A Report on the Defaulters’ Complaints to the Housing Monitor on Home Loans in Light of the Financial Crisis
Data management Jana Haider
Analysis and Writing Abir Saksouk, Jana Haider, Joanne Shaker and Nadine Bekdache
Legal Contribution Zeina Jaber
Since the 1990s, the state has ignored the urgent need for a policy that addresses the multifaceted housing crisis. Instead, the state has adopted a unilateral approach of offering loans for home ownership. Despite the financial burdens that borrowers have been bearing for decades, this approach made home ownership the primary way for securing safe and sustainable housing. The state’s approach was not accompanied by any further housing incentives. Rather, rent and schemes that secure sustainable tenure of land and housing have undermined access to housing, which in turn prompted thousands of families that satisfy the conditions to resort to borrowing from banks in order to own property.
Today, there are about 138,000 home loans subsidized by Banque du Liban, distributed as follows: 84,000 – 60% of the total – are granted through the Public Institution for Housing. The remaining 40% are distributed among private banks, with some private bank loans being subject to protocols approved by the Military Housing Apparatus, Judges' Mutual Fund, the Ministry of Displaced, Lebanese Internal Security Forces and Lebanese General Security, while others benefit citizens who are not beneficiaries of the aforementioned agencies.1
With the onset of the current economic crisis and shrinking job opportunities and wages, numerous families are unable to pay their monthly loan installments. In this context, the Housing Monitor launched in November 2019 a questionnaire to track cases of loan default. In just three days, 127 cases were reported. The purpose of the questionnaire was to draft procedural demands that ensure families maintain their homes and meet the various needs of borrowers.
In light of the impact of COVID-19 precautionary measures and the political economic collapse on families’ incomes, the importance and urgency of this goal has increased significantly. With the deepening economic crisis, unemployment is estimated to reach record levels – up to 65% of the workforce according to studies.2 This means that, in addition to those whose salaries or income sources have diminished or have partially or completely been postponed, there will be approximately one million people who will lose their salaries and no longer be able to support their families. On May 13, 2020, the Suspension of Debt Premiums and Financial Entitlements at Banks and Credit Outlets Resolution No. 177/2020 was issued to suspend all loan installments between April 1 and October 31, 2020, without specifying how to reschedule or repay the accrued payments. It seems clear today that the aforementioned law neither took into consideration the period before October 17, when the economic crisis began, nor expected the crisis to extend and worsen in the months following it.3
In this report, we analyze both the complaints that the Housing Monitor received between November and December 2019 and the figures that the Public Institution for Housing announced. We argue that home loans policies lack a crucially important perspective on housing policy against the goal of social development.
Who Reported the Default on Loans?
The Housing Monitor recorded 127 cases of individuals who failed to pay their home loans, noting that on its own this sample does not represent the reality of all borrowers and their various situations. This is due to the methodology we followed to reach families by publishing the questionnaire on social media, which implies that the questionnaire was not equally accessible to different regions and social categories. Nevertheless, we consider that the number of cases received and the speed with which they were reported (the first 100 cases came within less than 48 hours of publishing the questionnaire) allow us to draw preliminary conclusions about the conditions of families that have become unable to pay the monthly loan installments.
Geographical and income distribution: Who are these 127 cases?
The largest number of reported cases came from the North Governorate (54 cases, including 31 in Tripoli), compared to 42 cases from the Mount Lebanon Governorate, despite the fact that, according to the statistics of the Public Institution for Housing, Mount Lebanon contains the largest number of the Lebanese population as well as the largest proportion of home loans (60% of all housing loans). The geographical distribution of cases coincides with other indicators on the national level, most notably the high level of poverty and the lack of basic services.4
While the publishing mechanism of the questionnaire may explain these figures, it should be noted that, prior to the crisis, the monthly income of 80% of the cases was five times the minimum wage (Graph 1), i.e. below LBP 3,375,000. Looking into the housing prices in these cases (Graph 2), we see that the five lowest-income respondents bought the cheapest homes, which is also reflected in the average loan value for this category (Graph 3). Notably, people with lower incomes are more likely to default, despite the small size of their loans and their purchase of cheaper houses in poorer areas. This is because they spend a greater portion of their monthly income on loan payments in comparison with higher-income borrowers (Graph 4). So, the burden of the loan increases as the value of the loan decreases due to the borrower's low income in the first place. Thus, the numbers clearly show that the crisis has exacerbated inequality and increased the vulnerability of a group that was already and significantly more vulnerable.
[graphs 1 - 4]
Why the Default on Loan Payments?
