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CBE Amends Mortgage Initiative for

CBE Amends Mortgage Initiative for Low- and Middle-Income Individuals
In February 2016, the Central Bank of Egypt ("CBE") issued a decision to amend its "Mortgage Finance Initiative" for low- and middle-income individuals launched in February 2014 (the "Initiative"). Principally, the new decision: 1) creates new categories that can benefit from the Initiative; 2) grants new exemptions and provisions; and 3) encourages mortgage finance companies to implement the goals of the Initiative and to support banks.
Background
Over the last few years, the Egyptian government has given special attention to low- and middle-income individuals, and even more attention to the field of mortgage finance. Consequently, several legislations and initiatives have been issued to support low- and middle-income individuals, companies, and projects to acquire housing. In light of the aggravating housing crisis in Egypt, the CBE Initiative and its recent amendment come in accordance with the government's attempts to overcome the said crisis – especially after recently launching a number of social and middle-income housing projects – through providing safe, decent, and affordable housing for all citizens specifically low- and middle-income ones. Pertaining to the field of mortgage finance, several legislations have been promulgated in order to develop and promote the field. This includes: 1) Presidential Decree No. 55 of 2014 modifying the Mortgage Finance Law; 2) Decisions No. 1 and 2 of 2015 amending the executive regulation of the said law; and 3) Egyptian Financial Supervisory Authority's (EFSA) Board Decision No. 64 of 2015 regarding the special conditions and requirements needed to obtain licensing to practice mortgage finance or mortgage re-finance activities. Previous Egypt Legal Update issues have already thoroughly covered most of these decisions and amendments. All this has been complemented by CBE's "Mortgage Finance Initiative" for low- and middle-income individuals launched on 19 February 2014 and amended on 24 February 2016.
The Initiative
On 19 February 2014, the CBE launched an initiative whereby it allocated EGP 10 billion for mortgage finance activities, in favor of low- and middle-income individuals, and for a period of 20 years. The banks were to re-lend the allocated amount to targeted beneficiaries through a reduced interest rate of 7% per annum for low-income individuals and 8% per annum for middle-income individuals (the rates remain constant throughout the loan term). The said financing was to be directed for the purchase of housing units in new urban communities. It should be noted that the Initiative has confirmed the eligibility of low-income individuals to benefit from both CBE's Initiative, as well as the support provided by the Mortgage Finance Fund. The latter Fund was established by virtue of Presidential Decree No. 405 of 2014. Its main purpose is to provide cash support to low-income individuals for mortgage finance activities, and therefore reduce financing burdens and prices of housing units for them. It adopts a gradual approach, whereby financial support increases with the decrease of the individual’s income and vice versa. Requirements to benefit from CBE's Initiative are as follows: 1) the beneficiary must be Egyptian; 2) the beneficiary should obtain funding for only one housing unit; 3) the monthly income of beneficiaries should not exceed EGP 8,000 for an individual and EGP 10,000 for a family; 4) the unit’s value should not exceed EGP 300,000; and 5) the units must be dedicated for housing purposes only, since the Initiative does not include licensed units used for touristic purposes. The main provisions of the Initiative are:
  1. Banks are entitled to the mentioned amounts on a monthly basis after they have paid their clients, provided that each bank conducts the necessary credit studies, in accordance with its own policy, obtains credit approvals, and meets all conditions and guarantees; while taking the following points into account as minimum requirements:
  • Conducting client checks, through the Egyptian Credit Bureau and the Credit Risk Department at the CBE, in order to determine the client's previous history with the banking sector.
  • Ensuring that the client does not obtain another funding under the same Initiative.
  • Ensuring that the bank has been provided with a first class mortgage or under escrow deposit.
  • Providing a system for evaluating and analyzing the creditworthiness of clients.
  • Ensuring that banks receive requests from low-income individuals through the Mortgage Finance Fund.
