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It was supposed to make home ownership more affordable for millions of Egyptians. But mortgage finance has struggled to get off the ground since its inception six years ago. In 2007, however, the industry turned a corner, with new lenders entering the market and the value of outstanding mortgages doubling to reach LE 2 billion. So what’s driving this new enthusiasm?
BY GEOFFREY CRAIG
When the country’s mortgage law was passed in 2001, no one expected results overnight. It would take years to build the necessary infrastructure, experts cautioned. Indeed, four years elapsed before the country saw its first mortgage, followed by only a slow trickle of new lending.
The government emphasized patience. It was developing the institutions and lending procedures for a mortgage industry, including a mortgage refinance company, a national credit bureau and foreclosure rules. In the meantime, spiraling property values have altered the basic economics of home buying. It may no longer make sense, or even be feasible, to take out a traditional five-year bank home loan.
“I don’t see how people can really buy properties over four or five years like they used to do,” says Ahmed Haggag, CEO of Amlak Finance & Real Estate Investment. “With the increase in the prices of raw materials and land on all classes – high, middle and low – it’s becoming very expensive not to stretch the repayments over 10, 15 and 20 years, and maybe more.”
A mortgage offers a number of advantages for would-be homeowners. For one, the monthly installments and down payment of a mortgage are less than those of a traditional bank home loan because borrowers are able to use the property as collateral for the loan. Borrowers also make a smaller monthly payment because the mortgage’s repayment period is stretched over 20-30 years. A 30-year mortgage with a 10-percent down payment, for instance, would let the borrower pay 60 percent less each month than a five-year loan with a 25-percent down payment, although the total amount paid could end up being more than double the bank loan.
As a result of rising housing prices, more people are opting for longer installments and utilizing mortgages to buy their homes, says Syed Farhan Fasihuddin, manager of the housing finance program for the MENA region, International Finance Corporation (IFC). “People realize that they would rather be a homeowner now, and pay more in interest over a longer period than wait five years until they have more money. By that time, property values will have risen further.”
The value of outstanding mortgages doubled last year, reaching LE 2 billion. “The results might seem sudden,” says Hala Bassiouni, managing director of Egyptian Housing Finance Company (EHFC). “But we’ve been working since 2004 and nothing concrete came up until last year, when LE 2 billion of loans were given. It’s the result of work that’s been going on.”
Mortgage experts here and abroad have eyed the Egyptian market with keen interest for some time given the country’s size and untapped potential. In light of the recent progress, industry players have decided that now is the right time to enter the market. In the past year, the number of mortgage companies has jumped from two to seven, and 16 banks are now providing mortgage loans in Egypt. The addition of new lenders injected fresh liquidity into the market, which accounts for part of last year’s tremendous growth.
Total lending is expected to reach LE 3 billion by the end of 2008, and LE 4 billion by the end of June 2009, according to investment minister Mahmoud Mohieldin. Mortgage finance companies, rather than banks that provide mortgage loans, will be the key driver behind greater lending, he believes.
Laying foundations
Egypt is a relative latecomer to mortgages, even among its regional peers. Jordan, for instance, established its first mortgage refinance bank in 1996, 10 years before Egypt did. A refinance bank is considered a critical component of any mortgage industry, as it issues housing bonds on the local capital market that provides a source of long-term funding to mortgage finance companies. This allows lenders to offer mortgages with fixed interest rates.
But it is just one piece of a complex puzzle that forms a mortgage industry, says Michael Ball, a professor of urban and property economics at the UK’s Reading University. “You have to think of mortgage finance as a whole. It comes as an institutional package,” he said during a real estate conference in Cairo in late May.
An effective mortgage market cannot function without long-term credit, effective screening of applicants, the ability to foreclose on property, clear property titles and access to international capital markets, according to Ball. In Egypt, like many emerging markets, these components didn’t even exist a few years ago.
Several countries have recently developed mortgage finance industries, such as Mexico, Malaysia and the UAE, Ball noted, even though they are still far from market maturity. Countries in eastern and central Europe were also successful after first resolving complex issues related to property titles in the wake of communism.
Similarly, at the top of Egypt’s to-do list was improving property registration. Only registered land can serve as collateral for a loan, but in 2004 about 85 percent of the country’s property was unregistered due to high fees, taxes and inefficient registration procedures.
To encourage registration, in 2004 the government reduced fees from 12 percent to 3 percent of property value. It later capped them at LE 2,000. The government also streamlined registration procedures, which reduced the processing time from 12-18 months to about three months, according to Bassiouni.
