Home Real estate BDL decision upends plans of prospective first-time homeowners

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BDL decision upends plans of prospective first-time homeowners

Domestic dreams in jeopardy

by Jeremy Arbid

Just when you thought you could not disappoint teta any further, news that your home loan has been put on ice will surely do the trick. For the first time in nearly two decades, Lebanese citizens can no longer rely on the public sector for support in buying a starter home.

For older generations especially, Lebanese society is still a patriarchal one: The man must provide, and if he cannot, then he is not an eligible groom. For many young men, life leads inevitably toward that conversation with an elder on the general route of life: finish your education and then find a job so that a home can be purchased to house a wife and children. Those looking for more, asking the question ‘then what?’ are simply told that once these markers have been reached and children are in the picture the only thing left is to ‘live life.’

Following such profound wisdom in 2018 is neither as certain nor easy as these elders make it seem. For many single as well as dual-income households, the path to homeownership, marriage, and family planning is on hold—not because young Lebanese do not wish to marry or raise children, but because purchasing a home in Lebanon has become increasingly expensive, and many have been priced out of the homebuyers market. This is especially true in the capital, Beirut, where the minimum price for a first floor apartment can start at $2,000 per square meter, pushing people to search for properties in the suburbs and in the mountains overlooking the city. Now, with a public sector scheme designed to help low income, first-time homebuyers currently in limbo, even apartments away from Beirut may be out of reach. Parliament did legislate a one-year $66 million fix to subsidize housing loans as Executive went to print, but how much this temporary solution will help depends on future decisions, including on a more permanent solution by Parliament and a housing policy from the next government.

A subsidy is born

Public sector support for homeownership loans in Lebanon is currently on hold. At the end of 2017, Banque du Liban (BDL), the country’s central bank, decided it wanted to change course and would no longer offer the financing mechanism that had been key to facilitating low-interest home loans for nearly 20 years.

Since 2000, BDL has been helping subsidize home loans in two ways. First, the central bank allowed commercial banks to borrow against deposits held at BDL for liquidity purposes. Later, when Lebanon’s economy began to slow down, BDL offered stimulus packages geared toward Lebanon’s housing-related economic activity. Through both initiatives, commercial banks gained access to cheap credit with the understanding that savings would be passed on to the consumer in the form of lower borrowing rates.

Several organizations have made use of the financing through multiple schemes: BDL itself offered subsidized loans to developers to finance their projects, and home loans to employees in the public sector and the security forces. Lebanon’s housing bank, Banque de L’Habitat, offered loans with ceilings ranging from $553,000-$800,000 to qualifying Lebanese nationals and expats, respectively. The Public Corporation for Housing (PCH) channeled loans through  commercial banks to low-income Lebanese households buying their first home. (See explainer on financing and subsidy mechanism below.)

The discontinuation of the financing mechanism is cause for concern, especially due to its impact on the PCH. The PCH offers a housing loan, known locally as the “Iskan loan,” to borrower households earning less than $4,500 a month. PCH pays the difference between the interest rate offered by the commercial banks and a rate set by the central bank, covering this cost on behalf of the buyer. The loan amount needed is disbursed by the chosen commercial bank, following BDL’s financing rules.

This year, BDL was still willing to help homebuyers as part of its latest stimulus package, with a set budget of $500 million. This was exhausted during the first quarter of 2018, leaving applications in the pipeline in limbo. To satisfy the applications that had already been approved but were stuck for lack of funding, BDL promised additional money from the 2019 allocation. It is unclear how much money will be needed to make good on the approved loans, nor how much will be left to subsidize loans next year. The shelving of the financing mechanism and the early exhaustion of stimulus money means no more subsidized home loans for the foreseeable future.

The end of BDL’s financing mechanism means less cheap credit is available for banks to deploy for housing loans. Commercial banks could still finance loans from their own capital at the market interest rate, but with the exhaustion of the $500 million during Q1 2018, plus the amount BDL made available from 2019’s allocation, home loans will become more expensive in the long run and less attractive to the borrower.

What happened?

“The mission of the PCH is to facilitate Lebanese citizens’ access to housing through the provision of loans at low interest and competitive advantage,” explains Rony Lahoud, director of the housing authority.

Lahoud says that at the end of 2017, the central bank decided to no longer allow commercial banks access to their capital reserves—that money, held under a BDL rule for liquidity purposes, would again be blocked as it was before 2000. Concerning the PCH, BDL’s decision to allocate $500 million in lieu of the financing mechanism as a sort of interim solution translated as follows: The interest was set at 3.75 percent, commercial banks would lend from their capital via the PCH, and the central bank would pay the difference between the set rate and the commercial rate.

As is now known, the $500 million was not enough to satisfy demand for loans across the subsidization schemes of the different organizations. Lahoud tells Executive that every year PCH was averaging 5000 loans with the borrowing ceiling at $180,000 and the average loan disbursed at $133,000. This amounts to 50 percent of all subsidized loans but around 33 percent of their value. Lahoud says $2 billion in subsidized loans are disbursed annually, with the PCH facilitating roughly $700 million each year. (The central bank did not respond to Executive’s request for clarity on the breakdown of the subsidization schemes of the different organizations).

If the PCH only accounts for just one quarter of annual demand for subsidized loans, how was BDL’s allocation of $500 million for 2018 exhausted before the end of the first quarter?

There is no available data on who borrows what and how much, though presumably all organizations offering home loans—commercial banks, the housing bank, the PCH, and, ultimately, BDL—do collect such information. Although the reasons behind the rapid depletion of the housing fund cannot be determined, there are several possible contributing factors.