Loans from the Public institution for Housing constitute around 70% of the 127 cases. The remaining 30% are loans from private banks (Chart 5). The Public institution for Housing, unlike banks, requires that borrowers’ income be less than $4,500. While this might lead one to think that income level is the main significant difference between those who borrow from the Institution and those who borrow from banks, the fact is that the average reported income of those who borrowed from banks remains less than four times the minimum wage, which is effectively equal to that of the average income of those who borrowed from the Public institution for Housing. This indicates that the income level is a critical factor in determining the likelihood of default in crises, regardless of the borrowing channel.5
Since the end of 1999, the Public Institution for Housing has signed 84,000 loan agreements worth LBP 10,317 billion (equivalent to USD 6.8 billion per the official exchange rate). Only 8,000 loans have been repaid; 56,000 loans are in the first installment phase, i.e. the capital for banks; and 18,000 loans are in the second phase, i.e. interest to be paid as monthly installments (lower than those of the first phase) to the Public Institution for Housing. According to the Public Institution for Housing, without some laws that were approved at the beginning of this year to protect new loan defaulters, default cases would have increased from below 2% before September 2019 to over 15% of the Institution's current loans now. This means that today, there are 74,000 cases exposed to living pressures, including 11,100 (15%) cases – if not more – if the government does not take the necessary preventive measures, urgently, to guarantee their housing.
The Institution’s loans are subject to standards which different from those of private banks. They also have different requirements as far as payment method is concerned. Borrowing from the Institution is limited to those with a maximum monthly income of $ 4,500 or equivalent to ten times the minimum wage, whereas borrowers from private banks have no income cap. In other words, the Institution targets the poorest groups in society. As for the method of payment, banks adopt a payment mechanism that calculates the value of interest distributed over the period of the loan, so the value of the monthly installments remains fixed (or moving in parallel with a specific interest indicator) throughout the life of the loan. As for the Public Institution for Housing, it divides the loan repayment into two stages of equal duration. In the first stage, capital installments are paid to the banks. In the second stage, interest installments are paid to the Public Institution for Housing with monthly payments lower than those of the first stage. One advantage of the payment method adopted by the Institution is that it alleviates some of burden on families whose expenses may have increased as a result of changes in the economic situation. Another advantage is that the actual interest value of the Institution’s loans is less than the actual interest value of bank loans, even if it appears formally equal. This is due to the aforementioned method of calculating installments. These three differences make Institution loans a more realistic solution for the poorest. Which explains why, even before the crisis, delinquency rates in paying back Institution loans are lower than those in private banks. Therefore, the Institution handles 60% of all home loans in the country.
The cases reported to the Housing Monitor reflect the real estate market dynamics that accompanied home loans and the financial policies behind them. For instance, the upward trend in the number of reported cases over the years is in line with the rising need for loans as a result of inflation in real estate since 2006. Further, there is an upward trend in loan values over the years which reflects the increase in the size of a single loan in parallel with the increase in the value of real estate. This rise is stimulated by the increase in the number of home loans themselves, reflecting an imaginary increase in the purchasing power in the real estate market.
Since June 2019, the number of loan defaulters has risen, which prompted the Public Institution for Housing to warn second-phase loan defaulters of the need to pay in arrears.
As already mentioned, the vast majority of families that reported defaulting on loan installments between November and December 2019 are low-income families with a monthly income below LBP 3,375,000. More than 40% of these families used to spend over 50% of their monthly income on home loan installments, even before the economic crisis. Upon analyzing the reported cases, we found that 20.5% of families were unable to pay their loans due to a loss in their income. When monitoring the change in living conditions before and after the crisis, we noticed that the incomes of over 75% of the reported families decreased to below half of their basic value at the time of making the loan (Graph 6). And, about 15% of families lost their entire monthly income. It is also striking that the incomes of some reported families shrank over a year prior to the evident economic collapse. There are other reasons for defaulting on repayment of loans. According to the cases presented to the Housing Monitor, the high cost of living is in the forefront, followed by unforeseen life developments such as illness, setting a cap on cash-dollar withdrawals, and an increase in the premium or the value of the borrower's compulsory insurance.
It is worth noting here that low incomes and high cost of living were not an accident or a misfortune. To be sure, the security and economic conditions in the region were not helpful. Still, the decline in incomes and the high cost of living remain a direct and inevitable, though predictable, consequence of Lebanon’s financial policies, which were introduced since it emerged from civil war. Pegging the Lebanese pound’s value to the dollar results in an economic model that relies exclusively on the inflow of capital from abroad, and therefore demands a continuous rise in interest rates to levels that stifle the economy. It is a model that stimulates the real estate and banking sectors at the expense of industry sectors that provide jobs. Such model allows foreign capital to enter Lebanon, benefit from its high interest and then exit without losing its value as local currency declines. Furthermore, because of the economic recession it became impossible to pay the accumulated private and public debts. (See the appendix below, “Financial Policies Behind Home Loans: The Cause of the Crisis.”)
