New Housing Finance Guarantee Scheme & key aspects of National Housing Code: briefing by Department of Human Settlements

NCOP Public Services

23 August 2010
Chairperson: Mr M Sibande (ANC)
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Meeting Summary

The Department of Human Settlement elaborated on the R1bn Guarantee Fund, noting that in the State of the Nation Address 2010 President Zuma had announced the establishment of the fund. It was aimed at addressing the housing needs of those people who earned too little to qualify for a normal mortgage loan but whose income was above those qualifying for government subsidies. Such persons fell into what was normally referred to as the gap market with income levels of between R3 500 and an upper limit of R12 500.

Further objectives of the fund were to:
• make the 'Finance Linked Individual Subsidy Programme' (FLISP), currently under review, more responsive to the affordability challenges faced by the target market and
• enable such lenders to access long term fixed interest rate capital.
The fund was predicated on partnerships with financial institutions and would be a joint venture with National Treasury and require the involvement of the Reserve Bank and the Financial Services Board. The Fund was yet to be implemented and consultations were still in progess with November earmarked as a possible date for implementation.

The Department had introduced the National Housing Code 2009 as a legal requirement in terms of the Housing Act, 1997. The Code was aligned to the Comprehensive Plan for the Development of Sustainable Human Settlements ("Breaking New Ground") of 2004. The three core National Housing Programmes for future housing delivery were the Integrated Residential Development Programme (IRDP), the Upgrading of Informal Settlement Programme (UISP) and the Social/Rental Housing Programme. Another programme that elicited strong response from the members was the Community Residential Units Programmme which replaced the former hostel redevelopment programme. This included the Hostels to Homes programme in which hostel conversion was aimed at accommodating the poorest of the poor.

Meeting report

Opening remarks on department attendance
The Chairperson opened the meeting and tabled an apology from the Director General of the Department of Human Settlements and asked all present to introduce themselves.

In introducing himself, Mr Feldman (COPE, Gauteng) expressed his disappointment that the Director General was absent from the committee meeting once more.

The Chairperson noted that the Director General had many commitments and the Department was well represented by the Deputy Director General and senior management. Procedurally, budget meetings and other important meetings required either the presence of the Minister, Deputy Minister or Director General but for presentations such as this one, the present delegation was in order.

Ms L Mabija (ANC, Limpopo) stated that she was not clear about who had to be present and what was expected from the meeting and why those who should have been there, were not there. She asked for a discussion and agreement about the matter before the presentation proceeded.

The Chairperson said he thought he had just clarified the issue. He reiterated that the Director General had apologised and that those who were present were the people who were functioning in the specialities that were going to be presented. The Chairperson asked the members to comment on the issue.

Mr Z Mlenzana (COPE, Eastern Cape) stated that perhaps it was the manner in which the apology was tabled. The explanation given by the Chairperson in categorising presentations into when the Director General should or should not be present was not satisfactory. The expectation of the Members was that the Director General would be present when the Department was invited to a meeting. The norm would be for the circumstances of his absence to be provided and then to decide if the meeting should proceed. He proposed that if the officials present could give detail on the presentation and had the hands-on expertise, then they should be allowed to proceed, with the understanding that the Members had accepted the DG's apology.

Ms M Themba (ANC, Mpumalanga) expressed her satisfaction with the Chairperson's explanation that the Director General had apologised and called on the meeting to proceed to the presentation.

Establishment of the R1bn Guarantee Fund: briefing
Mr Neville Chainee, Deputy Director General: Department of Human Settlements, noted that a Guarantee Fund team had been established. Its members were present: Mr Samson Moraba (CEO) and Mr Sydney Mutepe (Equity Manager), from the National Housing Finance Corporation and Mr Sindisiwe Ngxono, (DHS Chief Director, Housing Equity). They were there to respond to the Committee's questions.