Increased demand for housing loans may have been brought on by public sector workers thanks to salary increases enacted last year, says Massaad Fares, director of Prime Consult, a real estate asset management firm. Fares says the salary increase may have boosted the number of households that could now afford a housing loan through the different subsidization programs, primarily the PCH. He speculated to Executive: “All of a sudden, [newly eligible workers] ran to the PCH to apply for a subsidized loan, and the banks began approving without looking at what funds were available. The allocation was finished but the approved loans were still there, and we still hadn’t finished the year. So the central bank made an exception, putting [forward] $500 million to give loans to those who were approved. This money was exhausted in two months.”

The absorption of available funds by big-ticket borrowers may be another factor. Lebanese expats and qualifiers residing in country could access subsidized financing to purchase homes at values up to $800,000 and $533,000 respectively, via BDL and the housing bank. Big-ticket borrowers, allegedly including the Mikati Group, a holding company founded by MP Najib Mikati—a billionaire and two-time former prime minister—may have eaten up a large chunk of the available funds. For its part, the Mikati Group said earlier this summer that it had accessed nearly $14 million in housing loans in 2011 and 2013, not from the PCH or the housing bank, but through another scheme offered by BDL that began in 2001, and denied any wrongdoing.

But we do know that since 2011, lenders have made fraudulent use of BDL money meant to subsidize home buying.

In early September, the central bank issued a statement announcing that it had counted 437 violations by undisclosed banks and their unnamed clients, and that it had consequently handed out fines to the tune of over $5 million, according to a statement quoted in The Daily Star.

Alain Aoun, a member of Parliament, told Executive in a mid-September interview that market conditions after then-Prime Minister Saad Hariri’s resignation under unusual circumstances in November 2017 were too juicy for unscrupulous lenders and borrowers to pass up. “So some people took the housing loan at 5 percent and parked it in a bank account earning 10 percent interest. This was done through complicity with some bankers and this is where anomalies were detected.” Aoun says that this is part of the reason why the available funds allocated for housing loans were quickly exhausted this year.

The central bank did not respond to Executive’s request to discuss this or any other matter relating to subsidized home loans.

What next?

Speaking with Executive before the temporary solution was legislated, Lahoud, the director of the PCH, said no more housing loans could be accepted until a solution is found to finance loans and to pay for the interest rate subsidy. He said that in 2018 PCH was able to service 1,800 loans before the BDL funds were exhausted, and that there are currently 500 loans in limbo—applications that were approved but cannot be financed.

Lahoud wants a solution to the issue of financing and if it were up to him, all subsidized loans would follow the criteria of the PCH, which stipulates that: household income should be less than 10 times the minimum wage ($4,500 per month); the household should not have taken any previous home loan from the public sector; the borrower should be a first time homebuyer; the borrower must have held Lebanese citizenship for more than 10 years; the borrower must be older than 21; and the borrower must not own an apartment within 25 kilometers of their place of work.

In June, Executive asked the governor of the central bank, Riad Salameh, whether the state could offer a solution to finance housing loans and pay for the rate difference. Salameh responded: “This will depend on the budget that [the government and Parliament] will adopt. Of course, all these initiatives need to be funded and need to be subsidized. Thus, if the policy of the government is to take over these activities, this will be shown in the next bud-get, because in the present budget there is no allocation for such subsidies.”

Lahoud said there were multiple legislative proposals that differ slightly but have the same objective:  that the state treasury should pay for the difference between the set interest rate and the market rate. “This will need a law and hopefully [one will be legislated] as soon as possible,” Lahoud says.

Aoun, a co-sponsor of one of the proposed laws, said that any legislative fix from Parliament to subsidize mortgages could come as a standalone law. But he says that since there are only three months remaining in 2018, any subsidies legislated immediately under this year’s budget framework should be followed up with similar measures for 2019 and beyond.

Aoun tells Executive that the treasury could pay the subsidy, but that it is unclear where exactly new revenue would come from. Salameh reportedly had suggested the reapplication of LL5,000 tax per 20 liters of gasoline, plus an increase to the value-added tax (which was already hiked last year, to 11 percent) to finance a fix for the housing loan crisis. In response, Lebanon’s current caretaker Minister of Finance Ali Hassan Khalil downplayed the possibility of new taxes in the 2019 budget. A second idea suggested by Aoun was to subtract the amount required to subsidize the interest rate from the tax bills of commercial banks. “We can encourage private banks to offer these mortgages by deducting the [amount needed to subsidize the loans].”

On September 25, Parliament passed a $66 million law to subsidize PCH loans for the coming year. It was not clear how this law woud work or how many loans the money would service, or what will happen past 2019. Where the money will come from to pay for this law is also not clear. If it is to be part of the 2019 budget, this would require government formation, because cabinet must approve and forward the budget to Parliament for it to be ratified into law. Ratifying the budget must be done at the start of the parliamentary session beginning in October and before any other laws can be considered.

Authorities scrambled to reach this temporary solution, but when the state will come up with a permanent one and how it will work is not known. Demand across the upper segments of Lebanon’s real estate market has already been slow for several years, and the discontinuation of the financing mechanism by BDL and the halting of the PCH subsidy this year meant the lower segments of the market came to a standstill—a dynamic threatening a knockout punch to the entire sector, developers tell Executive (see overview).

For individuals, purchasing a home is a major step in the building of wealth, and those without access to competitive financing are now unable to take this step. The route to homeownership for low-income households looking to purchase their first apartment was effectively blocked. This means teta will not be trying to marry you off anytime soon—such a disappointment.

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Jeremy Arbid

Jeremy is Executive's former economics and policy editor.

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