Panacea or nostrum?

By Mahmoud Fahmi*
In November 2000, the Ministry of Economy and External Trade presented to the cabinet its fourth version of the real estate financing law popularly known as the mortgage law. This latest draft was developed in response to observations made concerning the previous draft which, following its submission to the cabinet in June 2000, had provoked considerable debate among finance and legal specialists.
Leading the changes to this document is its new title -- the draft law for "real estate financing" -- a name which portrays its contents more accurately than the moniker "the mortgage " draft law, as it was previously titled.
This said, the law is directed at several objectives summarised in statements made in mid-December by Minister of Economy and External Trade Youssef Boutros Ghali. The law, according to the minister, takes into consideration several economic, social, administrative and environmental factors. It aims at facilitating the purchase of residential and commercial property, as well as financing the establishing, restoration and upgrading of such property by youth, small landowners and entrepreneurs, craftsmen and others.
Ghali's statements explained that the draft includes protection for the parties to the real estate transaction; namely, the buyer, borrower, seller and creditor. To effect the transaction, the buyer makes a down payment -- a percentage of the value of the purchased property -- and borrows to pay the remaining sum in instalments that are appropriate given his monthly income. Payments are made over the long term, even extending to periods of more than 20 years.
A prime objective of the law is to end the current recession in the real estate market which is evidenced by thousands of unused residential and commercial units. By facilitating real estate purchases, it is expected to give a boost to the construction sector, as well as the furniture, textiles and home appliances industries.
According to the minister of economy, regulatory institutions needed for the implementation of the law will be created. These include an administrative department regulating the provision of credit for real estate purchases. Agencies for the sale and appraisal of real estate will also be regulated.
However, the objectives of the draft law do not preclude asking whether, once implemented, it will solve Egypt's chronic housing problems which have given rise to the sporadic urban development so manifest in slum areas. A prior question, however, is whether the law will actually make housing accessible to limited income groups.
The consensus among experts is that the draft law, if implemented, would not afford a fundamental solution to the housing problems of limited income groups, or the phenomenon of informal housing. At best it will be a step on the road to resolving these problems.
The main weaknesses of this law as a solution to the problem of access to affordable housing is most clearly expressed by Professor Hatem El-Qaranshawi, dean of the Faculty of Commerce for Girls at Al-Azhar University.
"For a LE30,000 loan taken for a 30 year period at an interest rate of 14 per cent, the annual payments would be LE4,284," writes El-Qaranshawi. "If we assume that expenditures on housing represent 25 per cent of a household's entire expenditures, then our point of reference is a family whose total annual expenditures amount to LE17,136 -- that is a monthly average of LE1,428. Such a family cannot be considered to belong to the limited income bracket or the poor or young graduates categories," he asserted.
Taking El-Qaranshawi's calculations into account, perhaps a better course of action for the state would have been to arrange for the provision of credit at lower interest rates. If credit were offered with a 7 per cent interest rate on a LE30,000 loan, annual payments would go down to LE2,418, an amount suitable for a family whose annual expenditures come to LE9,670, or LE805 a month. Even so, such a credit arrangement would be beyond the means of limited income groups.
The main benefit afforded by the draft law, then, is that it reduces the margin of risk for parties to the real estate transaction. But the commendability of this benefit is mitigated by the fact that the burden of minimising risk falls most heavily on the borrower. The law stipulates that the borrower make monthly payments, in addition to those on the principal and interest, into a fund guaranteeing the payment of default instalments. This is in addition to an insurance instalment against death or disability, in favour of the lender. The two guarantees, therefore, are shouldered by the borrower. Another aspect of the draft which must be addressed is whether it is legally sound and well-formulated. Are its articles consistent with the constitution and basic laws of the state as well as other legislation?
The minister of economy has announced that the draft law was referred to the State Council's legislative department. This move, made in response to a request which I had raised concerning this matter, is aimed at ensuring that the draft does not contravene the constitution. Currently, there are other bases upon which the constitutionality of the draft law may be contested.