  1. Introduction of an electronic system at the CBE ("MIS"); its role is to tighten control over clients to ensure that they purchase only one housing unit via the mortgage finance system. The MIS provides instantaneous information on clients, including the issuance of their credit approvals, and the disbursement of the loan, provided that banks and mortgage companies are committed to the following:
  • Registration of clients' data on the system, given the templates prepared by the CBE. This ensures that information on clients' credit approvals (whether from a bank or from a mortgage finance company) is available immediately after the submission of the request. This would avoid any duplications of issuing credit approvals for the same client. In case of families, the bank should register all data of the husband and spouse. This data can be updated by submitting documents proving the change of marital status of clients through the entity providing the loan. The Control and Supervision Department at the CBE must verify the submitted data.
  • When disbursing to clients, mortgage finance companies are obliged to disclose the name of the bank which provided them with the funds. The monthly requested amounts from the CBE represent the total value of the actual amounts paid by the bank to its customers, in addition to what has been directed to mortgage finance companies. The Initiative also ensured that the process of submission of data to the system are to be carried out with extreme accuracy, so as to ensure the validity of the information used and relied upon by the rest of the banks and mortgage finance companies when dealing with clients.
  1. Regular Commitment of banks to the following actions (taking into account the necessity of separation between low- and middle-income individuals):
  • Providing the CBE on a monthly basis with the following: (1) schedules with the expected amounts to be paid on quarterly basis installments, which are accrued on the first working day after the end of each quarter (excluding return), in accordance with the expected repayment schedules of clients who received funding; (2) treasury bills are deposited on the first working day of each month in exchange of the required amount for disbursement for the whole month or the amount used at the end of the quarter, depending on each case.
  • Providing the CBE on a quarterly basis (five working days before the end of the quarter), with the value of the accelerated repayment, or the sale of units (whether voluntary or compulsory sale), before the expiry of the loan term. In addition to the banks' commitment to amend central bank's agenda by excluding the installments of such loans (with no return), and the subsidized amount in the interest rate, which should be refunded to the CBE.
  • Automatic deduction of the value of the installments on the bank's account at the due date, in accordance with the repayment schedules previously provided to the CBE and regardless whether the clients become insolvent or require debt rescheduling.
    • In case the client intends to sell the unit or repay the debt before its due date, the subsidized amount in the interest will be refunded starting from the date of granting the loan and until the date of sale/accelerated payment. In this case, the difference between the concessional interest rate and the rate based on the application of lending by 5% above the price of the final lending for low-income individuals, or 4% above the price of the final lending to middle-income ones will be calculated. This difference will be repaid to the CBE, provided that there is no commission for the accelerated repayment.
    • In case the client is insolvent, the subsidy shall be refunded using prescribed percentages in the year of insolvency. This shall be done immediately after the transfer of ownership of the housing unit to the bank, and shall be done regarding the installments starting from the date of granting the loan and until the date of the unit transfer. The bank is required to provide the CBE at the end of each quarter with the value of all units with transferred ownership as a result of insolvency of its clients.
  • The Bank may apply delay fees, not exceeding 2% above the price of the final lending to the client, on the due payable installments. In case the bank's approves the client's request to schedule the debt, the pricing shall be calculated according to the prices of the Initiative on the date of granting the loan.
  1. Benefiting from the CBE Initiative can o only once, regardless of any other real estate loans that have been or will be obtained by the client outside the framework of the Initiative.
  1. The possibility of using the evaluation of the units that require funding prepared by either the Ministry of Housing, or the New Urban Communities Authority, or real estate evaluation specialists enlisted in consulting firms that are registered at the CBE. It is also possible to use real estate evaluation specialists identified by the relevant authorities, so as to reduce the cost of real estate valuation.