As a result, she says, a mortgage applicant with a registered property will face a smoother ride. “From a timeframe point of view, it’s much easier because the title can be traced. We simply need to check the credentials of the applicant [to see] whether he is fit for the loan.”
A lending institution can claim the registered property in case of default to recoup its investment under the mortgage law, which wasn’t possible previously. Under a new rule, real estate agents are assigned to independently appraise a foreclosed property and sell it at an auction, and then give each party its stake.
Lenders were concerned because the procedures were untested. “A big fear for banks and mortgage companies was whether or not legal foreclosure could be implemented correctly and in a short time,” says Amlak’s Haggag.
There have been five foreclosures to date, according to the Mortgage Finance Authority (MFA). “Maybe it’s only been a few cases so far, but the number of defaults also aren’t that high,” Haggag adds. “At least it gives some comforting signals that foreclosure has been tested and is in place.”
Foreclosure proceedings can begin after more than two missed payments, though a government guarantee fund provides homeowners with coverage for up to three months of payment default every five years of the loan. Lenders say they regularly send SMS messages to remind clients of upcoming payments.
Another tool that will help keep default rates low is the national credit bureau, I-Score, which launched operations last month. The credit bureau – which shares information between the Central Bank of Egypt (CBE) and 27 banks – can help banks and mortgage companies to assess which applicants are least likely to default. Regulations are also structured in a way to guard against customers taking on too much debt. Monthly installments must not exceed 40 percent of income, or 25 percent for low-income earners, and the loan-to-value ratio cannot be greater than 90 percent.
This is a topic of keen interest in the wake of the US sub-prime crisis. Government officials here are quick to draw a distinction, claiming the country’s tough regulations are sufficient to prevent a similar meltdown. US mortgage companies were lending up to 120 percent of the unit’s value, according to Osama Saleh, chairman of the Mortgage Finance Authority. This worked until real estate prices began to fall. Suddenly, these borrowers were saddled with mortgages worth more than the property’s actual value.
Egypt provides only “plain vanilla” mortgage loans, Mohieldin said, as opposed to the “interest only” payment plans available in the US. In the former case, a client begins paying off the principal right away. But an interest-only plan requires the borrower to pay just the interest for the first few years. After this period, the principal is also due, and suddenly the monthly payment shoots up, leading many borrowers to default.
Egypt’s portfolio of “high quality” outstanding mortgages is particularly important because mortgage loans are now being bundled and sold as securities, Mohieldin. Securitization is necessary because it provides a source of long-term funding. Mortgage companies do not receive deposits like banks, and must therefore rely on these funds in order to continue lending.
But a secondary debt market has been slow to develop, experts say. Thus far, there has been only one mortgage-backed bond issued in Egypt. Last year, state-owned Egyptian Arab Land Bank issued a LE 750 million bond secured by a mortgage portfolio. The Egyptian Mortgage Refinance Company is expected to become the market maker and carry out securitization transactions, say local experts.
Lenders line up
After a sluggish start, Egypt’s mortgage industry appears to have entered a growth phase, with new companies jumping into the ring. Until last year, the only mortgage companies were Egyptian Housing Finance Company and Al Taamir Mortgage. There are now five mortgage companies operating, with the addition of Egypt’s Al Tamweel, Amlak and Al Tayseer. The MFA also granted licenses to two other companies recently, Dubai-based Tamweel and Saudi Arabia’s Naeem Investments.
Egypt’s potential is clear, experts insist. The country’s home ownership rate is an extremely low 32 percent, whereas it is 75 percent and 67 percent in Jordan and Tunisia, respectively. And despite recent growth, the value of outstanding mortgages is just 0.5 percent of GDP compared to 13 percent in Jordan, or around 70 percent in the US. “We’ve barely begun to scratch the surface,” said a marketing manager at a local mortgage finance company.
There is plenty of room for more players, Bassiouni says assuredly. “I haven’t sensed the competition yet. The market is so wide in terms of the demand and supply.”
Mortgage companies are poised to get a big slice of the housing loan pie. Only 5 percent of a bank’s lending can go to the housing sector, but non-bank finance houses are not limited by this regulation. That doesn’t mean a mortgage provider operates without constraints. A company must still consider its debt-to-equity ratio, as well as the quality of the loan portfolio.
An emphasis on solid credit fits into the business model that mortgage companies seem to have adapted of catering to well-heeled customers. The average household income of the clients at one mortgage company was LE 35,000 per month, a representative told Business Monthly.