Mr Chainee said the R1bn Government Guarantee Fund would develop and implement mortgage insurance in order to facilitate an increased supply of affordable housing finance which was one of government’s priorities. In the 2010 State of the Nation Address, President Zuma had announced the establishment of the fund aimed at those people who earned too little to qualify for a normal mortgage loan but whose income was above those qualifying for government subsidies. Such persons fell into what was normally referred to as the gap market with income levels of between R3 500 and an upper limit of R12 500 as set by the banks. The guarantee fund was aimed at addressing their housing needs. The Minister of Human Settlements and the Minister of Finance were promoting this initiative to attract the private sector to assist citizens and households with access to home loans. This 'Finance Linked Individual Subsidy Programme' commonly know as FLISP, would thus be responsive to affordability challenges faced by the target market and reduce the qualifying income bands and make available Long term Fixed Interest Rate Capital. Thus a person could access a fixed interest rate that would not fluctuate over time and this would give working families certainty about their commitments in terms of the home loan.

Defining Mortgage Insurance, Mr Chainee said that it facilitated access to affordable housing finance by offering protection against default risk to the lenders, thereby stimulating market confidence in the human settlement finance market. This affected the whole market mechanism and market players' response to the increased demand for homeownership. The perception was that the fund was about banks and developers but he reiterated that it was ultimately about utilising the Guarantee Fund to assist individual households with the income levels identified. The proposal was supported by international findings and was consistent with international best practice.

Besides its aim of accommodating people whose salaries were too high to get government subsidies, but who earned too little to qualify for bank home loan, other policy objectives were to:
• reduce monthly instalments progressively
• create opportunities for households to buy homes much sooner
• ensure better risk management of high-ratio lending
• enhance the housing finance system
• increase efficiency of secondary markets and attract institutional investors in the housing finance market
• create housing related construction jobs towards 2014 and beyond.

Mr Chainee continued by identifying critical success factors. These were:
• developing a coordinated regulatory framework (the Fund was located in the National Treasury and required South African Reserve Bank recognition of mortgage insurance and the involvement of the Financial Services Board (FSB) on mono-line and risk capital rulings).
• strategic business development (targeting strategic bank partners, linking to housing development projects and active business-to-business relation building).
• demonstrate the value of mortgage insurance to the South African market (via results with strategic bank partners and the link to liquidity funding/securitisation).

Mr Chainee emphasised that the key success factor for the department would be how many households were impacted by the Fund. In terms of the implementation of the Mortgage Insurance Fund it was envisaged that by November it would be approved after consultation with National Treasury and the FSB.

National Housing Code 2009
Mr Louis van der Walt, DHS Director: Human Settlements Policy Development, thanked the meeting for the opportunity to introduce the new code and said it was an exciting document with flexibility built into it which was flexible in design as well. It was available in hardcopy and electronically on the department's website.
By way of context and to answer the question 'Why a Code', he stated that Section 4 of the Housing Act, 1977 required the Minister to publish a Code that contained the National Housing Policy and procedural guidelines for the effective implementation of the policy. A copy must be provided to provincial governments, municipalities and also the relevant parliamentary committees. The Minister also had to publish a revised Code when amendments were effected.

Under the provisions of section 12 of the Housing Act, 1997, the Minister of Housing was tasked with negotiating the apportionment of the annual national budget for housing purposes and allocate funding received from Treasury to the nine provinces. He emphasised that Housing Grant Funding may only be administered in terms of the provisions of approved National Housing Programmes, as contained in the code. It was thus a legal document and was treated as such by the courts. The previous code had been published in October 2000. Since then there have been various policy enhancements and amendments and the revision of the Code was mandated in 2005.

Giving an overview of the Code 2009, Mr van der Walt said that it was aligned to the 2004 Comprehensive Plan for the Development of Sustainable Human Settlements ("Breaking New Ground"); it had a user friendly format with each programme a complete unit and thus there was no need to cross-reference; it contained prescripts only as required by law; the discretionary guidelines provided maximum flexibility. The Code’s redevelopment had been subject to broad and intensive consultation and participation.

