Not as safe as houses

Why the bank won't give you a mortgage.

Years of turf war and fighting for market share has decimated the banks' home loan profits. The big three banks that reported their annual results have all shown significant losses in their home loan business.

Absa has been the worst hit followed by Nedbank. Both have made losses greater than R500m. Standard Bank has managed to claw back some of its losses posting a more moderate loss for the full year compared to December's half year results. Although we still await FNB figures, their half year results showed they were already experiencing significant losses.

According to the Ernst and Young banking report, "banks are reluctant to raise mortgage lending in an environment where high and rising credit losses are hurting bottomline profitability - all mortgage portfolios are currently unprofitable".

Although the current economic downturn has played its part, profits from home loans were already in deep trouble long before customers started to default. From about 2003 banks entered into a market share war. Mortgage originators were recruited into battle and lending rates, significantly below prime, were used as ammunition.

While the going was good, banks were happy to hand over a significant portion of their profits to mortgage originators in order to outsource their sales. Then banks handed over a bit more of the profits in cheaper rates to secure the client. The idea was that once they had the client the bank could cross sell other more profitable services and products.

The result was a significant increase in exposure to home loans but it came with a weaker client profile - similar to what the US banks experienced with subprime. By outsourcing sales, banks lost some control of the quality of the client they were signing up and competitive lending rates did not fully price in this increased risk.

Banks have started to push back. Fees to originators have been cut and some banks are focusing on their own customers by requiring lower deposits from existing clients as part of a drive to bring home loan sales in- house.

There is going to be a lot of consolidation in the mortgage origination space - but more importantly for customers, the 2% below prime deals are a thing of the past. If you managed to get one in the lending spree, hang on to it, it may be your most valuable asset.

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