When a country’s mortgage industry is just starting out, it is “very typical” for lenders to cater primarily to affluent customers, explains Ball. “It usually takes far longer for other incomes groups to start to get mortgage finance. [That] essentially depends on ability to repay debt, which lower income groups can’t do at present.”
Several lenders have formed exclusive relationships with high-end real estate developers. A mortgage office can guide a prospective client to certain properties and then offer the financing. It is a similar arrangement that developers have had with banks, which act as exclusive financiers for projects.
Growth in this area depends on whether the pace of real estate development continues. Construction costs have risen in Egypt, but analysts note cement and steel prices are still low by regional standards. That may be enough reason for Gulf investors to continue pouring billions of dollars into Egyptian real estate projects. “The main driver behind the growth of mortgages has been the real estate market,” says Menna El Hefnawy, a real estate analyst at HC Securities & Brokerage. “The increase in the price of units means that many people can’t afford to buy without a mortgage.”
Property prices have risen steeply in upscale developments on Cairo’s outskirts, where demand continues to outstrip supply, experts say. This chunk of real estate now represents the bulk of mortgages, as opposed to existing property within the city core. And homes in these suburban compounds don’t come cheap, with prices reportedly as high as LE 8,000 per square meter. A small villa can fetch LE 2 million. “The developers went for the upper class,” notes Alia Kholeif, a marketing manager at Al Taamir Mortgage, which began operations in 2003 as the first financing company in Egypt. “They have the cash. It’s a quick, safe return.”
Expanding horizons
While developers have targeted wealthy Egyptians, the spill-over effect of the real estate boom is that it has pushed up property prices, making housing less affordable to the rest of society – even those with good credit. “You have the ‘B class,’ which wants to own a property, but cannot afford it,” says Bassiouni. “They are executives working in companies, or newlyweds, who really want to buy a townhouse, or a villa, or a small, semi-detached property, even a flat. But a flat today in a new urban area is on the verge of a million [pounds].”
Mortgages could make these homes more accessible, by reducing the cost of monthly payments while raising the buyer’s credit limit. They could also widen homebuyers’ selection to include properties previously considered beyond their budget.
With a glut of high-end housing developments under construction, it is hoped that developers will now turn their attention to building housing for people with limited incomes, experts say. Greater supply would translate into more demand for mortgages, the reasoning goes. It would also address the persistent undersupply of housing stock pulling at the fabric of society. The total annual demand for housing units is approximately 750,000 units, yet the supply to the formal real estate market is only about 260,000 units, or 35 percent of demand.
The government already has in place the Mortgage Guarantee & Subsidy Fund, offering mortgage applicants on limitied incomes a grant worth 15 percent of the value of the unit, to a maximum of LE 10,000. The subsidy is available to individuals earning LE 1,000 a month for singles, or LE 1,500 a month for married couples. The fund has provided subsidies worth over LE 32 million to about 4,000 individuals.
Lenders are hopeful that the private sector will next get involved in large-scale housing projects for lower-income residents. One such initiative is Orascom Budget Housing, a subsidiary of Orascom Hotels & Development, which plans to build 40,000 budget units in Sixth of October City to be sold for between LE 60,000 and LE 90,000.
The first 10,000 units are scheduled to be ready for occupancy by September 2008, with another 10,000 by June 2009. The business model is to allow customers to also finance their purchase with Tamweel, a mortgage finance company Orascom helped establish.
Another factor that would make mortgages more affordable is lower interest rates. The CBE has pushed interest rates into double-digit territory in an attempt to reel in inflation. But doing so has also created a tight credit market, with current mortgage interest rates between 13 and 14 percent. US mortgage rates, by comparison, are as low as 5.5 percent.
In the meantime, the government and private sector acknowledge that they must coordinate to spread information about mortgages, such as forming a public awareness campaign. “It’s an educational process that the Egyptian market needs in order to know mortgages are available, and that they are secure and better than paying rent,” says Kholeif.
Some people may feel reluctant initially to sign on, Bassiouni says. She likens the present situation to the uphill battle that credit cards faced when they were first introduced here. “Ten years ago, no one was aware of plastic money, but now everyone holds a credit card.”
From the lenders’ perspective, the ideal borrower isn’t necessarily wealthy, but must have a steady income. “We look for people who are stable, and with bank accounts to give us extra assurance about their financial status. [We want] people who save money or have a relationship with a bank,” Kholeif explains.
Ironically, some of the best customers are those with limited means. “They are the most disciplined people,” says Bassiouni. “They come on the first of the month to pay off their debt because it’s a matter of honor and pride that they own a house, and they can’t think of this home being taken from them... For them, ownership means a lot. They’d rather not eat than not pay the rent.”
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