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Home Loan Sector Is Showing Early Warning Signals

The number of people who cannot afford their monthly bond repayment is increasing in South Africa and causes concern in the industry.

The US home loan market experienced a crisis after 22 lenders in the US sub prime market has been declared bankrupt in the past two months. Household debt had risen sharply in the past few years but fortunately in South Africa; banks are more conservative than those in the US. Banks are not locked into a rate at which the loans become unprofitable.

Managing director of home loans at Nedbank says that disposable income is decreasing since mortgage credit was introduced 8 months ago. Agencies are rated and securitised very carefully and investors price the issue in line with how it is rated. The low end of the market in the US first showed signs of consumer distress and the concern in South Africa is for those newcomers to sustain the higher monthly repayments after the higher interest rates last year.

In June, the National Credit Act comes into force and this will make it difficult for banks to extricate themselves from arrangements with defaulting debtors. Through a registered debt counsellor, debtors who are in arrears will be able to negotiate rescheduling of debt with the credit provider and the debt counsellor may approach a court and make recommendations on debt restructuring.

Original Article: Business Report, 11 March 2007