SPEECH BY LN SISULU MINISTER OF HOUSING AT THE 2^ndANNUAL NATIONAL SYMPOSIUM OF THE NATIONAL HOUSING FINANCE CORPORATION

Chairperson
Invited guests
Ladies and Gentlemen: 

For several months now government has been involved in negotiations with the private sector, specifically the financial institutions, about a need for the introduction into the South African financial environment of a financial services charter that would; amongst other things, provide reachable lending targets in respect of affordable housing. The increased and acute demand for housing finance had been evident throughout the four decade long history of apartheid. As a result, with the removal of formal restrictions for migration into urban areas after 1994 the challenge of housing finance manifested itself in the main as a latent demand in the form of the development of informal housing and informal settlements in parts of our towns and cities.  

The impact then, Chairperson that finance has in the quality of the lives of our people is such that over the years its absence defined the nature of our cities and towns. In light of the fact that the ready availability of long-term finance allows for large-scale commercial and industrial development projects, this contention should not be difficult to understand. In residential areas; for example, the ability of households to access housing finance allows for the development of quality housing and neighbourhoods. 

However, in the South African population of 45 million (10,5 million households), which has about 10m people with formal employment, only 16m are active in a credit sense. In income terms, households earning above R7,500 per month can afford finance for  ‘normal suburban’ homes from a price floor of approximately R170 000. This group has access to traditional mortgage loans that are facilitated by estate agents, developers or established banks. Households earning below R7,500 per month, particularly those with formal incomes, have access to housing finance through micro-loans and institutional loans for rental accommodation. Thus, when I took over the portfolio of housing one of the main challenges that we identified concerned the extension and the expansion of housing finance to reach the categories we now have termed the hardcore-poor (those from R0 – R1 500) and the affordable (those from R1 500 - R3 500). 

Since 1994, it has been government’s intention to facilitate increased private lending for - and investment in – low and medium income housing. This strategy was accompanied by the intention to eliminate geographic discrimination (redlining) in the origination of housing loans. To give concrete expression to these principles we had proposed; for example, that a specific quantum of private funds should be committed to investment in low and medium income housing, first through the Record of Understanding with the banks, and later through the proposed Community Reinvestment Bill.

As we gather here today the Financial Services Charter identifies new lending for affordable housing as one of its four targets to be defined and then scored over the five years of its implementation. I am informed that a draft implementation plan has been prepared with a view to articulating and achieving these affordable housing lending targets.  

As the financial services charter stands at present, and despite the draft implementation plan it remains silent on the systemic problems in institutional arrangements between lenders, and the inappropriateness of housing finance instruments for the income categories I have mentioned. Thus, the critical issue between the financial sector and government remains the definition of non-financial risks in the low and medium income segments of the housing market, and the question of how these risks are to be allocated between the public and private sectors. On our part as government we have articulated the need for increased penetration in conventional markets, the normalization of non-performing markets, increased provision of finance for intermediated housing as well as a transparent performance measurement of housing finance institutions. 

In my interactions with the banks I have found that their CEOs are agreed with these critical principles. In terms of the financial services charter they have therefore agreed to the ‘origination of housing finance’ (to end users in the income bracket R1 500 to R7 500 a month), ‘targeted investment’ and to a lending target of about R40 billion. In a nutshell this is what is being discussed under the Financial Services Charter as a possible to impact on the housing delivery.   

Let me just consider why we found it necessary to do this. In October 1994 a Record of Understanding between the former Association of Mortgage Bankers and the Department of Housing was signed. This was terminated in 1996. On 1^st April in 1998 a New Deal between the Banking Council and the Department of Housing was signed and in the same year the MIF. In terms of the agreements all properties in possession and non-performing loans as at 31 August 1997 and which were not rectified by May 1998 were to be placed in a portfolio and managed by Servcon. This was effectively a payment normalization strategy whereby loans are rehabilitated and payments normalized through instalment sale, re-scheduling and rightsizing. Servcon was to have extinguished it’s portfolio through the aforementioned mechanisms by 31 March 2006. These measures were designed in part to stabilize the housing the market. 

In addition, the initiative to mobilize credit at scale led to the creation of the National Housing Finance Corporation and the National Urban Reconstruction Housing Agency. Within this framework the NHFC was to provide loans, guarantees and other products to support the entry of financial lenders into the low income sector. The NHFC therefore performed the function of a wholesale lender whilst NURCHA provided guarantees and finance for developers in this sector of the market. For various reasons however the financial institutions progressively withdrew from this market. Thus, presently funding to the low to medium income households is non-existent. 

As a result of various policy and legislative, political and environmental and socio-economic needs government proposed the Community Re-investment legislation to force the Banks back into the market. It was clear that the housing challenge was a huge one that the Government alone could not resolve without private sector participation. The first piece of Community Re-investment legislation was the Home Loan and Mortgage Disclosure Act which attempts to identify any possible discriminatory lending patterns by financial institutions. A follow-up piece of legislation was to be the Community Re-investment Bill. This, however, was set aside as a result of the Financial Services Sector Charter. Finally, a comprehensive proposal is awaited from the financial institutions which will cover areas of government involvement and which proposal will be fully interrogated and evaluated by government. Once more, therefore, we are at the point where through the financial services charter we are attempting to work a South African solution to the housing problem we face. 