Amendments of the Initiative
On 24 February 2016, the CBE decided to amend its Initiative. The amendments can be summarized in the following points:
  1. Offering the funding option for individuals with incomes below EGP 1400 (a new category) through a 5% rather than a 7% interest rate. This amendment enables individuals who have not been able to benefit before from the Initiative, due to their low incomes or inability to prove income levels, to make use of the Initiative. This would further reduce the burdens on low- and middle-income individuals, as now banks are encouraged to fund, even those with no proof of income, through covering their credit risks via collective insurance bills. The amendment also assured that Mortgage Finance Funds will determine those who are eligible for the concessional within the Initiative. It also indicated the pricing limits for the housing units that can be financed for low-income individuals.
  1. Offering the funding option for a new category known as "earners of above average income". This new category was introduced in order to help youth wishing to acquire housing through the Initiative at an annual 10.5% reduce interest rate; making this category the least subsidized one. This funding is conditional on the monthly income of the young client not exceeding EGP 15,000 per person and EGP 20,000 per family, and provided that the price of funded unit does not exceed EGP 950,000.This amendment shall contribute in encouraging real estate developers to build new and banks to provide financing for middle-income individuals.
  1. Considering the maintenance deposit part of the funding for low-income individuals, with the same payment duration and interest rate stipulated by the Initiative (5% or 7% for low-income individuals, 8% for middle-income individuals, and 10.5% for earners of above average income).
  1. Exempting from the repayment of the value of subsidy in case of death of the borrower/debtor.
  1. Finally, opening up new marketing channels through the direct involvement of mortgage finance companies in the Initiative (through the Egyptian Company for Mortgage Re-finance) to work side by side with banks in order to ensure the achievement of the objectives of the Initiative. 
Commentary
The Initiative and its amendment are considered one of the most important steps taken by the CBE in the previous period that could help revive the housing market. No doubt that it will contribute largely to solving the housing problem in the country; provided that it is properly implemented. It is noteworthy that such an Initiative requires good promotion and marketing, so as to ensure that all citizens are aware of and can benefit from it. This is quite obvious from the fact that despite the Initiative was launched in February 2014 and officially implemented in April 2014, yet, so far it did not incur any remarkable achievements. This could be attributed to the non-conformity of many banks to its requirements and provisions of the Initiative, or to the ignorance of many citizens of the existence of such an Initiative.  
In February 2016, the Central Bank of Egypt ("CBE") issued a decision to amend its "Mortgage Finance Initiative" for low- and middle-income individuals launched in February 2014 (the "Initiative"). Principally, the new decision: 1) creates new categories that can benefit from the Initiative; 2) grants new exemptions and provisions; and 3) encourages mortgage finance companies to implement the goals of the Initiative and to support banks.
Background
Over the last few years, the Egyptian government has given special attention to low- and middle-income individuals, and even more attention to the field of mortgage finance. Consequently, several legislations and initiatives have been issued to support low- and middle-income individuals, companies, and projects to acquire housing. In light of the aggravating housing crisis in Egypt, the CBE Initiative and its recent amendment come in accordance with the government's attempts to overcome the said crisis – especially after recently launching a number of social and middle-income housing projects – through providing safe, decent, and affordable housing for all citizens specifically low- and middle-income ones. Pertaining to the field of mortgage finance, several legislations have been promulgated in order to develop and promote the field. This includes: 1) Presidential Decree No. 55 of 2014 modifying the Mortgage Finance Law; 2) Decisions No. 1 and 2 of 2015 amending the executive regulation of the said law; and 3) Egyptian Financial Supervisory Authority's (EFSA) Board Decision No. 64 of 2015 regarding the special conditions and requirements needed to obtain licensing to practice mortgage finance or mortgage re-finance activities. Previous Egypt Legal Update issues have already thoroughly covered most of these decisions and amendments. All this has been complemented by CBE's "Mortgage Finance Initiative" for low- and middle-income individuals launched on 19 February 2014 and amended on 24 February 2016.
