Possible Fall Out From The US Sub Prime Crisis - The African Angle

By Graham McKenzie

The sub-prime mortgage in the U.S. has been the topic of many conversations as well as articles. Market analysts have decided to blame the downward spiral of the credit market on the recent adverse credit conditions. Lenders are now extending home loans to individuals with less than impeccable credit ratings. In addition the borrowers have a less than impressive history with their finances. This effect in financial lending is now being seen in an unlikely country, a country not known for financial enterprise, which is Africa.

In the late 1990s and early 2000s banks and other financial institutions had so much cash that they were forced to lower lending and mortgage underwriting standards in order to put that cash to work. Increased liquidity in global financial markets was a major reason that lender developed mortgage products that allowed loans to be issued to borrowers that had little or zero change of repaying them. Lenders had so much cash available they were forced to create new loan products to market to home owners and first-time buyers in a marketplace already at full capacity.

This is how lenders eventually got to the point where they were adverse credit mortgage products to almost anyone who applied. Subprime mortgage were not the only loan products available at the time and while they may have triggered the crisis and collapse of the global financial markets they were not the only contributor.

Though financial analysts squarely blame the lenders for offering mortgage products to people with poor credit, the fact remains that surplus liquidity also played a role. Of course, the crisis surfaced because of the mortgage loans to people with poor credit. Today, 10 years after the actual foundation of the sub prime problem was laid, the same credit or liquidity conditions that existed in the US prior to the crisis, are now present in the sub Saharan African nations. Biggest banks here have too much cash on their hands. So is it going to result in mortgage boom in the region?

But the African residential mortgage markets, unlike the US and European markets are far from being fully developed. In these most of these countries only a small minority of the residents have a bank account or use any type of banking facility, let alone have a mortgage. In these markets the residential mortgage loan exclusive and generally only available to the upper class. But now there is a growing middle class demographic with the desire for home ownership.

Nevertheless, the possibility of the banks in Africa offering any mortgage products to people with poor credit is remote. The main reason for this is that most of Africans have no credit record. Because of this, it is difficult to judge them based on credit history. The criteria for home loans here are steady employment, and the amount of salary. In addition, in this part of the world, it is the employer who deducts the mortgage installments from salary and pays it to the lenders. Therefore, borrower does not have any way to default per se. Since this reduces the lender's risks, borrower is compensated with lower rates of interest on mortgage.

This means the lenders in sub Saharan region would not be allowing a mortgage market to run away. Instead, they will be investing elsewhere and earning profits on their investment. Mortgage market in the west, particularly, the home loan segment will take several years to recoup. In the meanwhile, it will be African banks that may rule the roost. - 31382

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