Published December 15, 2008

Banking and the art of mortgage lending

By SIOW LI SEN
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THE Monetary Authority of Singapore (MAS) has said recently in response to BT queries that it won't intervene when it comes to repossession of a home if the mortgage is in default. To put the issue into context, BT posed the question following actions by regulators in the UK and US (which were agreed to by the financial institutions there), to hold off on home foreclosures and also forgive part of the debt in some cases.

That's because mortgage arrears in the US and UK are reaching tidal wave proportions threatening to throw millions of people out on the streets.

British lender Royal Bank of Scotland, which is now 60 per cent government owned, said that it would not repossess the homes of mortgage customers who default until six months after they first fall into arrears.

Other UK mortgage lenders have already committed to waiting three months before repossessing customers' homes, under an agreement announced by British Finance Minister Alistair Darling last month. Mortgage arrears and repossessions in the UK have risen sharply this year, reflecting the economic slowdown as well as a sharp rise in borrowing costs in the wake of the credit crunch.

The UK Council of Mortgage Lenders said that there were 168,000 households in arrears at end-September, up 8 per cent from end-June. A total 11,300 homes were repossessed in the three months to Sept 30, an increase of 12 per cent on the previous quarter.

In the US, banks including Bank of America, JP Morgan and Citigroup have agreed to stop home foreclosures and forgive debt for owner occupiers. One report said more than 2.2 million homeowners are estimated to be more than 60 days late on their mortgage payments, and one in six homeowners owes more on a home than it's worth.

The situation is much less dramatic in Singapore.

The Monetary Authority of Singapore said borrowers here getting into trouble over their home loans is not a big problem. The MAS said it does not expect this to balloon either, even as Singaporeans are bracing for a prolonged downturn.

'Non-performing housing loans are currently low. While we expect these to rise, the increase will not be significant,' it said.

'Banks in Singapore do not generally repossess a property once a loan is in default. Repossession is usually a final step after exhausting other avenues with the borrower, such as restructuring the loan. MAS does not intervene in such commercial decisions by the banks.'

Last month in its financial stability review, MAS noted that the proportion of housing loans that is delinquent is low, at less than one per cent, and most housing loans have low loan-to-value ratios.

It makes sense that the regulator not intervene in a commercial matter, if a decision to foreclose was taken only after all possible attempts have been made to help out the unfortunate borrower. On a personal level, to be driven out of one's home is traumatic.

Households are much better placed to face the current economic slowdown relative to their position before the Asian financial crisis, the MAS has said.

But it did say that the impact is not uniform across different household income groups. 'There is likely to be distress among those who are retrenched or those who rushed into the recent property boom and leveraged up beyond their means.'

Earning goodwill

Foreclosures and bankruptcies will rise as recession hits, there's no getting around it. Banks can alleviate the impact by putting their affected distressed borrowers in touch with the relevant bodies which can offer aid. A helping hand can prevent tragic outcomes. It's not charity but one step, among others, to ensure responsible lending policies.

As for the MAS, while the approach now is not to intervene, this may not mean a hands off approach on its part if the situation were to get significantly worse. Like its peers, the MAS is probably finding that the timing for intervention is a craft which cannot be learned but an art which must be finessed so that moral hazard does not become the result.