Accordingly, we can deduce some of the ramifications of the home loan crisis on the standard of living for borrowers. By facilitating the process of home ownership, loans created a reality in the real estate market that is contrary to the reality of the economic situation, leading to a gradual escalation of the burden on borrowers. In other words, instead of controlling prices in proportion to the purchasing power of families, adopted policies generated money to keep up with the rise in real estate prices which, in turn, resulted in loans becoming a heavy burden on families over a period of 20 or 30 years and amidst a fragile and unstable economic and living conditions.
Evacuation Threat and Ambiguous Information
In addition to monitoring the change in living conditions of the reported cases, we monitored eviction threats and other sources of pressure on borrowers. Of the 127 cases, 60 reported receiving eviction threats from the bank. Effectively, this means that 25 people, including children, are threatened with losing their homes. Surprisingly, the eviction notices were in the form of verbal warnings over the phone without any reference to legal due processes. First, this makes these notices and threats informal and illegal. Second, such forms of notices are effectively a form of threat and harassment that creates fear and violates the borrowers' right to safe housing and takes advantage of their lack of knowledge of legal due processes. In addition to borrowers' poor awareness of legal eviction procedures, some reported cases pointed out their shock with the rise in monthly installments, a procedure they were unaware of when the borrowing agreement was signed. Also, one of the cases explained her inability to access any information related to her loan, simply because the Public Institution for Housing does not pick up its publicly-available phone line!
These incidents indicate an ambiguity that banks use in implementing the provisions of loan agreements and in respecting the rights and duties of borrowers, at a time when clarity is the basis of any contract or agreement, which turns these loans into a trap for low-income borrowers.
A profit-centric perspective dominates home loans in the absence of any developmental guidance that addresses the reality of housing conditions and demographic needs. Although the Public Institution for Housing grants 60% of all home loans in Lebanon – positioning it at the forefront of donors – the total value of the Institution’s loans remains less than that provided by commercial banks. The reason may be that banks allow lending to a wider range of social strata, and do not impose a cap on loan value. Thus, as the director of the Public Institution for Housing explains6, banks provide loans with a cap higher than that of the Institution marked at LBP 243 million. The fact remains that a large proportion of the subsidized loan funds goes to higher-income brackets. Home loans coincide with the complete absence of any affordable housing insurance schemes beyond the scope of ownership, or any rental price controls.
Thus, home loans are the only source for decent and sustainable housing solution. Nonetheless, and as we have seen, they constitute a greater burden on those with lower incomes, and this is the exact opposite of the desired result of any housing policy, as it exacerbates inequality instead of addressing it.
Given that the housing policies of the Lebanese state over three decades led to an increase in real estate prices instead of curbing them in proportion to the families’ purchasing power, which led to an increase in the profits of real estate companies and gradually mounting burdens on borrowers for 20 to 30 years;
And given that the financial policies of the Lebanese state over three decades enriched the banks and real estate companies at the expense of the wider community and directly led to lower incomes and higher cost of living – the vise that stifled the Lebanese economy and led to loan default;
Neither banks nor real estate companies have any right to take possession of defaulting borrowers’ homes. The Lebanese legislation is only fair if it protects those defaulters from the risk of eviction.
It is important to the Housing Monitor to continue monitoring cases of inability to repay loans, with the aim of crystallizing procedural demands that ensure families maintain their homes and meet the various needs of loan holders, as well as provide legal advice by lawyers and consider the possibility of following up cases in court.
If you have a home loan and are unable to make the loan payments, report it here.
Financial Policies Behind Home Loans: The Cause of the Crisis
In 2008, as a result of the massive influx of expatriates and foreigners' funds in light of the global economic crisis, Banque du Liban transferred the surplus capital to the real estate sector through financial policies that stimulated both developers and banks. Due to real estate speculation and legalizing it to banks, investments doubled and prices witnessed a sharp rise. With this rise in prices, most Lebanese grew unable to purchase homes, especially in the capital, Beirut. With the decline in people’s purchasing power in contrast with an increase apartment prices, the Banque du Liban subsidized the demand for apartments by granting home loans to the Lebanese, in an effort to prevent prices from falling to match the reality of supply and demand. In 2009, the so-called Incentives Circular was approved, allowing banks to utilize compulsory reserves without a cap in home loans. As a result, between 2009 and 2011, the largest number of loans subsidized by Banque du Liban was registered, in parallel with a raise in the loan cap from LBP 170 to 270 million.
