Avoiding a subprime crisis

  • Food for thought

THE recent announcement by the Urban Wellbeing, Housing and Local Government Ministry to enable property developers to obtain moneylending licences, and provide up to 100% financing for homebuyers has attracted many comments and debate. The minister, Tan Sri Noh Omar said the scheme is intended to assist Malaysians who have difficulties in securing a home loan.

In fact, the move is not new given that it has already existed under the Moneylenders Act 1951. Under the Act, the requirements for a moneylending licence are the same for any company, it only requires the approval of the Minister of Housing and the Registrar of Moneylenders. In our country, some property developers with the moneylending licence have already started to offer mortgage financing to their buyers, even prior to this announcement.

Despite not being a new scheme, all responsible developers need to consider the scheme carefully before jumping on the bandwagon. Without a proper framework, the move may create a similar US subprime crisis.

Let’s revisit the US subprime mortgage crisis that happened in 2008, less than a decade ago. The crisis stemmed from an earlier expansion of mortgage credit, including lending to borrowers who had difficulty in getting mortgages.

In the early and mid-2000s, high-risk mortgages were easily available as lenders were highly motivated to issue new loans without concern for purchasers’ credit quality. This move stimulated the demand for properties which then swiftly increased property prices. When property price finally peaked, mortgage refinancing became less viable for lenders and investors to settle mortgage debts. The bubble then burst. The demand for properties fell and sure enough, prices fell dramatically as well. Those caught in the net had difficulties paying off their mortgages, resulting in lenders also experiencing cash flow problem.

Being challenged with alarming loan defaults, lenders made qualifying even more stringent for new mortgage applicants, depressing property demand further. The US subprime crisis eventually saw the collapse of the 158-year-old investment bank Lehman Brothers, the nationalisation of two mortgage giants – Fannie Mae and Freddie Mac, and the takeover of AIG (US’s largest insurance company) by the US government within three weeks in September 2008.

The US subprime mortgage crisis led to plunging property prices, billions in losses, and a recession in the US. Worst still, these economic and financial adversities began to spread and affected global financial markets.

These chain reactions stemmed from the fundamental change in the way mortgages were controlled and funded. It was a mistake to grant loans to borrowers who later could not afford to pay their loans.

The lessons learnt from the US subprime crisis should serve as a guide before property developers in our country offer loans to homebuyers. Lending is not a core business of property developers. They have neither the experience nor the knowledge in analysing credit risk. In addition, unlike financial institutions which are able to spread their credit risk through various means, this security net is not easily available to all property developers.

Only responsible developers should engage in this form of lending, and only in a responsible way. Here are some suggestions on how to move forward responsibly. First of all, the moneylending process must be stringent, and borrowers must be able to put in certain amount of down payment before borrowing. If purchasers don’t have the ability to pay a down payment, they should not be tempted to commit to a house that they cannot afford, as they may lose it later due to loan defaults.

Secondly, if developers were to offer loans to purchasers, it should be a service to customers, and not charge high interest rates. The Moneylenders Act allows the licence holder to charge 12% per annum for borrowers with collateral and 18% without. However, the rate should be reviewed, and the interest rate should be similar to those offered by the banks, considering the main objective of the loan is to assist homebuyers in securing a roof over their heads. With high interest rates stated above, the chances are that the borrowers will have trouble servicing the loan later on.

Other than the required upfront downpayment and low interest rates, it is important to ensure the homebuyers have the ability to service the loan. A responsible developer would do an income check on the purchasers when assuming the lending role. The income of the purchasers must be able to match and service the loan, so that they do not risk their savings when pursuing their dreams of owning a home.

Given the fact that our household debt-to-GDP ratio has hit a high of 89.1%, all parties need to be extra careful so as to avoid the loans turning sour, and creating risk to the whole economic system like the subprime crisis in the US.

As the Government and developers responsibly move towards housing the nation, safeguarding the rakyat’s interests and ensuring responsible lending are equally important in building a strong nation.

  • Datuk Alan Tong has over 50 years of experience in property development. He was the World president of FIABCI International for 2005/2006 and awarded the Property Man of the Year 2010 at FIABCI Malaysia Property Award. He is also the group chairman of Bukit Kiara Properties. For feedback, please email feedback@fiabci-asiapacific.com.

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