In terms of the user-friendly structure of the Code, Volume One provided a birds eye view and simplified guide to policy and housing programmes and a summary of the White Paper on Housing. Volume Two was comprised the Technical Guidelines Section which included ministerial norms and standards, qualification criteria, environmental guidelines; variation manual for subsidy amount adjustments and a monitoring and evaluation section. Volumes Three to Six comprised the National Housing Programmes, grouped into the four intervention themes of financial, incremental, social and rental and rural interventions. The standard lay-out of each programme looked at simplified policy prescripts, financial directives, roles and responsibilities and discretionary implementation guidelines.

The Programme under review was the Finance Linked Subsidy Programme (FLISP), which was being done in collaboration with the Banking Association of South Africa (BASA). This aimed to address the current market trends, the level of capital subsidy required, the income limit which was currently set at R7 000, the number of subsidy categories, the pre-emptive right clause was being re-negotiated from eight to five years hopefully, the contribution requirements which was a deposit which might defeat the purpose of the subsidy and a 'claw back' clause where penalties were imposed if the property was sold before the stipulated period. Alternative options to the 'claw back' clause had to be looked at.

Programmes under development were the Inclusionary Housing Programme which provided for a certain proportion of housing projects developed by the private sector to be set aside for affordable housing through a voluntary deal or by a legislative requirement. A rural individual housing subsidy voucher scheme had been finalised but not implemented as yet and the Department was reconsidering its options in this regard.

The three core National Housing Programmes for future housing delivery were the Integrated Residential Development Programme (IRDP), the Upgrading of Informal Settlement Programme (UISP), and the Social/Rental housing Programme.

Integrated Residential Development Programme (IRDP)
In the IRDP the focus was on social, economic and spatial integration which provided a vehicle for inclusionary housing from low to high income ownership and rental options and was government's contribution to integrated development which included the financing of a variety of land uses such as schools, clinics and parks. Here government would buy the land, install services and provide top structures for subsidy qualifiers and sell off properties to the gap market and higher income earners.

One of the problems identified with FLISP was the fact that one could not find a property in the market or a stand at a reasonable price and there was a need to provide for the gap market. The Department wanted to take a holistic approach and not to focus on creating subsidy islands but on an area-wide planning model based on community needs. There was also a move away from the previous approach where beneficiaries were identified beforehand to one where beneficiaries would be identified after housing construction commenced which simplified beneficiary administration and problems such as missing beneficiaries. A successful example of IRDP was Olievenhoutbosch in Gauteng completed with Absa Devco.

Upgrading of Informal Settlements Programme (UISP)
Mr van der Walt stated this was a priority area for government and that the Upgrading of Informal Settlement Programme (UISP), was the government's commitment to achieving the UN Millennium Goal of improving the lives of 100 million slum dwellers globally by 2020. In situ upgrading was the fundamental principle for this programme as preserving survival networks in communities was vital. Where this was not feasible or desirable, communities would be resettled using the Emergency Housing Programme. Emergency interventions such as basic sanitation and water were provided in the first phase with permanent services to follow. A serviced site was provided for each individual and a choice of housing tenure options including social housing, rental and option-to-buy, were available under other programmes. Resettlement assistance was provided. Community participation played big role and community facilitation was funded with 3% of the project costs set aside to ensure that the community participated in all aspects of the process.

Social Housing
This programme provided for substantial capital investment by the state to create rental units. The programme was financed via support from social housing institutions that must be accredited by the accreditation authority recently created by the Department. The programme only applied to areas in restructuring zones identified by municipalities and where there were key redevelopment programmes. It aimed at the refurbishment and conversion of existing buildings into decent living conditions and also new buildings within the identified restructuring zones. It allowed for maximum cross-subsidisation from higher /middle income earners to support lower income tenants. The programme would be supported by legislation for accreditation of institutions through the Social Housing Regulating Authority (SHRA) which would also be able to facilitate projects. Examples of such projects were Kliptown (which was close to transport facilities which reduced travel costs and was near to commercial nodes for job opportunities), Cato Manor in KZN and Europa House in Johannesburg KZN. Mr van der Walt noted that it was more expensive to convert a building than to construct a new one.

