Lebanon’s Public Corporation for Housing under attack

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A new high-rise residential building in Beirut's Sodeco neighborhood. (Photo: Marwan Tahtah)

By: Mouhamad Wehbe

Published Saturday, July 26, 2014

A number of banks have circulated internal memos asking their housing loans departments to stop accepting applications for loans backed by al-Iskan, the Public Corporation for Housing (PCH). The memos seem to have been the result of a decision adopted by the board of the Association of Banks in Lebanon (ABL), after the PCH failed to pay $25 million owed to five Lebanese banks. The majority of banks have since decided to suspend the implementation of the decision, however, following a backlash from their clients, while other banks have chosen to see the controversy as an opportunity to make their move against the public institution.

At the request of the ABL Vice President Saad Azhari, the board of the banking association convened a few days ago and made a decision to suspend PCH-backed housing loans. Some banks were quick to enforce the decision, and equally quick to backtrack a day or two later. But other banks, according to a banking source, including BLOM Bank, will continue to implement the ABL board’s decision.

According to informed sources, two things may explain why banks want to suspend PCH-backed housing loans: one, to undermine the PCH in order to sell different kinds of housing loans with higher yields for the banks; and two, to increase interest rates on mortgages.

Barely two days after the ABL board issued its decision to suspend PCH-backed loans, there was a huge backlash from loan applicants. The extent of the controversy reveals the sheer size of the demand for this financial product, which gives middle to low-income families the opportunity to own a home (the majority are new families, such as newlyweds).

Staff at the PCH estimate that there are more than 15,000 couples planning to get married each year. If we include expatriates whose incomes have improved enough to allow them to buy apartments, the proportion of PCH-backed housing loans of total housing loans offered in the market exceeded 5,700 applications in 2013, and the figure is expected to be higher this year. This is while bearing in mind that the portfolio of loans backed by the institution had expanded to 61,000 loans by the end of last month.

In parallel, however, the PCH started to fall into a deficit caused by a shortage of liquidity, with the institution no longer able to fulfill some of its obligations. The bulk of its obligations comes from its contributions paid on behalf of borrowers, amounting to L.L. 15 billion a month ($10 million), or about L.L. 180 billion a year (approximately $120 million).

This is what precipitated the crisis. However, it is essentially a liquidity crisis, but nothing more, resulting from a mismatch between the portfolio of debt owed by the PCH to the banks from the interest the institution pays on behalf of the borrowers, and the portfolio of receivables which it collects from loans and other resources such as taxes on real estate developments and two percent license fees from the Order of Engineers.

Nevertheless, the value of the PCH’s accumulated deficit amounts to up to L.L. 80 billion (approximately $53 million) annually. This requires the institution to manage its liquidity crisis until it can rebalance its finances, which is expected to be completed sometime between 2016 and 2017. As the PCH has not been receiving some of the revenues owed to the institution, the PCH’s management has made recommendations to the political authorities to grant it a cash advance to meet its obligations.

Despite this, there has been no panic at the institution. According to PCH Director-General Rony Lahoud, the Treasury owes L.L. 380 billion (approximately $253 million) to the institution. He said, “Despite all that is being said, the PCH is still standing on its feet.” “A cooperation protocol governs its work with the banks, and none of the banks should suspend PCH loans at will only to offer them to customers at will,” he added, stressing that citizens must not be manipulated in the way this is happening right now, as he said.

The data confirms that the PCH has a liquidity crisis rather than an insolvency crisis. For instance, the PCH has been able to pay on behalf of Lebanese families who have mortgages more than L.L. 1 trillion (approximately $666,666 million) as part of the interest on their loans, even though it did not have those funds at the outset.

So why have some banks rushed to suspend their cooperation with the PCH? There is no simple answer. The discussions among banks had indicated that the PCH failed to pay some amounts owed to some banks. According to bankers, the ABL vice president proposed suspending cooperation with the PCH and to instead sell housing loans backed by the central bank, the Banque du Liban (BDL), which are simpler loans and do not require all the complex measures and paperwork like the PCH-backed housing loans do.

While some banks have tried to claim that the value of the arrears owed to them by the PCH was in the vicinity of $55 million, informed sources have put the value closer to $25 million, stressing that the issue involved no more than 5 banks.

The sources also point out that the PCH is owed L.L. 1.2 billion ($800 million) in arrears by the borrowers, and had proposed selling part of the debt it controls to plug its deficit. However, the sources said, the banks tried to bargain to buy this debt portfolio at 20 percent less than its actual value. This happened after the PCH’s proposal met with some roadblocks, with the BDL Governor Riad Salameh requesting the institution to obtain the prior approval of the Audit Court; yet even after the latter gave its approval, the BDL and private banks did not go ahead with the debt sale in the end.

Meanwhile, one of the major banks in the country has reportedly contacted some customers and told them the PCH was in default, and that they had to repay the outstanding amounts they owed. The bank in question offered for the customers to open separate accounts where they can transfer the value of owed interest payments, proposing that in the event these are not repaid, an average interest rate of 11.5 percent would then apply.

In effect, some banks complied with the ABL’s decision, and told customers they had suspended PCH-backed housing purchases. However, there was a backlash from customers, who did not want to sign up for other housing loan schemes as these did not cover registration and other fees. Consequently, some banks have reversed their decision, and told customers they would now accept applications for PCH-backed loans, while notifying the PCH that they would not be implementing the ABL’s decision.

This article is an edited translation from the Arabic Edition.

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