By Kibui Butt
As interest rates hit the roof, many borrowers desperately sought ways to lower their monthly obligations and keep a roof over their heads.
The word foreclosure is relatively new to most Kenyans, but our parents and their parents had all heard of people who defaulted on their loans and were never able to recover— it was tough trying to refinance out of rates over 30 per cent.
Now as the year rolls by, many young families are facing insurmountable costs to stay in their homes.
After banks raised the rates all across their portfolios instantaneously and chose to bring them down slowly, there will be more people looking to secure better rates with another bank to keep their monthly obligations down.
Reality Bites
Owning a home is something we all dream of, it’s a goal that any couple would want to attain for their children and themselves.
As more people lose their homes under the heavy weight of interest rates, banks will have a glut of properties sitting in their portfolios. The fact that the Kenyan real estate market is on an upswing with little to stop it in sight has been a lifesaver for the banks.
If the market was flat and they had to move properties at a loss, then there would be plenty of panic in the industry.
Money is very costly, there isn’t enough of it to dedicate to long term lending and when faced with the prospect of clients refinancing to another bank or lender, then the loss of the interest income and a diminishing portfolio will be noticed and addressed when it could possibly be too late to effect changes to retain the business.
Baffling offers
In Nairobi, a friend, let’s call him JJ for now, recently refinanced his home from one of the top three lenders and got a rate that was 3.95 per cent lower than his current loan.
When the transaction was done and the loan paid off, a bank manager contacted him to find out why he moved his loan? He then mentioned that they could cover any fees he incurred to move the loan and bring him back at the same rate he just got, and maybe even slightly better.
Bemused and annoyed at this gesture, he told the manager he could take his fantastic offer and shove it. Why wasn’t he proactive enough to approach him and offer him a better rate before?
While JJ understood the basics of banking and the need to maximize revenue, he committed to the new loan and is proof that brand loyalty isn’t enough to keep one’s business today.
With mortgage rates over 20 per cent literally floating against financial benchmarks, it is impossible to plan and budget. Most people will look at their biggest debt first, and that will be the focus of their financial re-structure.
So, how does a bank in the Kenyan market develop the structures to retain their portfolio (auto, cars, personal loans and basic banking)? Does your bank proactively contact you as the index tied to your loan drops?
I know they call you when the rate goes up, or better yet you get a letter in the mail stating the change (effective immediately).
The US market is so developed that there are defence mechanisms in place that are both reactive and preventative in nature. The triggers are the main defence that banks use in relation to portfolio.
Defence Mechanisms
There are payoff triggers, which notify a banker to call the customer if a payoff has been placed on a loan (which is usually too late to save the loan from being paid off and transferred),
Then there are credit triggers, which record every inquiry that is submitted for credit instantaneously by customer X. The reports are updated and coded for the type of inquiry, whether it is from an agency that pulls credit reports for mortgage companies, credit cards or personal loans.
The information is then filtered and kicked back to the company that holds a loan (in this case a mortgage) for customer X.
At that point, the bank will have him contacted by a loan specialist who will casually state they are looking to provide a consultation on their loan.
The hope here is that despite not initiating the credit application with the bank they have a loan with, they will still be able to get to customer X in time to save his loan or be the preferred lender for a new home loan.
The banks also have effective preventative measures. Loans held in portfolio are reviewed quarterly, and those that meet a low-risk criteria (have been paid down aggressively, or have a low risk factor based on payment history and the customers cash reserves) will be eligible for a no-cost modification.
This is essentially a clerical change to the loan specifics in the system. Imagine receiving a call from your local banker stating that due to your fantastic payment history they are lowering your rate and payments (you could re-amortise to make the deal sweeter) as a valued client?
Sweet deals
Why would X ever talk to another bank for any of his/her needs? He would never have a reason to do so. This gives the bank face-time with the client to explore any other needs, earns their trust and will probably earn a referral or two when they show off to their friends about the service they get.
As consumers balance their finances and plan for the future, their main concern centres around minimising the credit and financial obligations they pay monthly.
In an age where the Internet provides so much information, and cell phones are easily accessible, it is easy to shop around for the best options in the market (based on each individual situation).
Brand loyalty
There is little brand loyalty in developed markets. At the end of the day, the consumer wants to know what you’ve done for them lately.
Building relationships and clientele involves a continuous process and maintenance, after all you don’t just pay the dowry and get the bride, you still have to take her out for dinner and make her feel like you care… or you could lose her.
The writer is a mortgage banker.