Beginning in 2011, with the deteriorating security in Syria, the flow of capital to Lebanese banks diminished back, thus, turning the real estate boom into a real estate and housing crisis in 2012. By 2013, Lebanese banks were starting to deplete their mandatory reserves, and the Banque du Liban set the loan cap in Circular 313.
The incoming capital to Lebanese banks continued to shrink with the continuation of the Syrian war. The crisis unfolded in 2015, when it became clear that the Lebanese state would not be able to renew its debts in dollars, unless it raised the interest on this debt. In order for the interest not to increase and the crisis be exposed to the public, the Governor of the Banque du Liban innovated the well-known financial engineering, which would reward banks with the Lebanese currency (that Banque du Liban can print) in exchange for banks buying Eurobonds and providing the Lebanese state with the dollars it needed to pay the existing Eurobonds dues.
By creating the Lebanese pounds that it needed with that financial engineering, Bank du Liban increased the money supply by up to 40%. This money would cause inflation if invested in the market. Thus, Banque du Liban stopped subsidizing large home loans in 2015. The financial engineering extended to 2016, and the risk of inflation increased, pushing towards the decline of value of the Lebanese pound. This resulted in Banque du Liban forbidding the use of reserves for home loans in 2017, so subsidized home loans were stopped.
However, this was not sufficient enough to curb the repercussions of the massive increase in money supply resulting from financial engineering. The June 2018 inflation index reached over 7%. Also, the Public Institution for Housing had worked throughout the year to restore its role in supporting housing and the economic cycle by resorting to the parliament and persuading it to allocate $ 100 million from the public treasury for the Institution. However, a few weeks before a law passed in this regard, in order to encounter the Institution and to reabsorb the liquidity that it had pumped through its financial engineering, Banque du Liban issued Circular 503. The circular set the cap for bank advances in Lebanese pounds at 25% of the total Lebanese-pound deposits with the central bank. It was with the knowledge that the banking sector had well exceeded this cap by far before the circular was issued; bank loans in Lebanese pounds amounted to about 37% of total deposits in Lebanese pounds. Thus, not only has it become impossible for banks to lend in Lebanese pounds for home loans or others, but they also had to reduce the size of their Lebanese-pound loans -- and this was the aim of the circular. This circular also stimulated the banks’ competition with each other for deposits, and the interest on deposits suddenly increased, and thus bank borrowers defaulted with unstable interest. It is worth noting here that the huge rise in interest destroys investment, leading to economic downturn and an increase in unemployment in parallel with rising prices and rents – the vise that ordinary people get put into, increasing their cost of living in parallel with shrinking their incomes. Borrowers took the hardest hit, as the interest on LBP loans has risen to at least 12%, while it previously did not exceed 9%. Indirectly, this increase was a new reduction in the subsidy available for home loans, as it forced the Public Institution for Housing to choose between two courses: On the one hand, it would choose expenditure to maintain stable cost on the borrower, which means reducing the number of loans granted. On the other hand, the Institution would have the borrower bear the difference in the increase in interest rates, which is an additional burden on them.
- 1. From an interview with the Director of the Public Institution for Housing on June 23, 2020.
- 2. From almayadeen.net, according to ‘International Information’.
- 3. Before October 2019, the default rate of Public Institution for Housing installments was about 2%. Today, the president of the Institution estimates this percentage at more than 15%, while it is likely to be higher with private banks.
- 4. Comparison made with lebanonspatial.org maps.
- 5. The Institution’s loans are subject to standards different than those of private banks. They also differ in their payment method. Borrowing from the Institution is limited to those with a maximum monthly income of $ 4,500 or equivalent to ten times the minimum wage, whereas borrowers from private banks have no income cap. In other words, the Institution targets the poorest groups in society. As for the method of payment, banks adopt a payment mechanism that calculates the value of interest distributed over the period of the loan, so the value of the monthly installments remains fixed (or moving in parallel with a specific interest indicator) throughout the life of the loan. As for the Public Institution for Housing, it divides the loan repayment into two stages of equal duration. In the first stage, during which the capital installments are paid to the banks. In the second stage, interest installments are paid to the Public Institution for Housing with monthly payments lower than those of the first stage. One advantage of the payment method adopted by the Institution is that it alleviates some of the burden on families whose expenses may have increased as a result of natural life changes. Another advantage is that the actual interest value of the Institution’s loans is less than the actual interest value of bank loans, even if it appears formally equal. This is due to the aforementioned method of calculating installments. These three differences make Institution loans a more realistic solution for the poorest. Which explains why, even before the crisis, defaulting rates in paying back Institution loans are lower than those in private banks. Therefore, the Institution handles 60% of all home loans in the country.
- 6. From an interview with the Director of the Public Institution for Housing on June 23, 2020.