One Billion Rand Mortgage Default Insurance Fund update by National Housing Finance Corporation

Meeting report

Mortgage Default Insurance (MDI) update by National Housing Financing Corporation (NHFC)
Mr Neville Chainee, DHS Chief Operations Officer, introduced the presenter and stated that the Mortgage Default Insurance (MDI) fund was a key ground-breaking programme that would fundamentally change access to housing and mortgage financing for working class and lower-income families. The Department and the NHFC were managing the process.

Mr Samson Moraba, NHFC Chief Executive Officer, presented the update on the Mortgage Default Insurance programme which would be made available through South Africa’s major banks. Some of the MDI’s recent achievements were that it had been registered as a company and had received an agreement from one major bank for it to share data that would inform the MDI’s funding model. Some of the next steps to be taken in the short term were for the NHFC to select a service provider for the IT architecture plan by 30 November 2011 and to review the product description, based on lender consultation, by 15 December 2011. Master agreements with lenders would be finalised by 23 December 2011 and the MDI would continue with the application process for a license from the Financial Services Board (FSB) which it hoped to complete by 31 March 2012. In the medium term, the MDI would develop risk management, audit and monitoring process as well as sign an agreement with at least one major lender. The early pilot testing would begin once an agreement had been signed with one of South Africa’s major banks and a pilot project had in fact been identified. The launch of the test pilot project would be in July or August 2012. Longer term action to be taken included the implementation of business development and marketing initiatives by September 2012. The formal launch of the MDI Company was scheduled to take place by October 2012.

The MDI faced a few challenges which included the signing of agreements with all four of South Africa’s major banks and obtaining a license from the FSB by 31 March 2012. One of the major banks was currently standing on the side lines to observe the MDI before it committed to it. The concurrent approval of the allocation of the MDI capitalisation of R150 million and the issuing of the R1 billion guarantee for initial implementation of the MDI by the Minister of Finance was also a challenge for the MDI. The R1 billion guarantee was what would make the insurance of the MDI scheme more affordable than if reinsurance was sought from the private sector. The R1 billion guarantee “came at a price” however.

Discussion
Ms G Borman (ANC) thanked the NHFC for its clear presentation and appreciated that the targets of the MDI had been measurable and therefore would enable the Committee to play its oversight role.

Ms Borman asked what the intended scale of the MDI would be.

Mr Moraba replied that the number that the NHFC was working with was the same as that that had been identified by the banks, which was to support loans for 600 000 households. The first phase of the MDI implementation, which would be backed by the R1 billion guarantee, would deal with 125 000 of the 600 000 affordable houses. A R3 billion guarantee over the next three years would be needed for the MDI to back bank loans for 325 000 households. In dealing with the banks, the NHFC had realised that its assumption that each of the four major banks could deal with approximately 2000 loans per month had been wrong. It had instead been found that the volume of house loans processed by each bank was closer to approximately 900 per month.

Mr A Figlan (DA) asked if an individual who earned R15 000 per month would qualify for assistance from the MDI. Currently people earning between R3500 and R12 000 a month would qualify for a house loan through the MDI.

Mr Moraba replied that the qualifying amount for a house loan would have to be adjusted each year according to the inflation rate. The amount could not remain fixed over a number of years. Anyone who earned amounts outside of the range of R3 500 and R12 000 per month would not be considered in at least the first two years of the implementation of the MDI.

Ms J Sosibo (ANC) asked who the underwriters of the MDI were.

Mr Chainee replied that the State – and the R1 billion guarantee that it would be providing – was the underwriter of the MDI.

Mr B Steyn (DA) stated that he was disappointed with the time frames presented by the NHFC as the MDI had been announced in the Budget Speech almost two years. When a programme or project was announced in a budget debate it was expected that its implementation would follow in the coming months but this had not been the case with the MDI. By the time the MDI was implemented, it would be two and a half years since it had been announced.

Mr Chainee replied that the Department had been mindful of the delay of the MDI’s implementation but that it had had to be set up in a way that was sustainable. Everyone should be aware of the financial and National Treasury regulations that had had to be put in place. The Department could assure everyone that the MDI would be sustainable and had a strong foundation. The time delays could have been shortened but a certain degree of care had to be taken in launching the MDI.

Mr Steyn said he was concerned about the supply-side of the MDI scheme, especially in the context of the current recession. Was there a market for the MDI in the current “double-dip” recession? Ways of stimulating the supply-side of the MDI scheme needed to be found if it was going to be a success.

Mr Chainee replied that there was indeed a recession but that there was a need to be optimistic about the future. South Africa was a growing country and seven of the fastest growing economies in the world were in sub-Saharan Africa. There might be issues around employment and sustainability but the Department needed to supplement government’s emphasis on job creation and economic growth. South Africa had been dealing with a financial system that had not been responsive to poor and working class people. The MDI was a response to that.

