Will the new mortgage finance law make home ownership more than a dream? Niveen Wahish examines the prospects Among the many things one can aspire to, owning a decent home tops the list for many people. How about a garden, a pool where the kids can cool off during the summer and spacious rooms? Something approximating the slogans used to advertise new housing compounds such as "your dream home" and "life as it should be". But the fine print on those advertisements requires payment facilities, and tens of thousands of pounds in down-payment -- sums that are beyond the dreams of the great majority of Egyptians. We are not just talking about people typically expected to fall into the low-income category. Doctors, engineers and other professionals do not, for the most part, have enough cash for a down-payment for a regular-sized apartment -- let alone a house. The lucky ones are those assisted by their parents. In fact, those parents who can afford to, often buy apartments for their toddlers in anticipation of the day they will see them marry. Owning an apartment is central to any potential groom's eligibility. Abdel-Rahman Omar, aged 60, used to work abroad. When he married -- 35 years ago -- he took his young bride with him. Upon his return to Egypt a couple of years later, he had no where to live but his parents' home. He used the money he had saved to apply for an apartment that was yet to be built through a housing cooperative at the ministry where he worked. It was 10 years before he finally obtained the key to his new home. But it was nothing like he had expected. The apartment he had been waiting long years for looked like housing for the economically disadvantaged. He took it though -- he had no choice. The housing problem persists although it is not for lack of apartments. Thousands of apartments remain unsold -- their asking prices ranging being between LE250,000 and LE500,000. According to Essam Rashad, first undersecretary for housing and utilities at the Ministry of Housing, Utilities and Urban Communities, "One of the major problems facing individuals wishing to acquire homes is affordability." Maha Abdel-Razek, a banker with 16 years experience in the mortgage business in the United States, pointed out that some people can afford monthly payments, but are unable to put together the lump sum required for a down-payment. Others have the money in the bank, but do not want to invest it all in a house. In an attempt to address these problems a mortgage finance law was drafted and was passed by parliament in June 2001. The law is an attempt to address the lack of financing available to individuals and developers interested in investing in the real estate sector. It is primarily targeted at enabling individuals to obtain the long-term financing needed to purchase housing and commercial units, new and old, or even restore an existing home. Click to view caption "What is happening now with the new developments is that investors are the ones financing consumers. Units are paid for by instalment, typically following a substantial down-payment. The new law allows the developer to stay out of the business of financing. Instead, the bank and consumer work out financing arrangements. Under the new law, mortgage financing can be used to pay for up to 90 per cent of the price of a unit, while payments are not to exceed 40 per cent of the buyer's monthly income," explained Walid Gamaleddin, financial specialist and deputy head of the Capital Market Unit at the Ministry of Foreign Trade. Because the new law has not been implemented, banks continue to provide loans on terms that few can afford: down- payments are substantial and financing is extended for a maximum of 15 years. The new law, in contrast, allows for the repayment of loans over a 25- to 30-year period. Banks also currently require loan-seekers to put up considerable collateral. The new law provides for a mechanism by which the financier could repossess the unit -- something that was not possible previously. For repossession to occur, the investor is notified several times after which the registry office is then informed of the financier's claim. If the registry decides that the claim is legitimate, the unit is confiscated and a judge appoints a real estate agent to oversee the auctioning procedures. Before the auction two appraisers evaluate the unit taking into consideration its value at the time of purchase, the modifications made to it, the rate of inflation as well as the market value of similar units in the area or in similar areas. The real estate agent announces the terms of the auction within 15 days of the authorisation to execute by the registry office. The bank gets its money and if the value of the house has increased the defaulter also receives the difference between what the bank is owed and what the house was sold for. But those counting on the mortgage law to buy a home or move into a larger residence will have to hold their breath a little longer. To date if you head to any bank and request a mortgage you'll be met with amused smiles or you'll be told that the law is not yet in force. Mahmoud Mohieddin, chairman of the People's Assembly Economic Committee, is displeased by the unnecessarily slow pace of implementing the law. "Considerable effort went into the law -- the executive regulations alone were enormous. People's expectations were very high," he told Al-Ahram Weekly. This situation prevails in spite of the widely-held view that the importance of the law lies not only in the fact that it could enable people to acquire homes, but in its domino effect on the economy. The Ministry of Housing's Rashad estimates that around 100 economic activities are affected by the contracting sector. In fact, when news broke that the executive charter of the mortgage law was about to be issued back in December, the stock market responded favourably. "It [the law] will breathe life into the Egyptian economy," said Gamaleddin of the Capital Markets Unit, adding, "Mortgages