Community Residential Units
Government has also looked at its own rental stock of hostels and the Community Residential Units programme has replaced the former hostel redevelopment programme. It aimed at providing secure, stable and affordable rental tenure for the lowest income persons. Thus in the Cape there have been renovations and upgrades to the former hostels such as the Hostel to Homes conversion project in Nyanga. The households targetted were the poorest of the poor. The programme applied to hostels and the balance of the public rental stock that could not be sold.

Other programmes in the Code
Individual subsidies were there for people to acquire existing properties or to buy a serviced site. Rural housing was provided, emergency housing for disaster victims and eviction casualties, rectification of stock built before 1994, basic social and economic facilities, a consolidation subsidy, an Operational Capital Budget Programme, an Enhanced Extended Benefit Scheme and for the Housing Chapters of Integrated Development Plans.

A new programme was the Farm Residents Housing Assistance Programme which had been approved in 2009. It was a flexible approach which aimed at assisting persons classified as labour tenants to access housing subsidies. The programme was built around the farmer as the implementing agent and it did not impact negatively on the rights of the farmer and the tenants on the farm.

Mr Z Mlenzana (Eastern Cape, COPE) expressed his appreciation to the Department for the presentation and for receiving copies in advance. Referring to one of the objectives of the R1bn Guarantee Fund which as increasing the subsidy quantum, he suggested that this objective should be seen as a work-in-progress given the current financial constraints in the country and globally. He wanted more clarity on the policy objective of reducing monthly instalments progressively. He also wanted to know at what level risk management would be located, cascading downwards from national, provincial and local level. In the second presentation on the National Housing Code, he asked how the Rural Individual Housing Subsidy Voucher Scheme linked to the R1bn Guarantee Fund. He regarded the IRDP as a cornerstone of the department's housing programmes and wanted the presenters to elaborate on the FLISP. He was positive about the Community Residential Units programme and felt conversion programmes such as Hostels to Homes were very good. Using Nyanga as an example, he wanted to know where the incumbents were housed during the conversions and if they received the same units back.

Mr H Groenewald (North West, DA) expressed his concern about fixed interest rates and wanted to know how it would be managed in the long run. He was especially concerned about the rural areas, which were most disadvantaged and asked how people there would benefit. Noting the new products put in place by the Department and the oversight visits undertaken by the Committee, he wanted to know the projects that would be undertaken for low cost housing and how these projects would be monitored for quality control as well as the other core programmes. Where would the launch of the programme take place? He requested more information on the emergency housing programme and how quality would be ensured in such housing. His last question was about curbing fraud, given the substantial amounts involved and he asked if tenders would be awarded again.

Mr Jacobs asked what differentiated the Guarantee Fund from the RDP, a bond and what was the ceiling people would qualify for. He wanted to know how far the Department was in achieving the Millennium Goals. He also wanted clarity on the subsidy municipalities could apply for and for what it could be used.

Ms Themba welcomed the presentation but said she had difficulty in assimilating the content and that she would have a problem in making the information accessible in her constituency. She was concerned that most of the examples given such as Kliptown, were from major urban areas and none were from rural areas and provinces such as Mpumalanga. She said that the provinces should own the document and should understand how communities would be able to benefit. She wanted to know how the Department had established that the current subsidy was inadequate. Practically speaking, how much would a person earning R3000 have to pay monthly for housing?

The Chairperson expressed his appreciation to the Members for their questions and said there was sufficient time to handle all questions.

Mr D Feldman (Gauteng, COPE) referred to the Programmes Under Development in the National Housing Code and asked for clarity on the Inclusionary Housing Programme which provided for a proportion of housing projects developed by the private sector being set aside for affordable housing. On the IRDP he wanted clarity on the scope for financial sector participation through the Finance Linked Individual Subsidy Programme (FLISP).

Mr M Jacobs (Free State, ANC) remarked on the Hostels to Homes programme and the examples from Cape Town which he said were not the only hostels that required conversion.

