Nedbank home loans: "worried about negative equity"

Falling property prices, not other banking woes, were the major reason for big four bank Nedbank (JSE: NED) tightening the lending screws, the bank's acting home loans boss Clive van Horen said on Wednesday.

He was responding to a report by Realestateweb about the bank clamping down on residential home loans as rumours swirled in the markets and in the media that the bank is in trouble.

Van Horen expressed discomfort over the Realestateweb report, questioning whether it was appropriate to link news that the home loans division would make it more difficult for consumers to borrow money with highly-publicised rumours about the bank.

Banks can easily go under if clients withdraw their funds en masse, so Nedbank is understandably anxious not to encourage the rumour.

South Africa does not have deposit insurance so clients stand to lose all their money where a bank fails.

In the past, there have been occasions when the government has helped banks rather than let them fail - and there have also been times when the government has allowed troubled banks to collapse.

Nedbank's chief executive Tom Boardman told Moneyweb's editor-in-chief Alec Hogg, on the SAfm Market Update with Moneyweb on Tuesday, that he had "no idea at all" what had fuelled rumours in the market that his bank was in trouble. The rumour spread quickly via SMS, and was broadcast on television.

"Normally we don't comment on speculation, but I think that (the fact that) the national carrier of news put something in a bulletin at 10 o'clock last night must have been a contributory factor."

Boardman was on the show to discuss a Nedbank trading update which reflected "a very good, solid third quarter".

The Nedbank boss suggested that a major source of comfort for those worried about the bank should be the fact that its lending figures are growing.

He told Hogg: "I think the most interesting thing in this quarterly update, we're still seeing strong advances growth, so our loans and advances grew year-on-year on an annualised basis by just over 19%."

Realestateweb received information this week that suggested the home loans book, an important part of the bank's loans and advances, could shrink.

A letter, sent by Nedbank's general manager of origination, said the bank was changing its loan-to-value criteria in "the light of the continued economic and financial pressures".

Investors and  sellers in lower-income areas where properties are on offer for up to R300 000 are likely to be hardest hit, as it is now very difficult to obtain 100% finance for these homes from any bank.

Van Horen, however, said the change would affect "a very tiny segment of the lower end of the market".

He also said that the home loans business was, at about 20%, a relatively small part of the picture.

Van Horen said shareholders would "definitely see" lower home loan growth rates than previous years but said there would "still be modest growth".

This is "not a dramatic tightening of credit", he said, particularly if compared to what the other three banks have done. "This puts us at where they are," he said of Nedbank and its competitors.

The latest Nedbank move would make it harder to meet targets aimed at helping lower income earners move out of shacks into their own homes, but Van Horen said the bank had to think of shareholders.

The higher value homes are already subject to more stringent requirements, he said.

Van Horen would not be drawn on whether Nedbank expects to tighten up on lending for residential property again soon, but said: "We're constantly looking at it. We're not saying we'll do it."

Van Horen said concerns about negative equity - where a property is worth less than the price paid for it - was the major reason for the change.

Nedbank does not have its own property index, but relies instead largely on Absa and Lightstone data, he said.

While the property industry has lost employees as the market shrinks, Van Horen said Nedbank had changed its mix of jobs so that it has "reduced" numbers in operations and the "front end" and "increased in the collections area".

This is similar to other banks, which are seeing a growing number of consumers struggling to repay their debts in the face of high interest rates and inflation.

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responses to this article

Nedbank need not fear. Customers will go to banks that can and not those that cannot. Nedbank believes its a bank that can... so no worries. As for deposit insurance, its is simple for a bank to arrange deposit insurance through other private institutions. No-one . .more does this in SA but it can be done and will pacify the risk-averse and cater to a market need. If I was any bank in SA I would fear the growth of Mutual Societies. Its time for their revival. Just review the historical precedents that initiated such societies and there are remarkable similarities to current conditions today. . .less by Bull on November 05 2008, 17:46 Find this comment inappropriate? Report it

trouble 100% loans had to come to grief why wd anyone be surprised ? by K Venter on November 05 2008, 18:00 Find this comment inappropriate? Report it

