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When Land or House Turns into Bad Debt

Francis Wanyeki
Mr Francis Wanyeki director of Fountain View real estate Kitengela. PHOTO | COURTESY 

In 2012, Francis Wanyeki looked at a 10-acre piece of land in Kitengela, tufts of dry grass combed by wind and a beaten path winding into a distance of the picturesque landscape.

But here he saw a vision, he saw 70 three-bedroom houses, manicured lawns, live bush hedges and tarmac roads, he saw a future in real estate and he was not alone.

Where he saw units that could fetch him Sh7 million each, his banker saw assets it could loan against so he got the money to build.

Fast forward to 2019, Francis looks at land and does not see houses growing like trees, he sees the three acre piece of land where he is yet to put up houses and sees liquidity if he can sell the land as serviced plots for Sh7.5 million just to keep the banker away.

The 55-years-old surveyor turned a real estate developer says he was shocked when he realised on the fine print that even with the rate cap, banks could charge as much as they want, once one fell behind the mortgage payments as default rates, which you had to accept or lose your house to the auctioneers hammer.

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“Once a developer is subjected to pay penalties on loans, it might force them to increase cost of the house which led to very slow market uptake further creating a financial crisis to the developer,” Francis says.

He says, the undefined penalties on banks have forced him as a developer to adopt a new method of remaining relevant in business. He now sells serviced plots and even here there are no takers. “Banks risk assessment fear is hindering easy approval of the loans,” Francis says, standing on a 50 by 100 serviced plot is currently selling at Sh2.8 million.

“Financing remains a key challenge developers are facing and the major stumbling block when it comes to bank loans is lack of penalties control definition. We better have a capping rate of 20 per cent and minimise the penalties charges on delayed loan repayment,’’ he says.

Borrowers are pulling all manner of stops to avoid being auctioned including joining the long list of ‘the distressed’ seeking safety nets like those fundraising for health or school fees in WhatsApp groups.

However should you fall into this nightmare, if you have paid for the house half way and the house is placed on auction, you have not lost everything.

Jared Osoro, the Kenya Bankers Association director of research and policy says that one should try shopping around for another lender since if you are distressed it is unlikely that the primary lender will want to tweak around the tenor and payments.

“What usually happens is that if the property has to be auctioned, there are two ways. You are given the first portion of seeing whether you can get refinancing, if you can get somebody else to take that loan out then they will discharge the mortgage and the new party can take it up in different terms including lengthening the maturity profile in which case your regular payments will be much lower,” he says.

Jared says that even when the property is auctioned one is entitled to the money paid up to the point he or she fell into distress.

“If it goes to the last resort, the law is you can only auction at market value, whatever state. The lender can only recover the portion that is outstanding and the rest is due to you legally,” he said.

The rise in default is opening up conversations at the insurance sector on whether there are enough products that can save a borrower in case of a default.

The mortgage market is in two levels, the first is where you get a loan from a bank to acquire a house in which case that house is mortgaged as security for that loan.

The mechanics of it are once you go into that transaction there are several safeguards that a lender has to put in place for that documentation to be complete. Typically, it includes safeguards like, you have to have the insurance for the property itself, either fire insurance for the property and life insurance in case of death.

Currently, there are products that cover unforeseen issues like job losses, but these come with strict terms or higher costs.

“Now people have gone ahead and brought up some additional insurance products in case of retrenchment or job loss, and you know there are several conditions that come with those add-ons,” Jared said.

“If you are a driver and you have your job and it has enabled you to get a mortgage and you are sacked because you are driving drunk or with an expired license, you cannot run because that is negligence on your part,” he said.

Peter Kagia, a general life insurance at Monarch says initially insurance just covered lenders but now even those taking the mortgage are seeking cover.

He said the rising cases of terminal illness like cancer and organ failures, disability through accident and involuntary loss of employment are some of the new areas where insurance is growing as uncertainties over mortgages grow.

“What insurance usually pays is the interest on the mortgage for a period of time not exceeding nine months, it’s not for the full period of service but to allow you to get back on your feet,” Peter said.

Homeowners who can barely keep up with mortgage payments are dreading the day they will flip open a copy of the newspaper and find their property listed for auction.

Worse still are those who have assigned currency to their names and the auctioneers corner is an indictment to their credit scores as well as a social measure of the health of their pockets.

The problem is widespread, and it is showing right through the entire construction sector.

“The question we should be asking is why properties are being auctioned,” said Jared.

“It has to do with the economic cycle and whether people’s disposable incomes are sufficient to make them meet their obligations. It’s not all because somebody has lost a job or somebody has died, there are people who are still in jobs but are being kicked out of their homes so it must be something to do with their circumstances beyond being sacked,” he said.

A University of Nairobi study, The Causes of Non-performing Mortgage loans in Kenya’s Residential Property Market by Waiganjo Chege indicates that economic woes in Kenya has often led to retrenchments as firms and industries were forced to shut down or reduce their operations, leading to reduced demand for new mortgages because of rising unemployment but also to a high number of mortgagees who have been unable to service their loans as per the mortgage contracts.

Instead of offering discounts on interest rates and more lenient repayment terms in order to recover their money, they levy additional payments as a punishment for a mortgagees incapacity to pay, equating incapacity with unwillingness to pay,” Waiganjo said.

Kagia said cash flow problems tied to medical bills is the second most prevalent reason for defaults.

Andrew Chimphondah, the Shelter Afrique executive officer says local banks have tightened their credit standards and introduced stricter rules of engagement, leaving the borrower at the mercy of the lender. Most defaulters are subjected to harsh penalties by the lender.

He attributed project failures or stalling of projects to improper feasibility studies, inadequate financing and capped interest rates and general economic slowdown, or sometimes changes in preferences.

“In the case of Kenya, it could be as a result of a tighter credit regime by the banking sector. It’s now a bit harder to get construction loans by developers or mortgage loans by end users or buyers,’’ said Andrew.

This dire state has affected housing prices which means that even the repossessed houses are fetching a low price at market value and even lower in the case of forced sale.

The Kenya Bankers Association Housing Price Index report indicated a depressed housing market during the second quarter of 2019 after declined for the second consecutive quarter by 1.72 per cent in quarter two 2019 compared to a decline of 2.78 per cent during the previous quarter.

According to the report, the reduction in house prices was due to the interplay between demand and supply conditions coupled with limited credit.

The subdued housing market outlook was due to weak household income and credit constrains.

“For the second consecutive quota we are in the red, this means that even that property value itself is in decay, a house that you could have sold for Sh20 million right now you can only sell for Sh17 million since prices are on a decline,” Jared said.

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