Resuscitating real estate
The mortgage finance law, passed two years ago, is finally coming into fruition. Waleid Gamal Eldien* examines its technical provisions and potential for improving the economic situation
"Mortgage finance" is an expression the Egyptian populace has repeatedly heard in the past decade but was never fortunate enough to see in action. The concept presented itself and swiftly gained academic and political support within Egypt as a means of overcoming the current real estate downturn. In June 2001, Law No.148/ 2001 was issued to promulgate the real estate finance functions subsequent to bitter encounters between the Egyptian government and parliament, and is expected to be implemented later this year.
Mortgage finance, also known as housing or real estate finance, could be defined as providing relatively cheap long-term funds or loans through financial institutions (banks or real estate financing companies: the mortgagee) to individuals (the mortgagor) to buy, build or renovate a piece of real estate property financed through the individual's monthly income with the protection of a mortgage or lien on the property as security for the repayment of the loan. Typically the mortgagor has the title of the property and the ability to fully use the real estate property; thereafter, the lien would be removed when the obligation is fully repaid.
Under the new law, real estate financing companies came to life. Therefore, these companies can provide mortgage financing that can be up to 90 per cent of the price tag of the property, while monthly payments should not exceed 40 per cent of the household's monthly salary. The rise of the real estate financing companies came as a result of the shortage of funds in the banking industry for the real estate sector and even the overall economy. Without enough funds and liquidity available, banks cannot provide loans to the public, and this will induce an aggregate effect on the economy since investments needs cannot be fulfilled.
Real estate financing companies would help to overcome several issues: (i) allowing developers to concentrate on real estate development rather than financing; (ii) providing cheap long-term funding through specialised mortgage vehicles for this nerve sector; (iii) companies are permitted to either securitise their future receivables on-balance sheet or through true sale of mortgage pools to special purpose vehicles (SPV) or securitisation companies as some refer to them. We can simply define securitisation as the process of pooling "homogenous", "financial", "cash flow producing" "illiquid" assets such as loans or debts (generators of future cash flow receivables) and issuing bonds or claims on these assets in the form of marketable securities to be sold on the capital market.
These guaranteed/secured bonds have several forms called mortgage-backed securities (MBS) or Mortgage- Pass Through Certificates or Collateralised Mortgage Obligations (CMO), each of which has its own unique feature and system in providing funds. These are investment instruments that represent ownership of an undivided interest in a group of mortgages. Principle and interest from the individual mortgages are used to pay principle and interest on the MBS. When investors buy an MBS, they are essentially lending money to a home buyer or businesses. MBS are a way for banks or real estate financing institutions to lend mortgages to their customers without having to worry if they have assets to cover the loan. Instead, they act as a middleman between the home buyer and the investment markets. Securitisation helps financial institutions make certain assets suitable for sale swiftly in the capital markets. The higher yield associated with these securities attracts investors who are willing to bear incremental credit, prepayment and liquidity risk.
Securitisation could reactivate a host of sectors such as real estate, export finance, project finance, the telecom sector and most importantly retail banking such as car loans and credit cards receivables. Securitisation could also contribute to increasing the volume of liquidity and addressing the problem of nonconformity, mismatches in duration, between assets and liabilities through easing down the status indebtedness. Benefits of securitisation are; (i) provides long-term funding for institutions in order to grow and expand with relatively low cost; (ii) off- balance sheet funding, that is the cash and proceeds are added to the assets and the transferred or sold assets are taken off the balance sheet; (iii) improved ratings, due to specialisation and the diversity of loan portfolio; (iv) diversified funding source, expands the base of financiers and investors and reactivate the capital market; (v) lower capital requirement compared to normal banks and deposit institutions and (vi) opens up employment opportunities in different sectors. In spite of the fact that securitisation is not risk-free and there are some legal issues, which need to be tackled to ensure success of securitisation system in Egypt regarding the secrecy of accounts and the financial leverage of the securitisation company. This is what has led to the emergence of securitisation worldwide, which is the means to get extra financing and liquidity.
Nevertheless, with numerous laws and organisations in tacked, several issues should be addressed before fully operating this animal. These are: (i) activating the primary-dealer system which is in the hands of the Ministry of Finance, Central Bank of Egypt (CBE) and Capital Market Authority (CMA) by issuing fairly priced governmental debt through pre-determined schedule to establish a governmental yield curve for long-term maturities; (ii) issuing the Securitisation Law that will be added as a chapter within the existing Capital Market Law No.95/92, even though the process of securitisation will not be utilised in the initial stages of implementation; (iii) decreasing the registration cost of real estate property from 4.5 per cent to no more than the actual cost of registration, which needs both government and parliament approval; (iv) giving opportunity for the CBE to control interest rates and implement prudent monetary policy through cutting down on rising interest rates on securities issued by the government; (v) elevated and continued governmental budget deficit should be addressed otherwise pressure would mount on the Egyptian pound leading interest rates to go higher or further devaluation; (vi) the legal system for foreclosure and eviction should be of high standard, needing judges specialising in commercial law, otherwise one case of inability to foreclose could bring about the collapse of the whole system and (vii) establishing liquidity institutions to provide continuous flows of funds at low cost to real estate financing companies, which in turn directs that to the real estate sector.
It is believed that the real estate sector is the primary engine of the Egyptian economy in particular due to its penetrating multiplier effect. Therefore, it is the responsibility of the government, market participants and the public at large to make the new system work. Inefficiency or failure could have a crippling impact on the attempt to resuscitate the economy.
* The writer is part-time instructor of finance at the American University in Cairo (AUC).
