25 February - 3 March 1999
Issue No. 418
|Published in Cairo by AL-AHRAM established in 1875|
Egypt Region International Economy Opinion Culture Features Travel Living Sports People Time Out Chronicles Cartoons Letters
The mortgage solutionBy Amira Shalaby
Egypt's inhabitants of over 62 million occupy less than five per cent of its total land area of around one million square kilometres. The rapid rise in urban population, coupled with industrial growth in suburban centres, have significantly increased the demand for real estate activities. Everyone pictures themselves owning their "dream home." Some of us are fortunate enough to own our homes, whereas others must settle for renting. However, renting is perceived as uneconomical and of lower yield to developers, so very little is offered. Buying is not accessible to many people in Egypt because the market is basically a "cash and carry" one. This inaccessibility is causing serious social, economic and security problems that definitely need to be addressed.
In 1994, a real estate boom began in Egypt when the Egyptian government adopted a comprehensive reform programme which encouraged private sector investment in both tourism-related and residential real estate. The government has encouraged private developers to invest in establishing 44 new urban communities by the year 2007. The goal of this new communities reform programme is to create towns with adequate infrastructure and service bases in order to redistribute the population to less dense areas. The programme's objective is twofold: first, to form new towns on the outskirts of Cairo, Alexandria and the other main cities and second, to form new, independent cities.
Now that the government is increasing the habitable area by giving away land at subsidised prices, building homes and encouraging private investors to develop complete communities and resort areas; how are people to buy these homes? If the buyer has cash, there should be no problem. If the buyer has some cash now, and more to come over the next three to seven years, then the buyer may take advantage of the three-to-seven year short-term, interest-free financing offered by various developers. If the buyer does not have a lot of cash, but is willing to stretch payments out over time and pay a little bit more, the buyer has the option of considering one of the few banks which offer financing of 50-75 per cent of the home's value (depending on its location) at a 13-15 per cent interest rate amortised over 7-15 years. (Amortisation is the reduction of the principal of the loan based on a periodic schedule, i.e. the gradual repayment of the loan.)
Buyers, in Egypt, currently have very limited alternatives for financing their homes. One alternative is financing by the owner or developer. The other is short-term financing with rather high interest rates offered by banks. This still leaves a large part of the population unable to find the financing which would enable them to own a home. Therefore, what remains to be developed is a mortgage system with mortgage laws offering various creative financing packages based on solid, objective and standard criteria.
So, what is a mortgage? How does it work? Why are mortgages needed and what are the risks involved? A mortgage is a voluntary loan on real estate -- a means of borrowing a certain sum of money using the property, property that has finished construction and not under construction, as collateral. Real estate is defined as land plus permanent man-made additions. The mortgage market is divided into a primary mortgage market and a secondary mortgage market. Sources of funds for the primary market include trusts, savings associations, commercial banks, credit unions, pension funds, endowment funds and private investors. Secondary mortgage markets come about as a result of loans being bought and sold after they have been funded the first time (through the primary market). Once the source of primary mortgage money has been established, certain criteria and guidelines are set for lending from these funds. These include standard appraisal guidelines for the properties to be mortgaged, loan durations, interest rates charged for the loans and the fees involved in making such loans, as well as the methods and intervals of repayment.
Long-term real estate financing amortised over 15 to 30 years, with monthly repayments and various creative packages of both fixed and adjustable rates, are imperative if Egypt's real estate market is to expand. There are one-to-three year adjustable rate mortgages (ARMs) whereby interest rates are gradually increased every one to three years, either according to preset conditions or according to a certain objective economic indicator. This allows buyers to afford the payment increases as their wages and salaries increase. There are also five-to-seven year ARMs which also help buyers plan even further ahead for their mortgage payments. Another type of mortgage is the "balloon payment," which allows for lower monthly payments. But because these payments are not enough to fully amortise the loan by the due date, the final payment (balloon payment) is larger than all the others. This type of loan is most suited for buyers who are expecting a lump sum of money at a later date.
There are also loans that allow buyers to refinance when interest rates drop. Certain clauses such as "no penalty for early prepayment" are, therefore, desirable in the mortgage system, because they allow for more flexibility.
But there are also inevitable risks involved with mortgages, which include the accuracy of home value appraisals, the buyer's ability to pay in a timely manner, as well as what recourse the mortgagee, (lender), has if the mortgagor, (buyer), does not pay on time or not at all. As far as appraisals are concerned, certain objective, calculated and standard rules and guidelines based on scientific data must be set within the mortgage system. As for buyers' timely payments, a prequalifying system is mandatory. What recourse the lender has if the borrower does not pay on time or not at all must be addressed by laws of foreclosure.
With mortgages, there is a creative financial package for everyone who wants to own a piece of the rock, i.e. real estate. The introduction of a mortgage system and mortgage laws will enhance the movement of real estate sales, increasing primary real estate sales (new homes being built) and will definitely increase secondary real estate market transactions (homes that are available for re-sale). It is definitely now that we have to address this issue, or else developers will continue to plan for and build homes without being able to market them, especially in the high and luxury classes of homes. And if they must sell them, they will have to drop their prices sharply, regardless of their actual building costs. Why should we unnecessarily create our own dilemma of oversupply when the solution lies in the hands of our lawmakers who have so far done a great job?
If we want to add leverage to the real estate market and expand Egypt's habitable area, the global system of mortgages and mortgage laws must be institutionalized. Let us all join in encouraging our government officials to continue the journey, and pass the necessary mortgage laws so that a mortgage system is in place that makes it possible for every citizen to own their own home.
The writer is a licenced real estate broker with 15 years of experience in the American real estate market, and is currently a consultant.