The Initiative
On 19 February 2014, the CBE launched an initiative whereby it allocated EGP 10 billion for mortgage finance activities, in favor of low- and middle-income individuals, and for a period of 20 years. The banks were to re-lend the allocated amount to targeted beneficiaries through a reduced interest rate of 7% per annum for low-income individuals and 8% per annum for middle-income individuals (the rates remain constant throughout the loan term). The said financing was to be directed for the purchase of housing units in new urban communities. It should be noted that the Initiative has confirmed the eligibility of low-income individuals to benefit from both CBE's Initiative, as well as the support provided by the Mortgage Finance Fund. The latter Fund was established by virtue of Presidential Decree No. 405 of 2014. Its main purpose is to provide cash support to low-income individuals for mortgage finance activities, and therefore reduce financing burdens and prices of housing units for them. It adopts a gradual approach, whereby financial support increases with the decrease of the individual’s income and vice versa. Requirements to benefit from CBE's Initiative are as follows: 1) the beneficiary must be Egyptian; 2) the beneficiary should obtain funding for only one housing unit; 3) the monthly income of beneficiaries should not exceed EGP 8,000 for an individual and EGP 10,000 for a family; 4) the unit’s value should not exceed EGP 300,000; and 5) the units must be dedicated for housing purposes only, since the Initiative does not include licensed units used for touristic purposes. The main provisions of the Initiative are:
  1. Banks are entitled to the mentioned amounts on a monthly basis after they have paid their clients, provided that each bank conducts the necessary credit studies, in accordance with its own policy, obtains credit approvals, and meets all conditions and guarantees; while taking the following points into account as minimum requirements:
  • Conducting client checks, through the Egyptian Credit Bureau and the Credit Risk Department at the CBE, in order to determine the client's previous history with the banking sector.
  • Ensuring that the client does not obtain another funding under the same Initiative.
  • Ensuring that the bank has been provided with a first class mortgage or under escrow deposit.
  • Providing a system for evaluating and analyzing the creditworthiness of clients.
  • Ensuring that banks receive requests from low-income individuals through the Mortgage Finance Fund.
  1. Introduction of an electronic system at the CBE ("MIS"); its role is to tighten control over clients to ensure that they purchase only one housing unit via the mortgage finance system. The MIS provides instantaneous information on clients, including the issuance of their credit approvals, and the disbursement of the loan, provided that banks and mortgage companies are committed to the following:
  • Registration of clients' data on the system, given the templates prepared by the CBE. This ensures that information on clients' credit approvals (whether from a bank or from a mortgage finance company) is available immediately after the submission of the request. This would avoid any duplications of issuing credit approvals for the same client. In case of families, the bank should register all data of the husband and spouse. This data can be updated by submitting documents proving the change of marital status of clients through the entity providing the loan. The Control and Supervision Department at the CBE must verify the submitted data.
  • When disbursing to clients, mortgage finance companies are obliged to disclose the name of the bank which provided them with the funds. The monthly requested amounts from the CBE represent the total value of the actual amounts paid by the bank to its customers, in addition to what has been directed to mortgage finance companies. The Initiative also ensured that the process of submission of data to the system are to be carried out with extreme accuracy, so as to ensure the validity of the information used and relied upon by the rest of the banks and mortgage finance companies when dealing with clients.
  1. Regular Commitment of banks to the following actions (taking into account the necessity of separation between low- and middle-income individuals):
  • Providing the CBE on a monthly basis with the following: (1) schedules with the expected amounts to be paid on quarterly basis installments, which are accrued on the first working day after the end of each quarter (excluding return), in accordance with the expected repayment schedules of clients who received funding; (2) treasury bills are deposited on the first working day of each month in exchange of the required amount for disbursement for the whole month or the amount used at the end of the quarter, depending on each case.
  • Providing the CBE on a quarterly basis (five working days before the end of the quarter), with the value of the accelerated repayment, or the sale of units (whether voluntary or compulsory sale), before the expiry of the loan term. In addition to the banks' commitment to amend central bank's agenda by excluding the installments of such loans (with no return), and the subsidized amount in the interest rate, which should be refunded to the CBE.
  • Automatic deduction of the value of the installments on the bank's account at the due date, in accordance with the repayment schedules previously provided to the CBE and regardless whether the clients become insolvent or require debt rescheduling.