Negative equity is here!!! People who have bought in the last two years and didnt put at least 20% down are sitting in negative equity.There is no denying that. Prices are down and they are down big. by Bear on November 05 2008, 18:03 Find this comment inappropriate? Report it

My Christmas Wish I wish for Banks to come clean and explain to people WHY this could happen: "Banks can easily go under if clients withdraw their funds en masse, so Nedbank is understandably anxious not to encourage the rumour." by Freemarketman on November 05 2008, 18:15 Find this comment inappropriate? Report it

Really.... " Falling property prices, not other banking woes, the major reason for tightening the lending screws, says home loans boss " Tighten up the money supply so nobody can sell theie home is going to do what to house prices?? Surely this . .more is just going to add fuel to the fire and drive prices down further? . .less by the fireman on November 05 2008, 18:17 Find this comment inappropriate? Report it

Agreed... freemarketman agreed This is sounding very concerning, I thought exactly the same thing when I read that comment : "Banks can easily go under if clients withdraw their funds en masse, so Nedbank is understandably anxious not to encourage the rumour." The . .more fact they have put out 2 press releases sounds fishy to me too.. . .less by Brennan on November 05 2008, 18:22 Find this comment inappropriate? Report it

If Nedbank bites the dust and all depositors loose their money it stands to reason that all my outstanding debt will dissappear with them too? by Mischa on November 05 2008, 19:09 Find this comment inappropriate? Report it

Mischa- My answer would be No to debt, Yes to deposits. But if debt was called in you could arrange credit with another institution to pay off your debt. by Bull on November 05 2008, 19:27 Find this comment inappropriate? Report it

Bull You may be right on paper but in practice debtors will default en mass and the banks won't have the funds to pursue them. Debtors will simply walk away, who wouldn't. by Simon on November 05 2008, 20:23 Find this comment inappropriate? Report it

Depends upon the level of an individuals debt. And it also depends on which voting constituency it mainly affects. If its lower income groups SA Government assistance would probably be forthcoming. If its middle income black diamond and others they will probably be left to make their own plans. . .more Companies with debt would just throw in the towel. . .less by Bull on November 05 2008, 20:50 Find this comment inappropriate? Report it

Simon in fact any debt will be pursued by the liquidators ( as with any business going pear shaped) so Yes , debt will have to be paid back. by Gem on November 05 2008, 20:52 Find this comment inappropriate? Report it

@Brennan Stop agreeing with me Brennan...it sounds very fishy to me! Nobody ever agrees with me...lol !!! Just kidding. Regarding why banks can quickly go under, read here: http://mises.org/econsense/ch79.asp by Freemarketman on November 05 2008, 20:53 Find this comment inappropriate? Report it

@freemarketman No you are a deflationist and I am inflationist,.. We have moved on from Bulls and Bears, although I have never actually considred myself either. It was decided for me... Anyway its not if its going to get bad its about whats going to . .more happen and what you are gonna do about it to make money. But I see you are of the Austrian School ilk, I am of the Monetarism variety.. . .less by Brennan on November 05 2008, 21:10 Find this comment inappropriate? Report it

@ Gem I have been through liquidation and understand the process but don't forget pursuing debt costs money. If the debts are large and many there will not be funds in an insolvent business for recovery of the debts. No liquidator will pursue debts if there are . .more no funds for same and it can be a costly process. . .less by Simon on November 05 2008, 21:23 Find this comment inappropriate? Report it

Friedmanite ! Ouch ! ;-) by Freemarketman on November 05 2008, 22:38 Find this comment inappropriate? Report it

Remember BOE One hears that Tom is excellent so all should be good but one can never say never. by Phil on November 06 2008, 05:17 Find this comment inappropriate? Report it

Interesting link Freemarketman Thanks for posting it. I will now move my money out of the bank. Unfortunately I have to wait for about a month. by Anon on November 06 2008, 07:00 Find this comment inappropriate? Report it

WHERE TO INVEST SAFELY NOW? But we were told housing could only go up? Sees to me the SACP will have a field day with this capitalist boo-boo! So, can pensions be the next example of negative equity? Ek vra maar net. by WASP on November 06 2008, 07:01 Find this comment inappropriate? Report it

good for the goose Is it ok to demand surity from Nedbank for the money I have lent them - the credit balances in my account? They demand all sorts of surity when lending you a few beans. Whats good for the goose is good for the gander. by Samoosa on November 06 2008, 07:51 Find this comment inappropriate? Report it

