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August 5, 2010

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Home » Business » Biz Commentary

Banks waking up to mortgage rules

August 5, 2010, Thursday | Print Edition

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American humorist Mark Twain once said that a classic is something that everybody wants to have read and nobody wants to read. Well, that folk wisdom may also apply to the situation in China's banking industry, where a government crackdown on mortgage lending is a policy bankers acknowledge but don't want to implement instantly.

Since April, China's regulators have been tightening the screws on mortgage lending to curb rampant property speculation. Banks, reluctant to squeeze the most lucrative part of their retail operations, have been dragging their feet in adopting the new lending rules.

It wasn't until mid-July, six weeks after the latest round of rules was announced, that some banks in Shanghai began checking up on the creditworthiness and home ownership records of mortgage applicants.

The new government rules require higher down payments and higher interest rates for mortgages on properties beyond the family home.

Previously, banks defined second-home mortgages only by borrowing records. Thus, if a person owned a home or two bought without bank lending and applied for a mortgage to buy another property, banks considered it a first mortgage. That allowed a lot of speculation to slip through the cracks of the government crackdown on multiple real estate purchases.

This is the first time China has required banks to check the home ownership records of mortgage applicants.

But there's been plenty of slippage between regulations that are announced and regulations that are implemented by credit officers at branch and sub-branch bank offices.

Government officials, worried about a stubborn property bubble that could pop and put the nation's economic growth at risk, have been relentless in trying to end speculation. But rising prices and the prospect of mounting profits have lured more greedy speculators into the market, using leverage to amass portfolios of real estate assets.

The real losers have been families priced out of a market where they just want to buy a home to live in.

Unaffordable

A lot of discouraged first-time homebuyers are now ruing their decision to hold off buying in hopes that prices would drop. Unaffordable family housing has spread from poorer families to Shanghai's middle-income professionals. Discontent can be easily heard.

The average new home price in Shanghai in July rose 0.8 percent to 19,313 yuan (US$2,883) per square meter. Prices have been at record levels this year after rising 16 percent in 2009.

The annual average disposable income of city residents climbed 8.1 percent last year to 28,838 yuan.

In terms of risk control, authorities appear to be on solid footing with their tighter lending policies.

Moody's Investors Service said in an earlier report that bad loans on the books of Chinese banks are set to rise, citing real estate loans and financing provided to local government-owned financial entities.

"Indicators of higher leverage, panic buying on skyrocketing prices, low returns and high vacancy rates were pointing to a bubble even before the new policy stance," said Yvonne Zhang, a Moody's analyst.

Banks said they needed time to digest the new rules, adopt new policies and integrate those policies into all their branch operations. But time may be running out.

In early July, amid media reports that banks were still lending in defiance of the new regulations, the People's Bank of China, the China Banking Regulatory Commission and the Ministry of Housing and Urban-Rural Development jointly issued a statement that the new rules on tighter lending would remain in force. That shot down market buzz about the government about to relent.

Dead serious

Then, I asked credit officers at sub-branches about mortgage loans. They told me they weren't checking on how many homes a mortgage applicant owned.

But their recalcitrance began to shift when it became obvious that government authorities were dead serious about tighter lending. Indeed, Shanghai's banking regulator said last month that banks flouting the new rules will be "severely punished."

The local regulator said a recent inspection at Shanghai's four major banks found no irregularities. More scrutiny is promised.

I revisited the sub-branches credit officers after that statement came out. The credit officers this time said the banks were now implementing the new rules.

Mortgage applicants are now required to bring in their family records, lodged with the government, to credit officers. The shortcuts and loopholes are being plugged.

There have been some signs that the credit crunch is beginning to bite. Individual mortgage loans in June grew at their slowest pace in a year in Shanghai.

Banks extended 3.08 billion yuan of home loans in June, only a quarter of the mortgages approved a year earlier, according to the Shanghai headquarters of the People's Bank of China.

The slowdown in lending has been cheered by would-be homebuyers who reckon price declines will follow. That remains to be seen.

The ones with sour faces nowadays are the lenders having to tow the line.

That will go on as on Sunday, the central bank reiterated that its tight home policy will continue into the second half of the year.

Biz Commentary


 

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