How far will LL100 billion go? That was the main question Executive posed to Rony Lahoud, head of Lebanon’s public housing authority, the Public Corporation for Housing (PCH). While there are still variables to be calculated, at the time of this interview in late October, Lahoud suggested that almost two thirds of the demand for subsidized loans via the PCH would go unsatisfied next year.
For nearly two decades, until the end of 2017, Banque du Liban (BDL), Lebanon’s central bank, had offered cheap credit to commercial banks with the understanding that savings would be passed on to home loan borrowers (see October cover story). This year, BDL still offered cheap credit worth $500 million to the banks to finance home loans as part of its stimulus package, but that money was quickly used up. By July, the PCH had to stop accepting loan applications, creating a housing loan crisis that is now close to being solved, thanks to the LL100 billion ($66 million) allocated for this purpose in a swiftly passed law.
Given Lebanon’s current interest rate environment, it is not yet clear how many loans the PCH can offer with the allocated amount. Lahoud tells Executive that the housing authority is hoping to conclude negotiations—which include discussion of a new PCH loan product—with commercial banks by early November. Then, Lahoud says, he’ll know how much the subsidy will cost the PCH and the borrower, and how many loans the housing authority can support.
E How were subsidized home loans financed before?
This new law is specific to the PCH—all other agencies or banks that offered subsidized loans [have stopped doing so]. Since 1999, [BDL] allowed every commercial bank to access up to 15 percent of their capital reserves held at the central bank to give home loans via the PCH and other institutions. And from 2013, there was the stimulus package, where the central bank offered a loan at 1 percent interest to commercial banks to use for home loans. At the end of 2017, the central bank stopped the first one [meaning banks could no longer access their capital reserves to finance mortgages], but it offered an additional $500 million in 2018 as part of its stimulus package.
E This is the $500 million that was quickly exhausted during the first quarter of 2018?
This was the amount that [BDL said] could be used for home loans, across all subsidy schemes via PCH, the Lebanese Armed Forces, Banque de l’habitat, and directly from the banks. The banks could borrow this money from the central bank at 1 percent interest and were offering around 4 percent on mortgages. This $500 million could not satisfy demand.
E Mortgages across all subsidized schemes is nearly $2 billion per year, so the central bank’s offering of $500 million for 2018 is only around 25 percent of demand by total value. Of that $2 billion, the PCH offers almost $700 million per year by total value.
For the PCH it is 5,000 loans per year with an average of $126,000 per loan. The average loan amount [multiplied by] 5,000 is $643 million per year.
E The money for subsidized loans dried up quite quickly this year, and in September you told Executive that PCH approved 1,800 loans in 2018 before the money ran out.
It’s two thousand files this year, in the 10 months from the beginning of the year until now. This is $244 million disbursed by total value. The $500 million was divided by a quota between the banks and they let us know they had no more money to finance subsidized loans. We took the decision to stop receiving new files because we could not take in new applications while there were still some on hold at the banks. At the same time, people were presenting files to the PCH, hoping their application would be approved soon, but in reality we could not approve any new loans. So we preferred to stop receiving files until a financing solution could be found, because most probably a new solution would be more expensive than it was before and [potential borrowers] might decide not to take a home loan at 7 or 8 percent interest.
E What was the official date that PCH closed its doors to new mortgage applications?
It was the beginning of July when we stopped accepting.
E Now that Parliament has passed a law to finance PCH loans are you accepting applications?
No, not yet. The new law is already in force and we’ve started negotiations with the banks and the Association of Banks to see what can be done, and how we can start again giving loans, at what interest rates, whether we’ll need to change any criteria, and we are trying to create a new product. Before, our product was somewhat complicated: Over the first half of the loan, the borrower was paying just the principal, while the PCH paid the interest; the second half, the borrower paid back the PCH. So it was somewhat complicated and needed a lot of tracking from our end.
E The PCH Facebook page recently posted that you were beginning to negotiate with the banks in relation to this law and to restart the subsidy scheme. What is being negotiated?
Before we paid the interest on the first period [the first 15 years of a 30 year PCH mortgage, when borrowers were paying the principal], and now PCH is going to subsidize the loans on the whole period. But now we’re talking about an environment where the interest rate is 10 or 12 percent and PCH is to subsidize that for the borrower, which is impossible for the PCH to pay the whole interest. So PCH is building a new product more similar to those offered at banks, where the citizen pays toward the principal and interest for the whole period.
[With the new product] the period can no longer be 15 years—it should become 25 years, and the loans should be offered in Lebanese lira. These two criteria were accepted by the banks. But what about the interest rate environment? We suggested that the subsidized interest be paid upfront. We’ll discount all of the interest subsidy and pay the net present value from the PCH. The whole amount of the interest that PCH is to subsidize will be paid at the beginning of the loan. The borrower pays the second part of the interest, paying toward the principal and interest over 25 years. This way the interest rate will be much less for the borrower than the market interest rate.
E So because of the interest rate environment, the PCH might not subsidize 5,000 loans, as it had been doing before this year?
We project demand from all potential low-income and medium-income borrowers via the PCH to reach 8,000 applications. For sure we cannot service 8,000 files with the LL100 billion, so what we are going to do is accept many fewer applications, maybe meeting 30 percent of demand. We haven’t finalized our estimations yet because we are still negotiating with the banks on the interest rate for the mortgage and on the interest that the PCH will cover. If we are going to pay 5 percent from the PCH and 5 percent from the borrower, maybe it will be ok, but until now we haven’t reached a final decision with the banks. Once we calculate these two variables we will better know how many loans the PCH can subsidize in 2019.
E This law is applicable from January 1, 2019 to December 31, 2019?
It is on the state budget of 2018, and we’ll figure out how to use it for 2019 as well.
E What comes next after 2019, or if this money is used up earlier?
We’ll discuss that next, but now we’re focusing more on the new product with the banks, and once we have that, we’ll know how much it will cost the borrower and the PCH.
E Is it possible that the PCH may be able to increase its annual budget as part of its request to the next state budget, and this LL100 billion would be the requested amount?
Yes, hopefully. Once we have this product and determine the two variables—interest for the borrower and what the PCH will subsidize—with the average disbursement amount of $126,000, we’ll know how many files [the LL100 billion] can subsidize via the PCH. Once we have all these numbers we’ll discuss with the Ministry of Finance to know where we are and what we can do.