Business & Economy

Thursday, 16 April 2009 15:47

How Hungry are the Banks?

 
{pp}Many reports in recent months have blamed the National Credit Act (NCA) and the escalation in interest rates for the ever-increasing number of unsuccessful mortgage bond applications. While these factors do influence consumers that are over-exposed to debt and those in the poorer income group, we have witnessed another phenomenon rear its head, namely, the banks’ lack of “appetite for risk”. Applicants, who, despite the current interest rate, qualify for a home loan as per the requirements under the NCA, are nevertheless dealt the dreaded “decline”.

The Cause for the Loss in Appetite

It is no newsflash that the market is experiencing a grim re-adjustment after the recent property boom.  Owners who purchased a year ago, obtained 100% bond and now need to sell, may find that their property is taking a lot longer to move off the shelf.  If they are in serious trouble, penalties, financing costs and other legal fees are fast mounting up and the bank is trying what may to recover its money.  Contrary to popular belief, the banks are not into property repossession, but into property finance.  Hence, this situation is making them seriously nervous. 

One can’t deny the effects of the US subprime lending on our financial markets.  Billions, if not trillions, of dollars have been lost by international investment banks due to the US subprime lending initiatives.  As per Fin 24 report dated 17 June 2008, investment guru, Warren Buffet, is suing Deutsche Bank for “risky consumer loans”.  Imagine the international banks’ reaction when our local banks approach them for funds for their mortgage book?   It’s either a straight “no” or a heavily penalized transaction.  This lack of funds situation is further aggravated by our own recent consumer spending and appetite for credit.

Banks can afford to exercise their right to be selective and believe me, they are flexing their muscles.  Depending on what size bond you now require, the bank may call for a substantial deposit, so that you too can share the risk.  Your credit record must be impeccable and your repayment ability substantially documented.   In other words, the tiniest element of doubt will swing the answer to your application from a positive to a negative.  Some examples of recent reasons for declines include:

  •   Unable to obtain a bank code on a savings account
  •   Income not evident through the personal bank account
  •   Unable to contact the employer to verify income
  •   Poor payment profile
  •   Failed score card

Expert knowledge is required to handle these obscure, often vague and unexplainable, objections.

What is the NCA’s take on this?

According to the NCA, a credit provider must not unfairly discriminate against a person applying for credit.  It further states that “a credit provider may determine for itself any scoring or other evaluative mechanism or model to be used in managing, underwriting and pricing credit risk, provided that any such mechanism or model is not founded or structured upon a statistical or other analysis in which the basis of risk categorisation, differentiation or assessment is a ground of unfair discrimination”.

Hence “unfair discrimination” is a not limited to race, colour or creed.  If a person can reasonably prove affordability, yet his application is declined, because he is a taxi-driver, in an industry that is “notorious for risk, accidents and taxi-violence” etc, or he only has a savings account or better still, does not have a landline, doesn’t this surely constitute “unfair discrimination”?

Rightfully banks are there to make a profit and look after the interests of their shareholders.  To blame this high surge of “declines” on the requirements of the NCA or high interest rates, is not entirely a true reflection of factors influencing this trend.  The bank’s lack of appetite for risk is a far greater motivator.

Contact information:
Property Factor CC
0861 106 306
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www.propertyfactor.co.za

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