could be the answer to the economy's troubles." The slowdown in the contracting sector began in 1996 and the sector came to an almost complete halt in 1999. "This sector pulls with it various industries ranging from cement, iron and wood, all of which come into play during the building process; to furniture, electricity and others once people move into the flats," explained Gamaleddin to the Weekly, adding that the US's economic boom in the 1990s has been largely attributed to mortgages. He added a word of caution, however, pointing out that "Mortgages are a double-edged sword: if they work, they can bring prosperity. If not, they have the potential to cause a disaster. One of the causes of the depression in the US in the 1930s was widespread defaulting on mortgage loans." According to the new law, financing may be procured through either banks or mortgage finance houses. Two mortgage finance houses are currently being established with the National Bank of Egypt (NBE) and the Housing and Development Bank (HDB) each in the process of establishing Egypt's first mortgage finance house. The first of these -- to be set up by NBE -- will include, as shareholders, five other banks and two insurance companies. The second company will include, besides HDB, six other banks as well as a number of contracting companies. Until these finance houses are operative banks are the public's only recourse. But banks are still in the process of setting guidelines for real estate financing. Central Bank of Egypt (CBE) governor, Mahmoud Abul-Oyoun, earlier this year spelled out directives setting limits on interest rates at a maximum of five per cent for mortgage lending and a maximum of seven per cent for lending to the contractors building housing units or tourism projects. According to statements by Abdel-Hamid Ibrahim, chairman of the Capital Market Authority and CBE board member, this translates into LE13 billion that could potentially be invested in this sector. He stressed that this sum does not include loans given by banks before the new law was issued. Although banks have money, they claim that lending it for periods of 20-30 years is unfeasible. Hassan Abdallah, a banker, said banks have to study the best means of securing long-term financing. Such financing could be procured through securitisation: the process by which mortgage-backing bonds are issued, the proceeds of which will be directed at financing mortgage loans. However, securitisation is new to Egypt and therefore it is not provided for in any of the current laws. There have been indications that it will be included in the new capital market law. But until then, a chapter on mortgage securities will be included in the executive charter of the current capital market law. Mortgage finance houses, according to the law's executive charter, should be joint-stock Egyptian companies with a minimum issued capital of LE50 million of which at least a quarter should be paid-in at the time of establishment. The remainder should be paid within a year of registering the company with the commercial registry. The International Finance Corporation (IFC), the World Bank body that lends to the private sector, is currently looking into helping to set up such companies. "Housing financing is an area that IFC works in everywhere," said Tarek Allouba, senior projects officer at IFC's regional mission in the Middle East. "IFC plays a catalytic role in bringing partners together. Banks may take part in setting up mortgage finance houses. And no limits have been specified on their participation in the capital of those companies." According to Youssef Khalil, a real estate broker with Coldwell Banker -- a US real estate brokerage and mortgage firm which recently set up shop in Egypt -- the real estate business in Egypt remains unorganised, however he expects that with time, the interest of international companies in the Egyptian real estate market will grow and that local companies will develop, too. The issue of interest rates is another important factor and experts have noted that a low interest rate is a crucial incentive for mortgage loans. But interest rates are set by the Central Bank in accordance with market rates. At the end of the day, the implementation of the law is not only dependent on banks and mortgage finance houses. As Allouba pointed out, the General Authority for Real Estate Financing Affairs must begin to operate. Although a presidential decree establishing the authority was issued in August last year, the organisational structure of the authority has yet to be announced. So far, only a chairman has been appointed for the authority: Ali Shaker, formerly professor of mathematics and insurance at the Faculty of Commerce, Cairo University. The authority will oversee real estate activity in the Egyptian market, including mortgage finance houses. Other intermediaries in the real estate sector, such as appraisers, brokers and agents, will have to register with the authority. The obstacles in the way of the implementation of Law No 148/2001 seem to be a natural progression of all the controversy that surrounded its inception. Real estate developers have been accused of supporting the law for their own narrow interests: to enable individuals to buy the many units that have been built but remain unsold. Also the idea of enabling the financier to repossess the unit in the event of a default has been deemed contradictory to Islamic Shari'a and unethical. The law, when in the final stages of being drafted, was passed from the now defunct Ministry of Economy, which had worked on it for years, to the Ministry of Housing which is still familiarising itself with its stipulations. And it is not only the Housing Ministry which has yet to familiarise itself with the law, all the related institutions are faced with the same task. "Some are even questioning whether they should go into the field at all," said Allouba of IFC. "Hence, it is difficult to predict when the market might begin to move."
