Welcome to home loan hell

Prospective home buyers follow a simple process when purchasing a house. First they approach an estate agent who takes them to view various properties. Once they find a home they like the make an offer to purchase subject to finance being raised. Signing an offer to purchase is no joke and the prospective buyer is legally bound to approach financial institutions to obtain finance for the house – usually within 30 days. As soon as finance is secured the transferring attorneys go through the motions until the property is transferred and duly registered with the new owner at the deeds office. But that, it seems, was yesterday.

Recent comments by First National Bank (FNB) indicate that banks are now willing to renege on their ‘guaranteed’ offers of finance. Of course the bank is using slightly different terms – telling SAPA that they are not withdrawing but ‘reassessing’ previously approved bonds.

A sensible move in certain circumstances

Jan Kleynhans, FNB Home Loans chief executive, said that the loans being reassessed were often granted more than a year ago: “This applies to situations where people have bought off-plan, or where the home is still being developed. The National Credit Act compels us to make sure that the customer can still afford the home loan.” Although these steps can be rationalised we contend that a home loan granted 12 months ago would have been granted with the protections of the National Credit Act in mind.

What FNB is doing is using the National Credit Act to wriggle out of a very difficult (for banks) home loan market. The bank is arguing ‘protection of customer interests’ to make sure that it doesn’t end up with too many negative equity properties on its books. Let’s say you bought a house off-plan in June 2007 for R750 000 and were granted a 100% mortgage loan. Everything is in place for you to take transfer of the house when it completes in September 2008... Unfortunately the housing market is not what it used to be and the house will probably only be worth R670 000 when you take deliver. And to make matters worse the R8 787 bond repayment (calculated in June 2007 at 13%) has jumped to R10 155 per month (at current rates of 15.5%). Although you are financially worse off, the bank finds that it’s R750 000 is no longer covered by the asset.

We doubt whether any bank would want to continue with this lending arrangement even if the client could afford the repayments. And we’re willing to bet the bank will pull this home loan – or at the very least demand the client offers up a 10% deposit to mitigate the bank’s risk.

Could cause serious financial hardship

Ombudsman for Banking Services, Advocate Clive Pillay is apparently not happy with FNB’s stance. “A bond is a guarantee and on the strength of this guarantee, the purchaser takes on legal contractual obligations,” he said. He pointed out that even though the transaction was not complete, the purchaser would have incurred additional fees. “He pays a deposit, plus the attorney’s fee and transfer duty. He may well have sold his home – he’s committed to that purchase and if the bank suddenly withdraws the bond, then everyone loses.”

It’s not only the property buyer that will suffer should FNB withdraw the home loan.

The move will cause serious financial hardship for property developers, sellers and attorneys too. Imagine you’d sold an entire development off plan and 80% of the sales were financed by FNB... As a developer your costs are sunk – and suddenly you’re sitting with a huge hole in your budget. The suppliers and contractors on the development will be out of pocket too because there simply isn’t a quick way to find new buyers in current market conditions. And we’ve not even mentioned the bond originators and estate agents who are desperately waiting to be rewarded for the work they did more than six months ago.

FNB has undertaken to pay the attorney fees in the event it withdraws a bond. But they might want to take a harder look at the consequences before proceeding. The decision impacts on many more people than the FNB client.

Editor’s thoughts:
So far media coverage of FNB’s decisions has focussed on the purchaser. But the seller is also prejudiced... What about the many people who have purchased new houses on the strength that their house is sold. FNB claims they are protecting the customer; but that’s something they should have done before granting the loan in the first place. What do you think is behind the bank’s decision to ‘reassess’ mortgage loans? Add your comments below, or send them to gareth@fanews.co.za

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