For years, the nascent mortgage sector was being primed to become a viable player in the economy, but it remains in its infancy. One year ago, Osama Saleh became the chairman of the Mortgage Finance Authority (MFA) after an extensive career in the banking industry. He spoke to Niveen Wahish about making mortgage financing a commonplace practice It has been five years since the mortgage law was issued, why hasn't mortgage finance taken off as expected? Since 2001, a lot of infrastructure work has been taking place. The mortgage industry is one of the largest industries in any economy, and is a big contribution to the growth of the economy. Mortgage is like a culture, more of an educational process; people need to be well informed about mortgage and its benefits. The market itself needed a lot of tools; completing the infrastructure was not an easy task given that it requires skilled people who are knowledgeable, experienced, very specialised and professional in all aspects of this industry. As a first step, we needed to train appraisers who are the cornerstone of the whole industry. Those are the people who evaluate property upon which basis a decision is taken to give the mortgage or loan for the unit or property. Then there are the mortgage agents who facilitate the process for consumers, starting from the selection of property that matches their income, and ending with finalising the deal with the financing agency -- whether it's a bank or a mortgage finance company. Then there is the third party providing insurance. Insurance companies are extremely important for this industry, and many new insurance products needed to be introduced for this system to work. We also needed to have the credit bureau system in place, whereby you have a score for everyone to better enable you to take the right decision when granting credit. Another main component of the whole set-up is the foreclosure, whereby the lender is allowed to terminate the borrower's interest in a property after a loan defaults. When the process is completed, the lender may sell the property and keep the proceeds to satisfy the unit's mortgage and any legal costs. Any excess proceeds would be returned to the borrower. Under civil law, this process did not exist, which led to excessive risk on the part of the lender. In 2001, when the People's Assembly approved the mortgage law, it gave a new quick set-up of procedures that would facilitate foreclosure. In 90 days, the financier (bank or mortgage company) could have the foreclosure completed. Putting this infrastructure in place needed a long time. Awareness is another big challenge; we are now trying to reach people in different ways. We believe the Mortgage Finance Authority (MFA) has now completed the right set-up for the market, and that it has the means and tools to protect the rights of all stakeholders. It is the right time for mortgage financing to move forward. What are the targets now that the infrastructure is there, particularly since only LE350 million in loans have been given out? As the regulator, my main concern is how to regulate the market, educate the different market players and protect the rights of all participants. This will definitely be rewarded with new investments in this industry, which will lead to the market growing in the direction we want. One of our main targets in the coming period is to expand the number of institutions operating in the mortgage industry. How does the mortgage sector in Egypt compare to other countries? We are still at the very initial stage; mortgages barely represent a half per cent of GDP. In the US, it is over 65 per cent of GDP. In Europe it is about 45 per cent on average, while in the United Arab Emirates it's 14 per cent of GDP. In Egypt, we have a mortgage industry but not in the formal sense. People were used to obtain their financing from banks or from developers over five to seven years at most, and mortgages extending to 20 years were non-existent. High interest rates are an impediment to the growth of the mortgage market. Do you agree? Interest rates are governed by Central Bank policies, and it is not in the hands of any party to change them. In the past, banks and companies were charging high interest on housing loans, given the absence of long-term benchmarks on which to price their loans and the short-term nature of their deposits. Interest did not reflect the real interest rate situation of the country, and the risk they were taking was incorporated into the interest rate they were charging. Today, they can charge interest of 11 or 12 per cent and still make acceptable profits. How will banks or mortgage finance houses have access to resources which they can lend for long-term periods. And how will securitisation play a role in providing such long-term resources? Recently, we established the Egyptian Mortgage Refinancing Company, which will be serving as the market maker and provider of long-term funding for banks and mortgage finance companies. It will specialise in refinancing the portfolios of banks and companies, and will provide them with loans up to 20 years at the real market interest rate. This is a source of long-term funding, and will provide a benchmark for pricing long-term funding. It will be owned by those who operate in this business. This company, which boasts a capital of LE212 million, is so far 20 per cent owned by the Central Bank of Egypt, two per cent owned by the Guarantee and Subsidy Fund and 17 other banks. Taamir and Masrya, the two existing mortgage finance houses are also shareholders, while International Finance Corporation (IFC) has also expressed interest in joining in. The company will receive LE213 million in the form of a loan from the World Bank, repayable over 20 years. As a second step, the company will be involved in the securitisation process, possibly through the creation of a specialised subsidiary. What are the persisting challenges? Although they may not be directly related to mortgage, there are areas that still need to be worked on. Registration, for example, is important for the whole process. The fees were slashed to the mere cost of the service, which is not more than LE 2,000 per property. In the past, it was 12 per cent of the value of the property, then it was cut down to six then three per cent, and now it has been lowered altogether. We are also working on simplifying registration procedures with the concerned ministries, in order to increase the supply of registered units. Is the market small because the number of registered units is small? No, the market is small because the unit that an individual is interested in buying does not necessarily have to be registered. What is most important, is that there is nothing to prevent the unit from being registered. Is there a limit to the amount of financing that any individual can receive? Their monthly installment must not exceed 40 per cent of their income. However, provided the individual could afford it, there is no limit on the value of the unit they are applying for. Don't forget that the mortgage finance law is not limited to housing units only, but applies to renovating houses, building hotels or administrative building, or buying a store. What is the function of the Guarantee and Support Fund (GSF)? Where does it get its resources? The fund performs a guarantee function for the whole sector. If somebody defaults, the fund pays three installments until foreclosure or the individual resumes payment. GSF also offers support to low-income individuals in the form of a non-refundable grant, as long as the buyer does not sell the unit in the first five years. An individual is eligible to receive subsidy once in a life time, provided his annual income is LE12,000 if single or LE18,000 if married. The individual receives 15 per cent of the value of the unit, with a maximum of LE10,000. This is normally intended for units measuring 85 square metres and a value of no more than LE75,000. This support helps ease the burden of the value of the unit. In the past 10 months, the fund has completed selling 300 units in Qatameya and is now offering 3,779 units in different areas for sale. Its total contribution to these units is estimated at LE25 million. GSF is funded by one per cent of installments from finance houses and individuals, as well as allocations by the government. MFA website: www.mf.gov.eg and a hotline (536- 6022) staffed to answer questions 12 hours a day, six days a week.
