US home loan crisis is a morality tale for SA
In the US, as the housing boom of 2001 to 2005 drove prices beyond the reach of many households, mortgage originators hit on a brilliant device for pushing their products.

They offered low-income households mortgage loans they wouldn't normally have been able to afford - at what they called "teaser rates".

For a specified period, borrowers were allowed to make monthly repayments, which covered only the interest cost of the loan. When the period expired, the normal repayment schedule kicked in.

At that point, many of these borrowers were hit by a double whammy - depending on when the bonds were taken out. Because in the intervening period, house prices had been falling and interest rates had been rising.

The US federal funds rate rose from 0.5 percent in mid-2004 to 5.25 percent in the middle of last year. So the standard repayments were higher than would have been expected at the time the loan was originated.

Last year US house prices started slowing and then reversed direction. And those who were unable to meet their monthly repayments were not necessarily able to get a high enough price to cover the debt - a terrifying situation known as negative equity.

As a result, subprime borrowers have been defaulting in great numbers.

Alliance Bernstein, a UK fund manager, quoting industry data provider Loan Performance, says the outstanding debt amounts to about $1.4 trillion (R10 trillion), which represents 16 percent of the overall US mortgage market. Last month Federal Reserve chairman Ben Bernanke put the losses attached to the outstanding debt at $100 billion.

That may or may not be the case. But the knock-on effect of the credit debacle is costing global stock markets far more.

The good news for the South African property market is that there is no local subprime market in mortgage loans.

Since November last year, SA Home Loans, a mortgage originator, has been offering some clients the option of paying only the interest portion of their commitment "for an indefinite period".

But chief executive Kevin Penwarden says the product is aimed at people with high credit ratings. To be eligible, borrowers must have at least 10 percent equity in their homes and must be in a position to make the full payment.

Of the four major banks, Absa offers the option only as a one-off to help borrowers over a seasonal hump such as the start of the school year. Standard Bank is considering the concept.

So credit problems of the scale encountered in the US are not lurking locally.

However, the 2.5 percentage point increase in mortgage rates to 13 percent has started to bite.

Nedbank says arrears in some form or other have risen from 5.5 percent a year ago to 7 percent, though they have stabilised over the past few months.

Standard Bank was unable to comment because it is in its closed period. First National Bank and Absa were unable to immediately extract the figures.

Penwarden says total arrears amount to only 1.5 percent of the mortgage book.

More problems are in store, but the local market is probably heading for a soft landing. Hopefully, the US experience will be no more than a morality tale.

Article by: Ethel Hazelhurst -