Bank unable to‘discover’ the real price

THE amount of housing loans given to some buyers during the hot property years starting from 2009/2010 are more than the current prevailing price, a source from a bank says.

The difference between the loan disbursed versus current house prices is further amplified when the borrower defaults and foreclosure proceedings are initiated, the source says.

“We expect the number of foreclosures to rise going forward,” the source says.

However, the source says the situation is not dire.

“Will this bring the property market down? We are not like Hong Kong where property is very much a part and way of life of the population. There, the rise and fall are very steep. We are not like that although during the past 10 years, prices have escalated. So this (expected) rise in foreclosures may be small money (to the banking sector). What we are concerned about are corporate loans,” the source says.

The situation banks find themselves in today vis-a-vis loans disbursed and current prices is a consequence of two events.

> The sales and purchase agreement (SPA) price is “on the inflated side” because developers have over the years included rebates, freebies, “cash back” and interest payments into the overall house price, or the headline price.

> Banks approve loan applications based on the SPA headline price, not based on the actual house price less freebies and rebates.

This form of marketing was “prevalent” for many years. It resulted in an “unsustainable rise” in prices, the bank source says.

Banks approved these loan applications because they were “unable to discover” what the “real price” was, the source says.

It was difficult for banks to discover what the real price is. And banks were keen to lend. There were many transactions conducted in this way, the source says.

“Besides pushing up prices, these marketing incentives resulted in a lot of speculation. Many entered into such transactions with the intention to flip,” the source says.

When the SPA states the unit as RM1mil, for example, when it is actually less, at the next launch, the developer would price his to-be-launched units higher from the last launch. So prices keep going up, the source says.

Malaysia’s house prices spiked starting 2009/10 and peaked around 2012.

Reserve price

The problem facing banks today is further amplified during an auction when the house is only sold in the third or fourth round. The reserve price drops 10% with each subsequent round. There is, therefore, a shortfall, which the borrower is lumbered with. Auctioneers say unlike before, some properties take up four rounds of auction to be sold. Those in poor locations may go beyond the fourth round, one auctioneer says. This further reduces the amount recovered from auctioning the house.

“Banks will try their best to avoid having to initiate foreclosure proceedings as this represents a cost. If the property goes through several rounds in the auction process, this further reduces the amount recoverable,” the source says.

If a borrower fails to pay on the 32nd day, “the bank makes provision”.

If he fails to pay by the third month, this is considered as a non-performing loan.

The source says there are three stages involved. When a borrower is in stage one, it is “normal”. It just indicates that he has an outstanding loan and he needs to pay this X amount by a particular day.

If he misses payment by a day, the bank automatically makes provision. The bank keeps an eye on the loan. Once he has made payment, he returns to stage one. He moves into stage two and subsequent stage if the amount remains outstanding, the source says.

He says it is normal for a person to go on holiday and misses a payment. In such instances, the bank would “make a polite call” and let the borrower “heal” on his own, the source says.

Considerations are given if he is an owner-occupier because we know he will try to his level best to pay. He will get rid of the credit card or the car loan just so that he can have a roof over his head, the source says.

It is not easy for banks to initiate foreclosure proceedings in instances like this. It would instead try to resolve it by offering to restructure the loan.

However, if the borrower has bought multiple units, the bank would proceed with foreclosure proceedings, the source says.