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Friday Nov 25, 2011

R1bn fund for affordable properties set to start next year

The government's R1 billion mortgage-backed insurance fund to encourage banks to grant more loans for affordable housing will be "up and running" by October next year.

Samson Moraba, the National Housing Finance Corporation (NHFC) chief executive, confirmed this yesterday, but said a number of issues had to be finalised with the banks.

In his State of the Nation address last year, President Jacob Zuma announced the government's plans to set up the guarantee fund of R1bn to incentivise the private banking and housing sector to develop new products to meet the housing demand in the country.

Moraba said the NHFC had entered into a master agreement with banks but still had to tie up the guidelines for the operation of the mortgage insurance fund and the sharing of the data of the various lenders.

The NHFC was engaging with banks about risk mitigation as there would be some form of risk sharing between the banks and the fund.

US government-run mortgage giants Fannie Mae and Freddie Mac, which buy home loans, package them into investments and guarantee them against default, played a major role in the subprime mortgage bond crisis.

However, Moraba said this insurance fund would differ from Fannie Mae and Freddie Mac, which almost guaranteed something "without opening the box and looking inside" and passed it on to institutional investors who could not see who was insured.

Risk mitigation was the top priority with the fund and the second level of risk mitigation would be the very strict underwriting roles of the partners.

Banks would not be able to merely approve home loans and shift the risk to the guarantee fund; they had to take on part of the risk. "Those are the current engagements with them (the banks)," Moraba said.

A formal announcement about the mortgage insurance guarantee fund would be made in about March next year.

Moraba added that the mortgage insurance fund would be a wholly owned subsidiary of the NHFC but registered, licensed and regulated by the Financial Services Board in terms of compliance with the regulations and its solvency requirements.

Once the mortgage insurance was in place, it was hoped that the mindset of banks would change in terms of lending into the affordable housing market, translating into broadened access to housing finance to the end beneficiaries.

However, Moraba said there would be other instruments used to intervene in the market, such as finance-linked individual subsidies that dealt with the affordability of the end user.

Marius Marais, the chief executive of First National Bank (FNB) Housing Finance, believed the fund would lower the cost of mortgage insurance because all mortgage bonds would be pooled into one and the risk shared on a bigger portfolio base.

FNB would pass on any cost benefit to its customers, he said.

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