This is further proof that property realists like CJ was right all along. Even the banks dont back property. This asset class is finished for at least a generation. by Ricko on November 06 2008, 08:43 Find this comment inappropriate? Report it

Irresponsible rumour mongering Moneyweb is guilty of spreading alarm and despondency. Don't you know that the whole economy rests on confidence. If you destroy that, all your panicky predictions will come true. Relax everyone, the government has demonstrated more than once that it will . .more stand behind any bank that suffers a run. . .less by Newton on November 06 2008, 08:50 Find this comment inappropriate? Report it

thats a broad sweeping statement Ricko and of course it has no substance. So Ricko are you looking at property as an investor or a home owner? I suspect the latter. If so its not a asset class, its a roof over your head and a liablity until the day its paid off. Dont . .more forget banks are in the business of lending money not buying property. The property is seen as their security for the loan. Property as an investment class and I refer to long term BTL, is only just starting to show signs of improvement after the boom years, now that all the speculators are gone. . .less by brennan on November 06 2008, 08:58 Find this comment inappropriate? Report it

Yes bulls - look at the rest of the worlds sats Wake up! by Gemini on November 06 2008, 09:17 Find this comment inappropriate? Report it

Nedbank in trouble Nedbank are definetly in trouble and this time old mutual wont be able to bail them out. by alcap on November 06 2008, 09:40 Find this comment inappropriate? Report it

we like rumpours Amazing that we still believe the rumour even after Nedbank has just shown better results that the other banks (impairments). IF you think Nedbank has problems, then surely the others like Investec must be in deep trouble. by gd on November 06 2008, 09:44 Find this comment inappropriate? Report it

Not Investec, look at their numbers and balance sheet Very strong. by chappie on November 06 2008, 09:53 Find this comment inappropriate? Report it

@chappie and Nedbank's even better. I wonder who started the rumour. A hedge fund shorting Nedbank maybe? by GD on November 06 2008, 10:03 Find this comment inappropriate? Report it

Agreed - Investec very strong Numbers looks as strong as an ox! However it is possible to show what you want to show through selecting certain accounting policies in IFRS to a certain extent. You would also need to analyse accounts to undertand the economic reality thereof. by NOT RUNNING WITH BULLS!! on November 06 2008, 10:03 Find this comment inappropriate? Report it

Look at future earnings Past results are exactly that - history. You have to look at future earnings. Goldman Sachs published near-record profits just weeks before they were forced to essentially close down and transform into a retail bank. Because of the levered nature of . .more banks' balance sheets, a loss of confidence can destroy a bank in a matter of days. I'll be very nervous if I owned shares in any SA bank. . .less by Sceptic on November 06 2008, 10:57 Find this comment inappropriate? Report it

Strong ? If Investec are so strong, then why is their share price down 60% in 18 months ? And how freely available is the information about their off-balance sheet transactions ? Also, can someone please explain if I have read this correctly . .more ? Tier 1 Capital adequacy ratios for the big 4 are as follows (as at 30 June 08); ABSA 11.4% Std 11.2% First Rand 11.2% Nedbank 8.7% Nedbank has just reported that at end Sep 08 the ratio was 8.8%. I don't have up-to-date numbers for the other 3. Thus Nedbank looks vunerable RELATIVE to the other 3 ? While this lower ratio is still above the minimum 7% requirement, the position is deteriorating due to growing mortgage defaults and slowing business. The UK banks were also well capitalised 6 months ago, and look what happened there. Have I got a number wrong ? . .less by DJ on November 06 2008, 12:17 Find this comment inappropriate? Report it

Simon Any house has a value. If the bank goes under , and lets use some numbers , if you owe the bank R1m , you will not be the lucky guy who gets to keep the house and your debt will be forgiven. The bank owns that house. The liquidator , just by selling that . .more house for any amount will be better of ( R1m less proceeds of the house), so yes , the house will be sold for something. And you have me , Brennan , andrewa and a few others just waiting to pick up a bargain. And there will always be a liquidator prepared to do it - demand and supply. So unless the whole economy as we know it ,collapses into oblivion ...I dont see you scoring a house . .less by Gem on November 06 2008, 13:39 Find this comment inappropriate? Report it