The Chairperson thanked the Department for the presentation which he found very affecting. He expressed his concern that properties in Cape Town beachfront were allegedly owned by foreign nationals and that many people were still disadvantaged in terms of land ownership in the rural areas. Where traditional leaders owned some of the land, people could not access finance from banks and this negated the success of the housing programmes. He wanted to know the achievements of the previous housing code as it would be useful to assess before proceeding with the new code. In the Programmes under review and elsewhere, he was concerned that subsidies were seen as not adequate in some instances, as this was contradictory. Under Programmes under development, he was concerned about the Rural Individual Housing Subsidy Voucher Scheme and what measures would be put in place to prevent it being abused and mismanaged. He used the example of the RDP houses where the lack of proper monitoring had resulted in the wrong people benefiting and the system being abused. He also noted that there were problems when traditional leaders were not taken on board in projects. He mentioned the Millennium Goals and related it to the Western Cape programmes and the recent ‘exposed toilets’ controversy there. He also raised the issue of foreign nationals occupying dilapidated buildings.

Mr Chainee responded to the question on the housing code and stated it had been adopted and implemented in 2000 and that in 2009 it had been revised, adopted and reconstituted. Housing was a concurrent function of the National Department and provincial departments. The National Department provided the policy framework and the policies and programmes of which there were 37 in the housing code. How these programmes were prioritised was a provincial determination and it was the prerogative of the provincial MEC for Housing to prioritise its needs appropriately. For example if the province was predominantly rural, it would prioritise programmes that would promote sustainable development of rural households. While the example for Hostel to Homes conversion was from the Western Cape as it had been prioritised there, it was possible elsewhere.

In relation to the gap market, Mr Chainee said there were two definitions. The housing code spoke of R3 500 to R7 000 and this was where the FLISP operated. However in the private sector financial market, the gap market was defined as the R3 500 to R12 500 bracket based on what people could afford. One of the big issues in the subsidised sector was the fact that it was difficult to find a house that cost less than R300 000. To secure a home loan of R300 000 would require a salary of R10 000. The subsidised house was estimated to cost R110 000 and one could not find a house for R180 000 and this was where the intervention was required. The mortgage guarantee was aimed at providing people with opportunities to access housing. The R1 billion was a proposal that still had to be finalised.

On long term fixed interest rates, Mr Chainee replied that it had to be carefully orchestrated and one had to be careful of Reserve Bank regulations and the stability of the financial sector. He assured the Committee that the Informal Settlement Programme for in situ upgrading provided a decent and acceptable level of development and infrastructure and he suggested the Committee make an oversight visit to inspect some.

Mr Samson Moraba (NHFC CEO) stated that every intervention had the household’s interest at heart and working partnerships with the banks, using instruments such as the Guarantee Fund, had that goal in mind. The fixed term interest rate was promoted as households liked certainty. Household commitments determined if they could afford 25% or 40% of their income for housing. Due to the volatility of the market, banks made use of hedging and the interest rates would remain the same for the end user. The FLISP was there to facilitate affordability and he noted that it was under review. In the short term the R1bn Guarantee Fund was there. Banks did a risk assessment when one applied for a mortgage loan and if you did not qualify, the loan would be guaranteed and whatever portion was outstanding in the worst case scenario, it would be insured and the bank would lose nothing. The interest rates would be different if the person went on their own and depended on the risk profile of the person, but it would still be reduced. He pointed out it was a work in progress and there was still much consultation to be done but the end user’s interests were the chief concern.

Mr Sydney Mutepe (NHFC Equity Manager) responded to the question on better risk management and said that the challenge for the financial sector was that high risk loans were difficult to underwrite. The introduction of a mortgage insurance fund for high risk loans was a major undertaking. The standardisation of current processes and criteria was to ensure that if there was a change in the market conditions, it would not adversely affect the gap market. A secondary function was a custodian role and to streamline the process of accessing loans.

Mr van der Walt apologised for the style of the presentation and suggested that the Committee arrange a one day workshop on the details of the various programmes. The individual voucher scheme meant that the credit mechanism was issued in voucher form with a subsidy value of R66 000 as its top limit and it was meant for the erection of the top structure.

FLISP had a maximum subsidy of R55 000 and was for persons earning between R3 500 and R7 000. The affordability structure published by UNISA some time back on what percentage of disposable income a person required for housing provided a bleak picture and that was why it was necessary to look at the quantum of the subsidy.

