SA banks tighten screw on risky bond clients

PRETORIA – At least two of South Africa’s major banks have tightened up on the access high-risk clients have to the flexible reserve funds in their mortgage bonds.

Gavin Opperman, the managing executive of Absa Home Loans, confirmed yesterday that the bank had notified its high-risk clients last week that they would no longer be able to access these funds. Jan Kleynhans, the chief executive of FNB Home Loans, said the mortgage division of First National Bank (FNB) had introduced similar measures for its high-risk clients.However, Leon Barnard, the director of personal and business banking products at Standard Bank, said no limitations had been placed on its clients with existing access bonds.Barnard said Standard Bank would reassess its risk only if a client applied for a further bond over the property.Spokespeople for Nedbank were unavailable for comment.Opperman defined high-risk clients as those who had defaulted on paying another loan or had a cheque bounce.He said this restriction applied to about 15 per cent of Absa’s home loan customers.Absa finances one in every three houses acquired through a mortgage bond and has about 670 000 home loan customers.South Africa’s household debt service ratio has risen from about 9 per cent in 2003 to just below 12 per cent.John Loos, a property analyst at FNB, said this week that a debt service ratio of 12 per cent was “the normal pain threshold”.It had been particularly bad in 1998 when it reached 14 per cent.Reserve Bank figures show that total outstanding mortgage bonds, after capital repayments, have doubled in three years to N$898,3 billion at the end of May from N$449,2 billion outstanding in May 2005.Residential mortgages exceed 80 per cent of the total.Opperman denied market rumours that Absa had put a blanket ban on all flexi reserve withdrawals on home loans.It would be crazy to do this, he stressed, because a mortgage bond was the best place for customers to park lump sums, such as bonuses, and to consolidate their debts.He said the measure was aimed only at clients who were “living off their mortgages” and was in line with Absa’s philosophy of responsible lending.Opperman said the move was linked to the slump in the residential property market, which was likely to last far longer than the 1997/98 slump.”We anticipate this one is going through to 2009.If it was going to turn in two to three months … we would not have taken these measures.”He said the greatest risk to both the bank and its high-risk customers came from drawdowns on their mortgages at a time when property prices were declining, which could result in negative equity in their bonds.This happens when the price at which a house can be sold, excluding any costs and outstanding debt, is less than the outstanding amount of the home loan.Jacques du Toit, Absa’s senior property analyst, forecast this month that house prices, excluding the effect of inflation, were in line for a drop of about six per cent on average this year with a further decline of 3,3 per cent next year.Opperman said that if any of Absa’s home loan customers wanted to draw funds from their bonds, there was nothing prohibiting them from applying, at no cost to them, to do so.Business ReportJan Kleynhans, the chief executive of FNB Home Loans, said the mortgage division of First National Bank (FNB) had introduced similar measures for its high-risk clients.However, Leon Barnard, the director of personal and business banking products at Standard Bank, said no limitations had been placed on its clients with existing access bonds.Barnard said Standard Bank would reassess its risk only if a client applied for a further bond over the property.Spokespeople for Nedbank were unavailable for comment.Opperman defined high-risk clients as those who had defaulted on paying another loan or had a cheque bounce.He said this restriction applied to about 15 per cent of Absa’s home loan customers.Absa finances one in every three houses acquired through a mortgage bond and has about 670 000 home loan customers.South Africa’s household debt service ratio has risen from about 9 per cent in 2003 to just below 12 per cent.John Loos, a property analyst at FNB, said this week that a debt service ratio of 12 per cent was “the normal pain threshold”.It had been particularly bad in 1998 when it reached 14 per cent.Reserve Bank figures show that total outstanding mortgage bonds, after capital repayments, have doubled in three years to N$898,3 billion at the end of May from N$449,2 billion outstanding in May 2005.Residential mortgages exceed 80 per cent of the total.Opperman denied market rumours that Absa had put a blanket ban on all flexi reserve withdrawals on home loans.It would be crazy to do this, he stressed, because a mortgage bond was the best place for customers to park lump sums, such as bonuses, and to consolidate their debts.He said the measure was aimed only at clients who were “living off their mortgages” and was in line with Absa’s philosophy of responsible lending.Opperman said the move was linked to the slump in the residential property market, which was likely to last far longer than the 1997/98 slump.”We anticipate this one is going through to 2009.If it was going to turn in two to three months … we would not have taken these measures.”He said the greatest risk to both the bank and its high-risk customers came from drawdowns on their mortgages at a time when property prices were declining, which could result in negative equity in their bonds.This happens when the price at which a house can be sold, excluding any costs and outstanding debt, is less than the outstanding amount of the home loan.Jacques du Toit, Absa’s senior property analyst, forecast this month that house prices, excluding the effect of inflation, were in line for a drop of about six per cent on average this year with a further decline of 3,3 per cent next year.Opperman said that if any of Absa’s home loan customers wanted to draw funds from their bonds, there was nothing prohibiting them from applying, at no cost to them, to do so.Business Report