x Abu Dhabi, UAETuesday 25 July 2017

Banks rob Eddie to cover loss of lending to Nigel

At the end of most mortgage agreements there's a line that says the lender reserves the right to change its terms and conditions.

Banks once viewed property in the same way captive pandas see bamboo. They dolefully munched on the asset class for years until the regulator capped their property holdings to 20 per cent of total assets. Undeterred, some lenders spun off developer units to circumvent the restrictions imposed by the Central Bank, allowing them to scoff even more without any pesky interference from the zookeeper. Their appetite was insatiable. Now, like their cuddly cousins in captivity, bankers are not quite so excited. Their diminished ardour for bricks and mortar is one reason why mortgage rates in the Emirates are among the highest in the world, despite low interest rates elsewhere. That needs to quickly change if the property market is to stand any chance of recovering some of the losses of the past year. But a lack of competition in the market and the absence of an effective consumer watchdog means it probably won't. At the end of most mortgage agreements there's a line that says the lender reserves the right to change its terms and conditions. None of us takes much notice. We assume that banks, those most trusted of institutions run by honest chaps, would never use a legal loophole like this to take more of our hard-earned cash. It's like the warning on the leaflet in the packet of throat lozenges that says they may produce vomiting, hair loss and dementia in some rare cases. Who cares? But these days, that last line on the contract is really the only one you need to read. In fact, it would save a lot of time and trees if this was all the loan agreement said: "We reserve the right to change your terms and conditions." When the US Federal Reserve began cutting interest rates last year, many local mortgage customers looked forward to seeing the benefits trickle down in the form of cheaper loans, particularly those whose lending agreements were based on the Fed benchmark. With each quarter came a fresh cut to the Fed funds rate, but local mortgage customers waited in vain. At the time, some lenders justified keeping their rates up by saying their cost of funds was in fact determined more by Eibor (the Emirates interbank offered rate), what banks charge each other for short-term loans. So when Eibor started to fall this summer, borrowers again waited to see the benefit trickle down. They're still waiting. Banks have long justified the margins they make on mortgages here on what they call the risk premium. It is the wild card they use to subdue their customers when reason and empirical evidence tell them they're being charged too much. So why are we such a risky, hell-raising mob here? Banks say the fledgling nature of the freehold property market in the Emirates poses a bigger lending risk. That compels them to charge customers rates of between 6.75 per cent and 9.75 per cent at a time when the three-month Eibor is less than 2 per cent. But it was never the market per se that was risky. It was the customers that banks chose to lend to that formed the risky part of the equation. Recent history has shown the risks banks exposed themselves to had nothing to do with this market and everything to do with ill-conceived lending criteria. Loans were given to people without even a rudimentary credit check - people who predictably skipped the country when they lost their jobs selling property. Why should a professional couple working for an international company in the UAE pose any greater risk of default than their equivalents in Paris, New York or London, especially when their disposable income available to service a mortgage is so much greater because they are not paying tax? The people paying for the bank's so called risk premium are the end-users in the market, the steady Eddies who bought homes for the quaintly old-fashioned purpose of living in them. Lenders find themselves in their current predicament because they were never really interested in opening an account for Eddies. They were not committed to exploring synergies in the Eddie "space". Instead, they courted the speculator who wanted to put down deposits on 10 flats without the income to support one. For story-telling purposes, we will call him Nigel. It was Nigel who was responsible for delivering the double-digit loan book growth among their competitors, so it was Nigel they wanted to talk to. One of the reasons that bad loans have accelerated this year, while property prices have fallen by as much as half, is that Nigel is no longer available to service the borrowings he took out to buy his revolving condo. Nigel is long gone after escaping through Hatta border post disguised as a pantomime horse. He's now living with his mum back in England seeking a publisher for his memoir called Cantering to Victory. But happily for the banks, Eddie is still about to pay for Nigel's misdeeds. Many analysts are wondering what can be done to revive the fortunes of the property market. The debate has coalesced around issues such as supply, demand and demographics. But this misses the kernel of the crisis, which must be about increasing the availability of affordable bank finance for home buyers and restoring their trust in mortgage companies. If a bank sells a mortgage that is based on the Fed funds rate, they need to follow the Fed funds rate. It isn't good enough for them to refer their customers to the line in the contract that says they reserve the right to change their terms and conditions. Banks are all about trust. It is why most of us let them look after almost every penny we earn. If people do not trust their mortgage provider to play by the rules, then people will not buy any more mortgages, forcing prices lower and creating more bad loans for lenders to absorb. By penalising the punters who are meeting their repayments with the cost of covering the bad debts of those who aren't, mortgage lenders risk following the pandas into virtual extinction. @Email:scronin@thenational.ae @Body-NoIndent: Frank Kane is away