    • In case the client intends to sell the unit or repay the debt before its due date, the subsidized amount in the interest will be refunded starting from the date of granting the loan and until the date of sale/accelerated payment. In this case, the difference between the concessional interest rate and the rate based on the application of lending by 5% above the price of the final lending for low-income individuals, or 4% above the price of the final lending to middle-income ones will be calculated. This difference will be repaid to the CBE, provided that there is no commission for the accelerated repayment.
    • In case the client is insolvent, the subsidy shall be refunded using prescribed percentages in the year of insolvency. This shall be done immediately after the transfer of ownership of the housing unit to the bank, and shall be done regarding the installments starting from the date of granting the loan and until the date of the unit transfer. The bank is required to provide the CBE at the end of each quarter with the value of all units with transferred ownership as a result of insolvency of its clients.
  • The Bank may apply delay fees, not exceeding 2% above the price of the final lending to the client, on the due payable installments. In case the bank's approves the client's request to schedule the debt, the pricing shall be calculated according to the prices of the Initiative on the date of granting the loan.
  1. Benefiting from the CBE Initiative can o only once, regardless of any other real estate loans that have been or will be obtained by the client outside the framework of the Initiative.
  1. The possibility of using the evaluation of the units that require funding prepared by either the Ministry of Housing, or the New Urban Communities Authority, or real estate evaluation specialists enlisted in consulting firms that are registered at the CBE. It is also possible to use real estate evaluation specialists identified by the relevant authorities, so as to reduce the cost of real estate valuation.
Amendments of the Initiative
On 24 February 2016, the CBE decided to amend its Initiative. The amendments can be summarized in the following points:
  1. Offering the funding option for individuals with incomes below EGP 1400 (a new category) through a 5% rather than a 7% interest rate. This amendment enables individuals who have not been able to benefit before from the Initiative, due to their low incomes or inability to prove income levels, to make use of the Initiative. This would further reduce the burdens on low- and middle-income individuals, as now banks are encouraged to fund, even those with no proof of income, through covering their credit risks via collective insurance bills. The amendment also assured that Mortgage Finance Funds will determine those who are eligible for the concessional within the Initiative. It also indicated the pricing limits for the housing units that can be financed for low-income individuals.
  1. Offering the funding option for a new category known as "earners of above average income". This new category was introduced in order to help youth wishing to acquire housing through the Initiative at an annual 10.5% reduce interest rate; making this category the least subsidized one. This funding is conditional on the monthly income of the young client not exceeding EGP 15,000 per person and EGP 20,000 per family, and provided that the price of funded unit does not exceed EGP 950,000.This amendment shall contribute in encouraging real estate developers to build new and banks to provide financing for middle-income individuals.
  1. Considering the maintenance deposit part of the funding for low-income individuals, with the same payment duration and interest rate stipulated by the Initiative (5% or 7% for low-income individuals, 8% for middle-income individuals, and 10.5% for earners of above average income).
  1. Exempting from the repayment of the value of subsidy in case of death of the borrower/debtor.
  1. Finally, opening up new marketing channels through the direct involvement of mortgage finance companies in the Initiative (through the Egyptian Company for Mortgage Re-finance) to work side by side with banks in order to ensure the achievement of the objectives of the Initiative. 
Commentary
The Initiative and its amendment are considered one of the most important steps taken by the CBE in the previous period that could help revive the housing market. No doubt that it will contribute largely to solving the housing problem in the country; provided that it is properly implemented. It is noteworthy that such an Initiative requires good promotion and marketing, so as to ensure that all citizens are aware of and can benefit from it. This is quite obvious from the fact that despite the Initiative was launched in February 2014 and officially implemented in April 2014, yet, so far it did not incur any remarkable achievements. This could be attributed to the non-conformity of many banks to its requirements and provisions of the Initiative, or to the ignorance of many citizens of the existence of such an Initiative.