SA Banks Share Different Views on Credit

FNB Criticised for Credit Withdrawals

An article by Realestateweb has drawn attention to the Ombudsman for Banking Services' recent warning shot fired at First National Bank (FNB)’s decision to withdraw home loan approvals “on a large scale”. ABSA has since revealed that it is those professionals who are self-employed that are being hardest hit by the severe downcycle in the property market.

FNB released the news about its home loan shock this week, saying that it was pulling the plug on property credit in the current economic climate, where inflation continues to rise and property prices are falling. The reason given for this decision is that levels of affordability have “deteriorated considerably”.

The decision involves the reassessment of certain loans that have already been approved; however those that have been lodged in the Deeds Office or registered will not be affected. Spokesperson for FNB, Xolisa Vapi said, “We continue to reassess offers. The need has become more acute now, given the fast-changing circumstances”.

Vapi admitted that this action is “unusual” and has not been carried out in a long time, “but has always been a possibility because the bank’s offers to provide credit include a clause allowing it to exit if necessary”. He went on to say that every contract has a clause allowing the bank to reassess its offer.

The focus of the reassessment is on home loan approvals that have been granted in the last year and have not yet been registered. Although Vapi could not divulge statistics for the amount of approvals the bank is set to withdraw, he did say that it is “on a large scale”.

The Ombudsman for Banking Services, Clive Pillay has taken an unprecedented step in his public criticism of the move by FNB. In a statement made to the media on Wednesday, Pillay argued that it was “sound and prudent to reassess bonds granted in principle,” but “cautioned that each matter be reassessed in a manner that does not unduly prejudice the customer”.

Pillay outlined the following scenario, which would “severely prejudice the purchaser” – where a home loan has been granted and the buyer then pays a deposit to the seller. “While the parties are awaiting registration, the bank withdraws the bond, either completely, or offers the purchaser a smaller bond. Because of the bank’s decision, the purchaser is unable to proceed with the transaction”.

What happens then is the seller insists that the buyer “fulfill his contractual obligations” and in so doing, the “seller retains the deposit paid and sues the purchaser for the balance of the purchase price”. In such a situation, said Pillay, the bank “should consider alternatives to assist the customer”.

Even so, Pillay said that reassessment is in compliance with the National Credit Act, which enforces strict new credit criteria and this is partly responsible for the dramatic decrease in property deals over the last year. Pillay urged bank customers who are unhappy with the outcomes of their related disputes to approach his office: 0861 662 2837.

Managing executive for ABSA’s home loans, Gavin Opperman is reported as saying that he spends more than half of his day collecting and recovering. This is true of self-employed professionals in particular, he said, such as lawyers and those in the medical field, who are “really battling” in tight economic conditions, but not necessarily the “guy who has a café on the corner”.

What seems to be happening is that consumers are now not going to doctors and dentists and are no longer paying their medical aids, according to Opperman. He referred to an example of a property he had recently handed over to the Alliance Group for auction after a medical professional could no longer keep up with his debts, having put down a deposit of R3m plus costs and was paying off the balance of R7m with a mortgage.

This particular individual paid R10m about 18 months ago for his home and was struggling to meet home loan repayments of around R100 000 per month. Even more discouraging is the fact that the owner can expect around 50 to 60% of that market value on auction. Opperman stressed that this is by no means an isolated case and that ABSA would assist individuals in similar situations if they contact the bank as soon as they anticipate financial trouble.

“These people will bounce back. We’ll restructure the debt and he will rent for a while,” said Opperman of the medical professional who is about to lose his home at auction. He went on to say that those in the affordable housing sector were not as hard hit as the upper income earners.

Opperman may be spending much of his time looking at debt recovery, but he remains optimistic about property because “you are effectively saving” when you invest in bricks and mortar. Also, saving money in a home loan makes better financial sense than saving it elsewhere. “We don’t believe interest rates will escalate further. So affordability calculations for mortgages now shouldn’t be a problem,” said Opperman.

Saul Geffen, chief executive officer of South Africa’s biggest mortgage originator, Ooba, said that FNB began reassessing and withdrawing home loan approvals at the end of July. “In the cases where a reassessment of our clients’ financial position has become necessary, we are expediting the process by contacting our clients and assisting them with completing the required documentation,” he said.

Geffen indicated that Ooba would try and secure alternative bond finance through a different lender where FNB makes a withdrawal. “Presently, banks do have different appetites for risk and we therefore find that an application declined by one bank is often granted by another bank,” said Geffen.

The information in this article is courtesy of Realestateweb (“Ombudsman fires public warning shot at FNB”, 7 August 2008).

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