Recent amendments to the executive regulations of the mortgage finance law may be a step towards its full utilisation. Yasser Sobhi reviews recent developments "2005 will be the mortgage finance year," Mahmoud Mohieddin, minister of investment, recently proclaimed. "We will see a significant amount of mortgage finance transactions during the next few months that will move the market." Since the introduction of the mortgage finance law in 2001, only two mortgage firms have been established in the market, in March and October of last year. The first company, Al-Taamir, has only offered a dozen loans during that period, and the other company, Al-Masriya, has made less than five loans. Both are now involved in projects with the "New Urban Societies Authority" to partially finance the acquisition of new housing. There are a few other banks which include mortgage financing within their personal finance activities, but the number of loans provided is still paltry. However, the Egyptian Arab Land Bank has announced the preparation of its first securitisation transaction to its actual portfolio, for an amount of LE500 million that will be used for new mortgage loans. The bank has also established a new holding company that allows expanding its activities in the sector according to the mortgage finance law. The mortgage finance system is considered indispensable in addressing the mismatch between demand and supply in the real estate market. Although there is a strong demand for housing, especially for new families, most of the needs go unfulfilled due to the lack of financial tools whereby a young couple could buy a new apartment without having to pay cash up front. Meanwhile, it is estimated that more than one million apartments are closed and uninhabited. The lack of financial intermediaries has made real estate developers keener to provide luxury housing and resorts targeting the rich. This has led to supply exceeding demand in this segment of the market. A mortgage finance market is expected to reduce these gaps. Three major problems stand in the way of the evolution of a badly needed mortgage system -- the lack of expertise in most of activities related to the system (loan officers, appraisers, monitoring the system, etc), a very complicated and expensive system of real estate registration, and the high cost of finance for both the borrower and the mortgage finance companies. "Since the beginning of our activities we have received more than 150,000 inquiry calls from the public on the opportunities available within the system, but we have only received 320 requesting files," says Magdeddin Ibrahim, chairman of Al-Taamir. "The main reason for the weak 'serious' demand is the high cost of financing in comparison with the low income level of the potential borrowers," he added. According to the law, the monthly instalment that the borrower is allowed to pay should not exceed 40 per cent of his income. The 14 per cent cost of finance that companies apply in the market make it impossible for a large sector of society to benefit from mortgage law. "At this cost, the borrower would pay almost three times the actual price of the apartment in 20 years," says Ibrahim. The new changes in the executive regulations for the mortgage finance law aim at increasing the base of beneficiaries from the system. Mortgage banks and firms are now allowed to set their own rules to define the borrower's overall income instead of only the original income. Mortgage finance will expand to include also buying lands, developing real estate and any improvement work related to existing real estate. The benefits from the subsidy fund are to include everyone whose annual family income is below LE12,000 for unmarried individuals or LE18,000 for married couples. But for other banks, the financing issues are not the main impediments for doing mortgage finance but rather the real estate registration system. "For our clients, financing costs are not a problem," says Frederic Coin, head of retail in the National Societé Général Bank. "If the registration system is reformed, the mortgage finance market will be taking off and will grow rapidly," he added. The registration of the real estate unit is a prerequisite to benefit from the mortgage finance. Though, only 12 per cent of real estate in Egypt is registered as people prefer to avoid the lengthy and costly process of registration. The official fees for registration were reduced last year from five per cent to three per cent of the unit price, but other fees add to the already expensive cost. The land registration is at the heart of the mortgage system, as it is the essential guarantee for financial lenders in case of investor default that leads to foreclosure procedures. "It is possible now to get loans to buy an apartment, but they are not real mortgage finance but rather a housing finance," said Allen Decker, chief of Party for the Egypt Financial Services Project, a USAID $32 million five-year project that aims to provide technical assistance to establish a developed mortgage finance system. He explained that the real estate unit should be the only collateral for the lending firm. "A true mortgage system encounters fewer risks for banks and mortgage firms, and cheaper costs for the borrower. It provides more protection and security for everyone, the lender and the borrower. There are now a lot of frozen assets in Egypt's real estate sector -- assets and resources that could be better used for the benefit of the economy," he added. The project is a cluster of programmes that address four major sectors. First, building capacities in the system through legal reform, technical training for lending, technical assistance to mortgage authority to create the inductive environment and regulate the market and to train and develop the human infrastructure and professionals related to the system. Second, to work with the government to improve the registration system. Third, to help the establishment of private sector credit bureau that reduce lending risks and therefore its costs. Finally, to develop commercial and financial instruments and registry components to increase financing opportunities. "People are in a rush to get the system working and are always asking about the number of loans. We have a master plan and are implementing reforms to build the infrastructure for the mortgage system," says Sameh El-Torgman, head of the Mortgage Finance Authority and former head of the Cairo and Alexandria stock exchange. "At the Egyptian stock market we worked hard under pressure for five years and are now enjoying the fruits. We are determined to do the same for the mortgage finance market. At the end of 2005 and the beginning of 2006, we will witness a big evolution in the mortgage finance in Egypt," he predicted.
