outstanding mortgage.

Banks loosen purse strings
Standard Bank stole the day by announcing its reduction in lending criteria on home loans this week. However, both FNB and Absa reduced their requirements for deposits in the past two months.

“We are gratified that Standard Bank is following our lead,” said Michael Jordaan, the chief executive of FNB, which announced changes to its lending criteria at the end of July.

Absa adjusted its lending criteria in August. Both offer above 100% loans for affordable housing (income earners under R11 000 a month). However, that said, Standard Bank is the only bank offering 100% loans on mortgages between R500 000 and R1,5-million.

Nedbank remains the most cautious of the banks. Clive van Horen, head of retail secured lending at Nedbank, says the bank “remains cautious about providing loans up to 104% of the value of a property, especially because we believe house prices remain under a bit of pressure. One of the lessons of the global credit crisis in the last year is that it is very risky for customers and lenders to assume that house prices will keep increasing to cover their mortgage debt, and so there is a benefit for customers and banks alike in putting down a deposit on home purchases.

“The housing market has stabilised somewhat and as more signs emerge of stabilisation in the times ahead, Nedbank will adjust its deposit requirements, but we are not there yet.”

Although not having to put down a deposit is a bonus, especially for first-time buyers, interest rates do still matter and should form part of a decision on which bank to use—even 0,5% makes a difference. For example, on a R1-million loan, if you borrow at 10% vs 9,5% you will pay an additional R79 000 in interest over the period of a 20-year loan.

Also remember that a deposit creates a level of equity in your home.

So, if you are in financial difficulty in the future, it will be far easier to restructure your repayments, or, if you are forced to sell, it is more likely that you will be able to repay fully the outstanding bond.

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