Paid off house with an accessbond with ABSA Dear Gem, My house is paid off. I did not close the account though, should I require the funds. But reading about the liquidation process, is it wise to leaave it like that or close the account and get my papers? Answer will help by Newton 2 on November 06 2008, 13:45 Find this comment inappropriate? Report it

To Newton 2 Have same situation with zero outstanding and bank still has bond registered on property. If you have zero owing they cannot make you pay or take the property. The only snag would be getting the bond cancelled under a curator / liquidator, which may take . .more longer. However, given the banks current stance regarding advances on bonds maybe we should get those paid up bonds cancelled. They are going to put you through the whole "NCA" story and then say sory, no can lend you. The flip side is the cost of registering another bond if you do need it. . .less by Samoosa on November 06 2008, 15:34 Find this comment inappropriate? Report it

Newton2 I am in that same situation (not with Absa) , and I have left all the bond accounts open. No extra charges to keep it open ( I just pay interest on R120 per account (outstanding balance). Reason being easy and instant access to funds. I think . .more as samoosa says , IF the bank goes belly up , it will just result in time wasted before you get the deed papers. . .less by Gem on November 06 2008, 17:57 Find this comment inappropriate? Report it

Banks failing? I'm astounded by all this chatter about SA big 4 banks failing? We've had bad downturns before and that didnt happen. Of the 4 Nedbank is the weakest and got into serious trouble twice. In 1985, when Chase Manhattan (Rockefeller) introduced sanctions . .more against us, Nedbank lost billions in forex at their London office. Obviously, they didnt see it coming and had taken positions that turned bad. Then they had another hiccup more recently when Laubscher and Hore departed. Nedbank has always been less risk averse than the others, and its cost them. I dont think they would take undue risks with their mortgage book, though. Of course, OM's woes will make the group wary, because their cushion is thinner. That might be the origin of these new policies. Cant see any failure risk with the other 3. Someone mentioned Investec. Much more like a Bear Stearns. They had a small subprime exposure but Koseff was not concerned. The market is saying their risk is higher, because shares and prefs are disproportionately down. However, nothing in their March AR signalled a threat. They'll produce an interim report soon and we'll see. . .less by Jack on November 06 2008, 19:56 Find this comment inappropriate? Report it

Gem Hi Gem Agree, I won't score a house for sure. Don't believe I alluded to this though in my prior post? by Simon on November 06 2008, 20:55 Find this comment inappropriate? Report it

Wrong Why the attack on Nedbank only. The other banks have all instituted this standard. ABSA went the route of withdrawing access facilites on surplus bonds where the debt to equity was above an accepatble level. Particularly on properites financed in the last . .more year. Your reporting while having a few facts behind it, hides half truths, inuendo and personal beliefs behind a veil of so-called facts. This and your article on the Wits accounting school have disappointed me as an avid reader of your pages. Doubt I will be back. . .less by Responsible Reporting on November 07 2008, 08:09 Find this comment inappropriate? Report it

Banks failing? Jack has a point that has implications for investors... Plan 1: Buy a cabin by a river with fresh water, start self subsistence farming (Not in SA - you'll be shot..) Stockpile Kruger Rand coins and Rifles with lotsa ammo... Take your kids out of school and self school them IT IS THE . .more END OF EXISTANCE AS WE KNOW IT AAAAhhhhhggggg!!! Plan 2 Or relax, use common sense, realise the cyclical down turn we are facing and WHAT THAT MEANS opportunity wise! If you think its the end of the world follow plan 1. In either case why panic?! . .less by JWi on November 07 2008, 13:39 Find this comment inappropriate? Report it

Banks are all the same When the poo-poo hits the fan, they will take everything you have. Dont let any advertising showing smiling ladies at counter fool you - they are sharks that will bite your A** right out. by Dave on November 07 2008, 18:14 Find this comment inappropriate? Report it

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