The first is that it violates the principle of equality before the law enshrined in article 40 of the constitution. This remark rests on the fact that the draft law includes a host of guarantees which are to the advantage of the creditor, while at the same time it imposes a number of constraints and obligations on the borrower. For instance, the creditor's prior permission is required before the borrower can rent, sell or give away the mortgaged property. If the borrower takes any of these courses of action without prior permission of the creditor, the latter may demand immediate full payment of principal plus interest. If this is not forthcoming, it is the creditor's right to expropriate the property and sell it by auction and receive the proceeds.
All of these rights afforded to the creditor by the draft law will create a situation where those operating in the context of a new law based on this draft enjoy privileges not extended to those engaged in funding real estate purchases not governed by such a law. This violates the principle of equality before the law, which should be afforded to all those enjoying the same legal status (in this case, all creditors).
The new draft law forbids early payment of the loan, either in part or in full, should the borrower wish to do so. Also, the borrower will bear extra charges, which are the contribution fees to the guaranteeing payment fund and the insurance instalment. Yet preventing early repayment is in violation of civil law and Islamic Shari'a which is the fundamental source of legislation, according to Article 2 of the Constitution.
In addition, the borrower is deprived of the appellate's right to challenge court rulings on expropriation. Yet this deprivation is against article 68 of the Constitution, which provides the right of litigation at all judicial stages, as confirmed recently by the Supreme Constitutional Court.
All of the above restrictions and obligations mean that a borrower will be worse off, in trying to obtain credit according to this new law, than he would have been borrowing from an individual, company or institution whose operations are not regulated by this law.
Finally, there are more observations, the most important of which are those related to securitisation of the loan. The draft law states that the creditor may refer the loans to a company engaged in securitisation. The securitisation company can then convert the loan to bonds to be issued to the public.
The observation here, is that securitisation is not included among securities activities listed in Article 27 of the capital market law for 1992. This means that there are no specialised institutions engaging in this activity under the existing law other than joint stock companies. Thus, this part of the draft law requires that either the capital market law be modified, or a decree be issued by the minister of economy adding securitisation activities to capital market operations -- after gaining the approval of the Capital Market Authority's board.
The draft law also imposes an obligatory agency on the securitisation company. Despite payment by the securitisation company of the value of the loan referred to it by the lender, the draft law still institutes the lender as an obligatory agent on behalf of the said company in collecting the loan instalments from the borrower and repaying them to the company so that it will be able to serve the bonds which it has issued. This is a very complicated procedure which could be substituted by an arrangement in which the lender would be allowed to issue bonds directly according to the rules of the capital market law.
A major inconsistency in the new draft law is that while its chapter number four delineates the execution procedures by which real estate is expropriated from the defaulting borrower, chapter number five deals with a completely different set of rules in relation to default. This latter chapter delineates the payment of the loan instalments to the lender by the guaranteeing payment fund and insurance companies, in case the borrower fails to meet payment obligations. Since this means that the lender is fully refunded in case of default, why then, does the draft law stipulate the expropriation of the real estate and selling it through an auction, so that the due proceeds will be paid to the lender? Where is the social insight in an arrangement which could lead to the expulsion of the borrower and his family from their home, while guaranteeing that the lender will be fully refunded?
Other weaknesses concern legislative consistency in the arrangements of the articles and ordinances of the draft law. More importantly, the draft law, which is a subsidiary law, as it stands, is not consistent with other fundamental laws. Among the laws for which this draft has implications is the civil law, the capital market law, the joint stock companies law, the Central Bank and banking sector law and the commercial law.
Given the above, the draft real estate funding law must be made open to public discussion on the widest scale. A start in this regard would be convoking a seminar or conference, held over a one or two day period, in which all those concerned can voice their views on the new draft law.
* The writer is a legal and investment consultant and former head of the Capital Market Authority. The above article is a summary of a memorandum submitted to the National Democratic Party's Economic Committee of which Fahmi is a member.
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