Published January 17, 2011

Speculation curbs to hit all and sundry

By SIOW LI SEN


THE latest clampdown on mortgages is pretty severe, prompting one observer to say that there is '100 per cent certainty' that the measures will cool the market.


The Monetary Authority of Singapore (MAS) has followed up to close a potential loophole, by proposing to impose the same lower loan limits on mortgage equity financing.

To recap, last Thursday, the government said that the loan-to-value (LTV) limit for more than one home loan is now 60 per cent, down from 70 per cent, and for non-individuals, it's 50 per cent. This is in addition to slapping a sellers' stamp duty of as high as 16 per cent, up from 3 per cent previously.

If the measures are going to work 100 per cent as the property market observer says, it follows that the banks will be 100 per cent affected, with the most immediate impact being lower loans growth.

Home loans which grew over 22 per cent in November, based on the latest data available, was the driving force of bank lending last year.

The new measures could signal an almost immediate contraction in home loans growth. But the ripples will spread as loans to contractors and developers could also shrink, along with lower demand for related support services, such as those provided by lawyers, agents, and retailers of furnishing and fittings.

Consumer spending could be pinched too because people spend more when they feel wealthy. If home prices slide, they will feel less rich.

With the additional clamp on mortgage equity financing, other sectors of the economy may also feel the impact of the new measures. Potential borrowers could have intended to use the funds for share financing, a holiday or for their children's education.

Bankers have so far put on a brave front. All agree that the latest measures will weed out speculators and make for a more sustainable property market in the longer term.

If banks had only been more prudent by lending only 50 or 60 per cent of the value of the property, the government might not have needed to act.

The latest measures are very drastic, certainly more harsh than those Hong Kong imposed last November to cool its property market.

Perhaps the Singapore government is trying to pre-empt the flow of hot money from China that could be diverted to Singapore after Hong Kong imposed restrictions on its property market.

'The unprecedented measures were due to uncertainties that emerge from the large amount of liquidity from quantitative easing in the developed countries,' said a United Overseas Bank research note. 'The new measures might turn away overseas speculators and hence could curtail the additional inflows that resulted as China and Hong Kong further clamp down on their real estate markets. In turn, this could reduce the pace of Singapore dollar appreciation ahead of the monetary policy meeting in April.'

So the multiplier effect could also reach the Singapore dollar which, up to last week, was expected to continue to appreciate.

The list of imponderables is going to be a headache for banks which have been struggling with low interest margins.

Will this lead to a new round of interest rate wars as banks fight hard to hang on to their customers? It's going to be an interesting 2011!


Source:/www.businesstimes.com.sg

Published January 15, 2011

MAS to tighten up on mortgage equity loans
Such loans to face the same loan-to-value limits as the latest property measures

By SIOW LI SEN

THE Monetary Authority of Singapore (MAS) has stepped in to close a loophole on mortgage equity financing (MEF), by imposing the same lower loan limits as the latest property measures.


It has proposed that mortgage equity financing - where banks offer loans based on the owner's equity in their homes - be subject to the same loan-to-value (LTV) limit of 80 per cent for those with only one home loan; 60 per cent if there is more than one home loan; and 50 per cent for non-individual borrowers.

By restricting the amount that can be borrowed through mortgage equity financing, MAS has cut off or severely narrowed one route for property buyers who need to raise more cash if they want to buy a second or third property.

Currently, there is no LTV rule on MEF though most banks lend 70-80 per cent of the value of the house.

MAS said the mortgage equity withdrawal loans (MWL) are subject to the financial institutions' (FI) credit assessment of the borrowers. 'Practices among FIs vary in the LTV limits that are applied . . . As a prudential measure, MAS plans to require FIs to comply with regulatory LTV limits on MWLs. The purpose of this policy is to apply the regulatory LTV limits, not just to loans used to purchase residential property, but to loans secured on residential property as well,' it said.

MAS also said that when assessing the LTV computation, FIs should aggregate loans taken from moneylenders, if any, which are used to pay for the property.

MEF would have become more prevalent given the sharp run-up in property prices and is popular with borrowers as banks charge a much lower interest rate compared with unsecured loans.

Last year, private home prices rose 17.6 per cent and have since eclipsed the previous 1996 peak.

The interest rate charged on MWLs if structured as an overdraft is typically the bank's prime rate plus 1 or 2 per cent, against double-digit rates for unsecured loans. The average prime rate here is 5.38 per cent.

Also, like overdrafts, borrowers pay interest only on the amount they use.

Banks said MEF is not a big business though many advertise it on their websites and some target customers whose home loans have been paid down.

A Maybank spokeswoman said: 'We have always adopted a prudent approach to MWLs and offer a lower quantum than for financing purchases of property.'

Dennis Khoo, Standard Chartered Bank Singapore's head of consumer banking, said the bank offers mortgage equity financing as part of its comprehensive suite of mortgage solutions.

'The same loan review and credit assessment process are applied across all mortgage loan applications, including looking at the customer's total credit facilities, monthly income and repayment habits,' he said. 'Responsible lending is our priority - the important thing for us is to work with our customers to ensure we strike a balance between the need for financing and the ability to service the loan.'

The deadline for written feedback on the above proposal is Feb 14.


Source: www.businesstimes.com.sg