We all know that historically housing was used previously by government as an instrument for the implementation of the policy of separate development. As a result of this the majority of our people became deprived of ownership and property rights in areas outside the homelands. As a result of the 1983 constitution, however, financial institutions engaged in lending for housing in so-called black townships but due to various factors such as loss of income as a result of retrenchment, death and other reasons, these financial institutions ‘emigrated’ from the townships to look for safer investment havens elsewhere. This period also saw the emergence of ‘redlining’ practices of areas that are mainly concentrated in black townships.   

A 1998 report by FinMark Trust titled State of Human Settlements thus states that:  

‘From the early 1900’s African Townships property markets have been characterized by changing laws pertaining to rights to land, with rights being given and taken away at different times over the last 100 years, poor social infrastructure and service delivery as a result of the fact that up until 1980 townships for Africans were seen as temporary areas, poor and limited housing delivery, often at inappropriately high standards which, resulted in housing shortages and overcrowding. All of these factors have resulted in creating a particular housing market with unique characteristics.’ 

The shortage of secondary houses on the market has much to do with the shortage of primary housing and new starts. There appears to be a shortage of the supply of new township houses across the board due to the fact that numbers of old township stock have remained unchanged, private sector housing has stagnated and there is a reduction in the numbers of RDP housing projects being undertaken. Other problems relate to difficulties in accessing development finance from banks and subsidy erosion through inflation. This suggests a stagnating primary market. 

The recently released report on Township Residential Market released in May this year captures too these issues. It reads that notwithstanding the fact that township have 2.28 million household the residential property market is not functioning thus creating a dead capital in the hands of the owners. It attributes this state of affairs to the fact that: 

‘Townships in Black areas have a distinct history, which has had a direct impact on the nature of residential property markets that exist in these areas. During the apartheid era Black Townships operated as a closed market. In addition, during this period they received poor social infrastructure and services. This has directly influenced the way in which housing is delivered and property is valued and traded these areas’. 

Thus, the total contribution that we must seek from the financial institutions in the form of the financial services charter is the eradication of this historical legacy and wrong. We would need to see, in other words, in business terms an equivalent of the government’s Reconstruction and Development Programme which since 1994 has provided the policy framework. 

Let me just demonstrate this need further by quoting some findings of another recently released report which was conducted in December 2003 by Fanae Mae. The report is the result of a survey that was conducted to look into practices by banks in ‘low income housing loan servicing’ by our financial institutions. Its findings indicate that banks believe they are ‘effectively reaching out’ to low income household and have ‘statistical and anecdotal information’ in support of this. Yet, as the report found few institutions maintained a branch presence targeted at low-income household, that methods of communication with the low-income category are methods that ‘have proven effective for the middle to the upper-end of the market. These methods are ineffective in reaching out to the low income, and that institutions rely mostly on ‘automatic payroll deduction’ which are ‘inadequate collection services’. 

In area management practices the reports states that banks fail to inform borrowers of the full-spectrum of work-out options and that lenders lack the ability to contact borrowers earlier in the default management process, and that most lenders lack models that predict borrower default. It therefore concludes that: 

‘Interviewed South African institutions do not demonstrate early default management policies and practices that encouraged borrowers to contact the lender early, when they first encounter financial hardship, nor do institutions pro-actively follow-up with borrowers when loans first become delinquent. The lack of a trusting relationship between low-income housing loan services and low-income borrowers prevents South African services from implementing best-practices in low-income housing loan arrears management’. 

The report also states that: 

‘The ability of collection staff to develop ‘trusting relationships’ with borrowers greatly improves their ability to work with borrowers to cure loans that have fallen into arreas. The main objective of these employees should be to ensure that eviction is the last resort for borrowers that have fallen into arreas. These individuals should be empathetic to the circumstance of the target market, and able to effectively communicate with the target market. The majority of interviewed institutions do not currently employ a collections staff that possess these qualities. In addition, most interviewed institutions have centralised this function, which works well from a control perspective but is ineffective from a ‘building client relationship perspective’. 

The strength of the Financial Services Charter then lies in having centrally mobilised resources. But it cannot be the final solution to our housing problems and challenges. In the context of the need for a business equivalent of an RDP we have these resources to tap into to create a partnership with the private sector that can provide multiple instruments by which housing finance providers can be accessed.  

The extent to which other similar developing countries have gone can provide some few lessons. These countries are; for example, Argentina where a former state housing bank pioneered mortgage-backed securities. 

Malaysia too provides a different set of lessons following the period in particular of the recession and liquidity crunch of the late 1980s, which had a severe impact on housing finance. It was in the context of this challenge that the Malaysian government formed an agency to issue debt securities in respect of housing. The success it is credited with was to get housing finance expanded to lower income households and lengthening the term of mortgage loans. It stayed profitable regardless.

We may not necessarily want to implement some of these lessons in our own situation. But it would be useful to look into what has worked and what has not worked. Our own model thus far has clearly not worked.

Let us therefore make the right choices now when we are still allowed the time. Let us pool all our resources together, both the public and the private sector forging a ground breaking partnership to increase access to adequate housing for all South Africans.  

I thank you.