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Lessons learned: Going back to mortgage finance basics

CAIRO: With Egypt’s demand for affordable housing growing and a thirst for the development of the mortgage industry, the American Chamber of Commerce hosted an event yesterday to bring the lessons learned from the US housing boom and subsequent collapse to Egypt. To speak at the event, the chamber brought in Kathleen Vaughan, an executive …


CAIRO: With Egypt’s demand for affordable housing growing and a thirst for the development of the mortgage industry, the American Chamber of Commerce hosted an event yesterday to bring the lessons learned from the US housing boom and subsequent collapse to Egypt.

To speak at the event, the chamber brought in Kathleen Vaughan, an executive vice president in the wholesale mortgage department at Wells Fargo, one of the biggest banks in the US. Her talk was titled “Promises, Perspectives, Progress, Possibilities.

Vaughan began by talking broadly about how boosting the housing market in Egypt was a recipe for economic growth. Building 50,000 houses in the US, she said, creates over 120,000 construction jobs and generates over $2 billion in tax revenue.

She noted that meeting the needs of lenders is an ongoing effort for governments, regulators, and consumers around the world, including in the US. Those needs include access to capital, borrower due diligence, collateral evaluation, property registration, and profit.

On the other hand, Vaughan discussed the challenges facing consumers in the US. For a long time, she said, credit availability was uneven around the country as banks and mortgage houses tended to focus more locally.

The creation of Fannie Mae and Freddie Mac, she noted, “helped with the free flow of capital.

Large government backed groups like Fannie and Freddie were able to spread credit to every corner of the country and, therefore, iron out any shortages that might arise in a local market.

Vaughan then used a lesson from the failures of the American housing market as a cautionary tale to Egyptian banking executives.

After the terrorist attacks of September 11, 2001, the US government lowered interest rates to spur the economy, particularly the housing market.

With rates low and banks still needing to pull profits from loans and mortgages, they came under “pressure to expand the rate of home ownership, said Vaughan.

Under pressure to push volume, the banks eased their standards for loans. “We had fallen asleep, said Vaughan. Banks didn’t require thorough documentation. Unreported income could still be enough to earn a loan.

As a result, banks issued loans to unqualified consumers. While default rates, historically, hover around 3 percent in the US, they rose to 20 percent as a result of shoddy work from the banks and misrepresentation by the consumers.

As the Egyptian mortgage industry begins to blossom, Egypt will face the same risks that the US did.

“The lessons learned, said Vaughan, “are go back to the basics.

At the end of her talk, Vaughan opened the floor to discussion by asking what the biggest obstacles were to growing the credit market in the housing industry.

One area that the assembled group discussed was rent control. Because Egypt is a low-income country, the government has firm rent control laws in place to prevent a housing crisis. As a result, though, the thirst for home ownership has yet to blossom in Egypt.

One person noted, though, that high interest rates were the primary inhibitors. When Vaughan asked who agreed, most of the room raised their hands.

Attendees also debated the merits of issuing longer-term loans, which most banks do not yet do.

“We are a long-term risk averse society, said Hala Bassiouni from the Egyptian Housing Financing Company, arguing that Egypt doesn’t have an appetite for long-term lending.

As the mortgage industry grows in Egypt, Vaughan’s speech was a reminder that the shortcomings in the US housing market might serve as a cautionary tale to Egypt.

Topics: FJP

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