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Letters

LETTERS: Auctions point to banks fighting to recoup investments

A house for sale
A house for sale. FILE PHOTO | NMG 

Auctions have become a nagging constant over the past months. The numerous listings are an obvious indicator that banks have stepped up their attempt to recoup their investments on their loan assets. I sympathise with them. That could be one side of the story.

The other version would be that the numerous listings could be calculated to create an alarm in the banking and real estate sectors with the intention of whipping up attention for the eventual benefit of the lenders.

How? A rather obvious statement is that banks are finding it more difficult to find buyers who can afford the 75 percent of the market value reserve price set by the Land Act 2012.

Numerous listings signify efforts to sell and attract the attention of many to this problem. Stuck with a bunch of dud securities, lenders will have to find alternative solutions to this. One that quickly comes to mind would be to get rid of the 75 percent reserve price requirement. Again, how does this benefit them?

A number of loan portfolios are grappling with the problem of negative equity whereby the amounts outstanding on loans are more than the value of the security. Some lenders may have realised this. Those who haven’t are likely to realise this given the time.

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The values of most of these properties have been exaggerated by the very market to which the lenders played a significant role albeit unknowingly, or blindly.

This is how. It cannot be ruled out that causality appears between property prices and lending. Bank lending plays a significant role in pushing up property prices.

A number of years ago banks dished out loan facilities having been motivated more by the appetite to earn more on interest charges when they had the leeway to price the loans as much as they preferred.

This generous supply of capital into the property market created a boom which in turn contributed in pushing the property prices up.

By their own undoing, the banks within a few years closed the taps on lending when the interest rate caps were introduced. Liquidity declined in the market and businesses found it tougher to operate.

Paying rent became a hurdle as properties no longer generated as much as was expected. Property values begun their decline. The banks are now paying for their sins, so to speak.

The problem may worsen when borrowers come to the realisation that their outstanding loans far exceed the real market value of properties pledged as security. It may be quite tempting to force a trade off with a bank.

The incentive to continue with the repayments wanes off, defaults increase and banks lose money.

Back to our question. How does selling below the 75 percent sale reserve price solve the lenders problems? It doesn’t. But it eases the pain.

The extent of this cushion is further determined by the kind of policies the bank has in place on provisions for bad loans. Which bank has been spot on with this?

James M. Mwangi via email

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