Home loan shocker: FNB pulls plug on property credit

Realestateweb.co.za reporter

04 August 2008

Property deals set to crumble as big bank withdraws approved home loan offers "on a large scale". Property deals are set to crumble, leaving developers, estate agents and conveyancers scramble to cover costs, as one of the biggest banks withdraws approved mortgage offers "on a large scale".

It's not just service providers who will be knocked financially: buyers and sellers with deals from other banks could find themselves high-and-dry where FNB pulls the plug on a key buyer in the chain.

FNB, one of the big four and part of the FirstRand group (JSE:FSR) listed on the JSE, confirmed to Realestateweb.co.za today that will withdraw home loan approvals "on a large scale". This is because affordability levels have "deteriorated considerably" as soaring inflation hits the economy - and pushes up interest rates - more than expected.

Xolisa Vapi, spokesperson for FNB, said a decision has been taken to reassess certain loans that have been approved. Loans that have already been lodged in the Deeds Office or registered will not be affected. "We continue to reassess offers. The need has become more acute now, given the fast-changing circumstances".

He said this is "unusual" and hasn't been done "in a long while" on a "large scale, but has always been a possibility because the bank's offers to provide credit include a clause allowing it to exit if necessary. "Every contract would include a clause allowing us to reassess," said Vapi.

The focus in particular is on home loan approvals made on new developments or properties under construction where the bank would have taken a year's view on an application at the time. He said they are looking at approvals that have been granted in the past year and have yet to be registered. He said FNB could not divulge the statistic for the number of approvals it is set to withdraw - saying only that it is "on a large scale".

Some property purchasers have already received letters from the bank notifying them of the decision. Vapis said there "is an impact unfortunately" on customers, conveyancers and agents.
In many cases, buyers may have to walk away from deposits made in new developments.

"Our relationship is with the home loan applicant. We don't have the relationship with the developer, but we are aware of the potential fall-out there," he said. However, he said FNB believes that withdrawing approvals "is a socially responsible thing to do". "We don't want to repossess people's houses and put them through the pain of repossession," said Vapi, adding that many people would probably be quite relieved to receive such a letter from FNB.

He said that in the current economic situation there is "nothing wrong" with people postponing their decisions. Access, or savings', facilities in home loans - where you can use your loan as a place to park your cash temporarily - also carry clauses where banks have the right to close a facility. However, Vapi said the current focus would not include access bonds.

He said deals approved over the past three to four months would "probably still hold" however it is not out of the question that the bank can withdraw these offers. Existing affordable housing projects in Gauteng where home owners are paying fixed interest rates of below 12% will be unaffected, however current and planned projects will be affected with the bank changing to variable interest rates for future approvals.

In addition, buyers in those newer FNB affordable housing schemes will be subject to an affordability reassessment every six months. If you want to avoid problems, make sure all your bills - even the small ones - are paid on time and in full because the bank is paying close attention to your repayment record, is the message from FNB. FNB is, as far as it is aware, the first bank to withdraw loan approvals on this scale.

Property lawyer Arno Watson of Mansons Inc in Cape Town said conveyancers aren't used to deals falling through because of banks withdrawing approvals at a late stage. He predicted big debates over who would be liable for the costs associated with scuppered deals.

"The client is going to say: ‘You can't look at me, I qualified for the loan. As far as I am concerned I still qualify and the bank is breaching an agreement.'" It is already "so difficult" for buyers to obtain loans - the estimate is not far off 50% of loan applications are rejected these days - and this is set to be an additional challenge for service providers, he said. Watson said he believes it would be better to adjust the stance for new applicants rather than "push the guys who are already in the system".

Nedbank's home loan spokesperson Pramod Mohanlal said he would "absolutely not" comment on FNB's decision to withdraw offers. He said Nedbank was not doing this, however it has introduced tighter loan-to-value capital requirements along with other banks.

He said the "acquisition and growth" of the mortgage book remains important for Nedbank. Nevertheless, Nedbank recently hit the headlines after pulling the plug on the luxury La Residence development in Sandton (read Nedbank: "Why we dumped Pam Golding clients".

Standard Bank said it announced in June 2008 the need to revise Loan to Value (LTV) criteria for new loan acquisition. "In light of further repo rate increases announced and expected in the foreseeable future that we had no alternative but to tighten these lending criteria. Deposits also ensure that there is equity in the property in the event that customers find it difficult in future to make repayments," said Ross Linstrom.

Standard Bank made the following changes:

The LTV adjustments are:
· Less than R750K 100% LTV
· R750K to R2.7Mil 95% LTV
· R2.7Mil to R3Mil 90% LTV
· R3Mil and above 80% LTV

The following products are not offered for cost inclusive purposes, previously these products allowed 108% loans:
· Jumpstart
· DreamStart
Absa, meanwhile, said last week it was focusing more on commercial property opportunities.

The South African Economy... our personal finance and end-of-month money

Like most people, when thinking about the South African economy, I cringe when I hear: “This is just the beginning…”, “You may soon pay R16,00 per liter for petrol…”, “The interest hike has been increased by 50 basis points…”

The list seems endless, occurs daily and becomes increasingly worse.

85% of South African citizen are over-indebted as it is, and amidst the increases and further expected increases, I heard a podcast yesterday, which was hosted by a well-known Retailer and Financial Services Provider, in which their expert stated that in this time of turmoil, people can still find a way to save and pay off their debt.

He suggested that one evaluates expenses like DSTV, eating out and other, what can be termed as luxury items, reduce or eliminate those costs and use the savings to pay off your debt, starting with the items that bear the highest interest rate.

It does sound like good financial advise… the problem I have with it, is that we, as a working individuals, whom have worked hard to provide our families with the little luxuries in life have to, in certain aspects reduce our standard of living in order to cope in this economic downward spiral.
Furthermore, who benefits from us having to tighten our belts? Well, one sector that definitely does is the Financial Sector!

It’s time to get real. And I will share information with you today that you might know and have chosen to be oblivious to, or that might be an eye-opener…

The financial sector is set up to benefit from the consumer whether the economy is “bad” AND they are set up to benefit from a booming economy.

This is all done through their interest rate systems.

Here is an example: When you have a homeloan of R500 000 at an interest rate of 12% (the good old days), over twenty years you would pay back a minimum of R1 500 000, that is if you have not refinanced your homeloan within this time frame.

With the current economy, you will repay R2 400 000 on your current bond of R500 000. Almost R1 000 000 difference!

What the Financial Services providers and experts do not share with the “struggling” public, sadly a lot of them do not know this, is that one can beat the system!

You do not have to pay so much interest on your homeloan.

You do not have to repay your homeloan over a twenty year period

AND

You definitely do not have to reduce your standard of living in order to do this!

As a matter of fact, if you know how the banking system and financial sector works… you can increase the amount of money you have available at the end of the month whilst reducing your interest and your homeloan term.

And then there is the magic of saving interest on your credit card…

You are welcome to comment, question and discuss!

Have a lovely day!