Tuesday, March 13, 2007

Mortgages To Remain Cheap and Plentiful

Mortgage loans against residential property are both readily available and cheap. With the possible exception of the sub-prime market, I expect this to continue. There are several reasons for this - most of which are risk related:

1. mortgage loans are secured over a tangible asset. Even if the asset declines in value, there is usually enough equity to protect the lender's position (or at least most of it);

2. historically, individual borrowers have shown low default rates on home loans and, where there is a default, the loss to the lender is very low compared to other types of defaulting loans;

3. transaction costs are low. Residential loan and mortgage documents are much more standardised and less negotiated than almost any other types of loan. Transaction size (compared to credit cards and other personal loans) also provides for some economies of scale for lenders;

4. mortgage loans can be securitised which removes them from the balance sheet (freeing up capital) and, depending on the terms of the securitisation, may also remove the default risk from the lender;

5. under Basel I, residential mortgage loans receive a very favourable risk weighting (50%) which means that banks have to provide relatively less capital against residential mortgage loans than against, for example, commercial loans. Under Basel II the risk weighting for residential mortgage loans will be reduced (to 35%) reducing the amount of capital required to support residential mortgage loans and making them even more attractive to banks.

In summary, there are good reasons why residential mortgage loans are both readily available and cheap. With banks already beginning to move to Basel II there is reason to believe that this situation will continue for lending which involves sensible financials (at least some deposit and reasonable debt servicing ability). In Hong Kong the excess liquidity means that many banks have surplus capital. This has resulted in intense competition between banks both for market share and volume in absolute terms. The cost of borrowing and the terms have become progressively more favourable to borrowers like me over the last few years.

The above comments are directed at conforming or typical loans made to a borrower who is able to document the ability to service the loan and who is able to put down a meaningful deposit. The emerging problems with America's sub-prime lending market make me more hesitant to express a view on the sub-prime or non-conforming section of the mortgage market.

4 comments:

Hamburger Flipper said...

Cheap and plantiful, eh? How come nobody where I work can get one?

traineeinvestor said...

Hi hamburger flipper

In Hong Kong anyone who can put down 30% deposit (the industry standard here) and hold a job can get a mortgage. The banks are drowning in liquidity (I have lost track of the number of times I have been told that banks are recieving deposits faster than they can lend the money out).

Even if you cannot manage a 30% deposit there are ways around this (as an example, developers will often provide a second mortgage for all or some of the 30% on new projects).

The issue for most borrowers in Hong Kong is making sure you shop around for the best deal. With the banks being quite aggressive in lending to this sector, the "best" deal has improved quite a lot over the last few years. Things have reached the stage where (i) it is still possible to borrow at interest rates less than the yield on many properties and (ii) the banks will give cash back (unheard of in the last boom) and (iii) many banks will send someone to yoru home or office to help you complete the application forms and other documents.

I understand that things may be different in other markets and harder for non-conforming borrowers.

hamburger flipper said...

Here in the U.S. hamburger flippers generally earn minimum wage or something very close to it, and many of us are paying 50 percent (or more) of our income for rent. (In my state, 20 percent of all renters pay at least half their income for rent.) And of course, unlike homeowners, renters cannot lock in or stabilize their housing costs so they just keep going up and up. So we cannot save up the required down payment. Also, in my area, starter homes cost ten times the annual income of an unskilled worker, so we could never carry the mortgage payments.

Where do unskilled workers live in Hong Kong?

traineeinvestor said...

The Hong Kong government provides subsidised rental accomodation to low income residents as well as a subsidised home ownership scheme that effectively allows low income residents purchase properties at below market prices on attractive financing terms. It is part of a legacy from the need to provide accomodation to the many refugees who fled from the communist regime.

Hong Kong has the other advantage of very low income taxes (most people pay very little income tax). This makes saving a deposit affordable and mortgage payments more bearable. Stamp duty on properties below HK$2 million have just been reduced to a nominal level and banks will usually give a cash back on a mortgage loan which is larger than the legal costs.

It is sometimes possible to purchase in the private sector with less than 30% deposit. Quite often developers with offer second mortgages or you can borrow from a non-bank lender (although on very unattractive terms).