He reiterated the point made by Mr Chainee that programmes in the housing code such as hostel conversion and social housing were nationally available and there were examples in Witbank, Mpumalanga.
On the question of quality there were mechanisms in place to ensure quality control and there were municipal and provincial inspectors. One had to accept that some developers would take chances. The normal guarantee for structural defects was five years and all projects carried a guarantee for defects.

With regard to the launching of the programmes, they had been approved by the Minister in February 2009 and programmes that were subsequently developed would not be in the code but as soon as they were approved, they applied.

On the question of Emergency Housing, it was governed by norms and standards built into it for the provision of temporary units and they came in kit form that could be assembled and dismantled as required.

With regard to fraud and corruption, Mr van der Walt stated that tenders were applicable at all interfaces and fair and open tender processes were applied but the Department was not the policing authority and the Auditor General was responsible for this function. Value for money was a goal of the Department but advance payments was something that could not always be controlled and there were other structures to see that people abided by the rules.

The gap market had been defined by Mr Chainee but it was a debate that was ongoing and difficult to define exactly.

The answer to the question on the voucher scheme implementation in the rural housing loan fund programme was that it was not structured adequately to be ready for implementation and it has been decided to defer its implementation until the outstanding problems were resolved.

On the question of the spatial framework, all programmes had to be in accordance with approved IDP plans and the MECs would not approve projects which did not comply,

The Millennium Goal referred to 100 million people worldwide by 2014 and South Africa had to assist 400 000 people to reach its Millennium Goal.

With regard to the housing chapters, municipalities apply to the provinces for the establishment of a housing chapter to develop a housing development plan and once it has been passed, it became an official document.

With regard to the slides such as Kliptown, Mr van der Walt said, unfortunately, he had no other slides available.

On social housing, Mr van der Walt said it created rental opportunities but in smaller townships people wanted ownership.

The operational capital budget was there to appoint a core team with expertise such as engineers to assist in projects to make them work.

The farm residential scheme was available if the provincial MEC had prioritised it.

Under the USIP, up to 3% of project funding could be utilised to organise the community, to resolve disputes and facilitate participation in sustainable living developments,

On the international ownership of properties in Cape Town, he said the Department concentrated on low cost housing and not the high-end market.

On the question of land ownership in the rural areas and its ownership by traditional leaders, he noted that the tribal authority determined who could occupy the land but that all the land was owned by the state. The Communal Land Rights Act was currently being amended.

On the link between the old and new National Housing Code, Mr van der Walt said that it had not changed fundamentally and the new code made projections for the future.

He was aware of the risks in the Rural Housing scheme and risk mitigation strategies had to be implemented. It could be implemented as a pilot phase and then implemented nationally. If people used the money for something else in the first phase and sold the material such as cement, then they would not qualify for the second phase.

He clarified that there was no real demand for integrated development in the rural areas and traditional leaders were not linked to the IRDP.

Mr van der Walt said that there should be gatekeepers if there were problems with foreign nationals but community liaison and facilitation would assist in regulating what was happening. The Department of Home Affairs could assist as well. Foreign nationals might also not be illegally in the country and they had to be accommodated. The conversion process should not lead to eviction but rentals might differ.

In reply to Mr Feldman asking who would administer the R1bn Guarantee Fund, Mr Chainee said that the Fund was a joint venture with Treasury and it would be state managed and they had the expertise to do so.

Ms Themba requested that the Department supply information that was provincially based and supplied per province.

Mr Mlenzana asked about the availability of information to provinces.

Mr Chainee assured the Committee that the Department remained at the service of the Committee and that the information requested by the Committee would be supplied.

Mr Jacobs raised a point about a hostel that had been destroyed by fire in the era of resistance and asked if the municipality could secure funds for its conversion.

Mr Chainee replied that the municipality could submit a conversion plan and the provincial department would determine its execution in line with its priorities. He noted that hostels were a cause of concern identified by the Minister.

Adoption of Minutes

The committee approved the minutes of previous meeting.

The meeting was adjourned.


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