Mr Moraba addressed Mr Steyn’s concern about South Africa being in a recession saying that the NHFC was using a “multi-pronged” approach. The purpose of MDI was to provide access to home loans but the NHFC was aware that, because of the recession, affordability was still a challenge for households. One of the instruments that was being used to complement the MDI programme was the Finance Linked Individual Subsidy Programme (FLISP) which aimed to improve affordability for the end user. The NHFC had begun to ensure that the Government Employee Housing Scheme also became a facilitator for the MDI. Once developments for public servants had been identified and located, insurance would be needed for all the public servants who had been provided funding for housing purposes. This stimulated the supply side in the sense that development projects were being driven by the government. Project developers could be given the assurance that there would be a demand for houses and that the loans taken out to purchase those houses would be insured by the MDI.

Mr Steyn asked if there was a disjuncture between the aggregated data that had been received from the South African Reserve Bank and the “real data” received from the bank that had agreed to share its data with the NHFC.

Mr Moraba replied that the possible disjuncture between the aggregated data and the “real data” was still being refined by the NHFC but that he did not think there would be a huge disjuncture between the two.

Mr Steyn said that if the MDI ended up being too costly then it would not work. Could the presenter provide a practical, real-life example of how the MDI process would work? What process would follow for example once a person earning say R10 000 had found a house to purchase? Once the application had been approved and the person got into trouble, how would the guarantee kick in?

Mr Siegfried Mogane, Head of the MDI Project Management Office, NHFC, attempted to answer the question as simply as he could using hypothetical calculations. Consider a consumer who had found a house to buy to the value of R300 000, and took out a loan for R290 000. The consumer would take out cover for the value of R290 000. The premium might be R15 000 which would be a once-off amount over the life of the loan. This amount could be paid in two ways. It could either be added to the loan amount that was paid to the bank or the consumer could pay cash for it. If the consumer were to default after five years and the house had to be repossessed by the bank – which would be the worst case scenario – then the MDI would only cover the loss suffered by the bank after the bank had sold the property. Repossessing someone’s house was the last resort.

Mr Steyn requested the opportunity to seek clarity on what had been said by Mr Mogane. It was the consumer who paid for the insurance on his house loan granted to him by the bank but, when the consumer could not afford to pay the bond anymore and the house was repossessed by the bank, then the bank was covered for the shortfall but there was no benefit for the consumer to be derived from his insurance and the consumer would still lose his house. Given the fact that the banks were the ones that would be covered for any loss, should it not be the bank that paid for the default insurance? Indeed the insurance would make the bank more willing to lend the consumer the money to purchase a house, but ultimately the consumer was paying to protect the bank from its loss while the consumer would end up without a house.

Mr Moraba replied that this was what the insurance business was all about. The challenge that NHFC had with this was that it wanted to make it possible for the bank to lend in a market in which it was currently not lending. From the bank’s perspective, the lower income market was very risky and so it would have to charge to lend in a riskier market. Without the MDI, poor and lower-income households would not be able to purchase houses through a home loan from the bank because of the higher interest rate charged to them by the bank (to compensate for the greater risk associated with lending to a lower-income household). The MDI gave lower-income consumers the opportunity to qualify for loans that they would not otherwise qualify for. This was where the MDI added value. Over time, the NHFC would engage with the bank on it being “more humane” when it repossessed a house. People should only lose their houses after the bank had done everything within its power to seek an alternative solution. As a public entity the NHFC was mindful of the norms it set.

The Chairperson replied that this was the reason it was important for the National Treasury regulations on this to be strengthened.

Mr Moraba replied that the financial industry was entering into a better situation in terms of regulations. Currently, National Treasury was trying to split the issue of regulatory supervision of financial institutions and how these financial institutions actually behaved in the market in dealing with households. The FSB was moving more towards considering how households were treated by financial institutions. The behaviour of banks would be kept more in check by the FSB in the future.

The Chairperson said that a session with the FSB would be scheduled to discuss regulatory supervision.

Mr Steyn referred to the pilot project saying that a number of years would be needed to test the results of the MDI. People would not generally default on their mortgage payments within six months of receiving a bond for their house but would more likely default after five or ten years, at which point the MDI could only be tested

Mr Steyn asked over what length of period the MDI capitalisation of R150 million would be spent. The cost of marketing the MDI should be kept as low as possible.

Mr Moraba replied that the spending of the R150 million would be split into three components. The first was for “the development side” which was a once-off expenditure for the initial start-up. The second was for the integration and implementation of the system for which approximately R40 million had been budgeted.

