Additional funding of $37.1 million to be provided by World Bank
CAIRO: In an attempt to address the shortage of long-term funds in the housing market, the central bank and 24 private and public financial institutions jointly established a new mortgage refinance company.
The Egyptian Company for Mortgage Refinancing (ECMR) has been created with an initial capital of LE 200 million.
The central bank is the key strategic shareholder in the new company with a 20 percent stake. The balance is held by domestic and foreign banks and specialized mortgage companies, all of which are either currently involved or plan to participate in the mortgage finance market.
The World Bank will support ECMR with a loan of $37.1 million (LE 213 million) as well as technical assistance.
The International Finance Corporation (IFC), the private sector lending arm of the World Bank, may also join the project as an equity partner. The IFC has already expressed its interest in participating in the company with an additional 10 percent [of capital], says Osama Saleh, chairman of the Mortgage Finance Authority.
A number of factors have inhibited the development of a substantial mortgage market despite the introduction of the mortgage finance law in 2001. Chief amongst these impediments are arduous property registration procedures and the absence of long-term funding instruments for primary mortgage providers.
The latest initiative is intended to address the second point. It s risky to have a mismatch between your liabilities and your assets, explains Sahar Nasr, a senior analyst at the World Bank. The bank borrows and takes money from depositors on a short-term basis, for one year [or] sometimes three months, and wants to lend for 20 years.
ECMR will bridge this funding gap by providing secured loans over a period of 20 years to banks and mortgage companies.
The banks and mortgage finance companies will pledge their portfolios to [ECMR], and against these portfolios they will get fixed-rate loans over a long period, explains Saleh.
Mortgage providers can in turn employ funds from ECMR to extend additional loans of up to 20 years to homeowners.
At present, banks are typically unable to provide loans of more than seven to 10 years in maturity. This has placed an enormous financial burden on individuals and families that purchase homes.
By extending the repayment period, each installment would reduce commensurately and this would ease the borrower s burden.
It gives you flexibility. It gives you access to a higher standard of living, because instead of paying installments over a period of 10 years, you pay over a period [of] 20 years, so you can afford to get a better house. And lower income [individuals] will afford to get a house in the first place, says Nasr.
ECMR itself may issue long-term bonds to the public in order to support its activities and expand its lending beyond its initial capital. In order to lend on a long-term basis, you have to have long-term funding, explains Nasr.
Saleh adds that the company is a swift solution to an immediate and pressing need.
We don t have a 20-year benchmark for interest rates and we don t have a 20-year instrument in the market, says Saleh. So how can you have a market for mortgages while you re missing both? The quick and practical solution is to create this vehicle.
Since ECMR will lend on a secured basis, its activities will also encourage discipline amongst mortgage providers.
It will organize the market because in order to pledge their portfolios, institutions have to be very strict and abiding to the law … otherwise [ECMR] will not accept it as collateral, says Saleh.
In the long run, Saleh expects ECMR to securitize its portfolio and sell it as a bond. This will go some way to create what Saleh describes as a self-contained mortgage industry that can generate its own liquidity needs.
Only two mortgage finance companies and four banks are currently active participants in the mortgage market with loans of LE 335 million. This is extremely modest, representing less that 0.5 percent of gross domestic product compared to 65 percent in the United States, 45 percent in Europe and 14 percent in the United Arab Emirates.
The potential for the mortgage market is therefore significant, particularly in light of the substantial demand for housing in Egypt.