Mr Steyn asked what the NHFC had meant in its statement that “a guarantee came at a price”. As far as he understood it, there was no need for an immediate “handover” of R1 billion as the money would be drawn on only as and when it was needed. It did not necessarily need to be in the bank but all that the NHFC needed to know what that the money would be available from the National Treasury when it was needed. Was Mr Steyn mistaken about this?

Mr Moraba replied that the R1 billion guarantee did not come for free. The price was low but the NHFC needed to know what the price was. The NHFC believed that the price was less than what it would have to pay if the guarantee were to be provided by the private sector.

Mr Steyn asked what “special” IT architecture was needed for the MDI. What specific and novel IT structure was needed for the MDI? Mortgage guarantees already existed in the market and so the wheel did not need to be reinvented.

Mr Moraba replied that a relatively sophisticated system was needed to process applications for home loans through the MDI. It was true that systems were already available – NHFC would not be developing a system from scratch but would need to adapt a system to its specific needs.

The Chairperson stated that the MDI should be widely marketed and that engagement with citizens on the MDI should be done in an inclusive and meaningful way. What plans were in place to do this?

Mr Moraba replied that consumer education was critical and that it was true that it needed to be started early. Consumer education needed to be done at the level of the bank because that was where people went to apply for home loans. Pamphlets and other material should be made available at the banks. This had been part of the NHFC’s engagement with the banks. Consumers should be aware of what it meant to have their home loans insured.

The Chairperson replied that the Committee believed in genuine interaction with people and that it was not sufficient for banks to dish out pamphlets to people in a mall. Meaningful engagement with people through workshops should take place.

Mr Chainee replied that a substantial publicity and educational campaign would be implemented closer to the time of the launch of the MDI.

The Chairperson asked if the Department did not need a policy directive on the MDI?

Mr Figlan asked what happen in an instance whereby an individual took a bond out on a house for 20 years and defaulted on the mortgage after 18 years.

Mr Moraba replied that the residual balance of what was still owed to the bank in this instance would be minimal. The courts had ruled that in this kind of a scenario, the matter could not be determined by the bank alone but would have to be heard in court for a judge to rule on. The NHFC’s impression was that the value of the individual’s asset was much greater than what was owed by the individual. The owner had options at this point. Hypothetically, an individual could have only R5000 left to pay to the bank and the value of the asset could be a couple of hundred thousand rand. The matter in this instance would probably be resolved to the advantage of the household.

Mr Figlan stated that Servcon had been set up for defaulters and the right-sizing of houses. Considering there was a backlog in the provision of housing, how would the Department deal with a situation whereby 1000 people had defaulted on their mortgage payments and were about to be evicted? What would the Department do for these people?

Mr Chainee replied that this had been a Servcon programme. As the Department had indicated, “there was a basket of issues it was responding to”. The MDI process lessened the probability of default and so at some stage the necessity of the right-sizing response would need to be reevaluated. The right-sizing was a component of what the MDI tried to readdress.

City of Cape Town plans to address Scottsdene challenges: postponement of briefing
The Chairperson stated that the scheduled briefing by the City of Cape Town on its plans to address the Scottsdene challenges would not take place today as the City of Cape Town was not ready to make the presentation. The Chairperson received an email and phone call from the mayoral committee member on human settlements yesterday afternoon who said that they had not been informed of the briefing that was meant to have taken place today. They had only found out about the meeting on Tuesday 22 November 2011 and asked for the briefing to be rescheduled. The National Department of Human Settlements (NDHS) should have informed the Province about the meeting who should have in turn informed the municipality. It was unfortunate that this had not happened and the NDHS was asked to shed light on what the problem had been. The City of Cape Town would however be called to present to Parliament to address the Committee on Scottsdene challenges before the end of the current parliamentary term as the matter was a critical one.

Mr Neville Chainee, NDHS Chief Operations Officer, replied that when the notice for the meeting had been received from the Committee Secretary, the Department had dispatched it to the Province and requested that the Province, in conjunction with the City of Cape Town, coordinate the presentation. It appeared that the presentation was being coordinated at an official level and that there had been a lapse of communication between the City of Cape Town officials and the member for the mayoral committee.

Committee Matters
The Committee briefly discussed plans for its oversight visit between 27 November 2011 and 2 December 2011 in the Eastern Cape. The Committee had also hoped to visit the Western Cape but this had been postponed as the Committee Report with its recommendations was still sitting in the Committee Section and had not been received by the Western Cape. It would therefore be unfair for the Committee to expect to follow-up with the Western Cape on recommendations that it had not even received.

The Committee would split up into two groups at some point in the oversight tour so as to get as much information as possible about what was taking place on the ground. One group would be lead by the Chairperson and the other by Ms Sosibo.

The minutes for the meetings of 19, 20 and 26 October 2011 were adopted by the Committee.

The meeting was adjourned.