Thursday, July 30, 2009

A well regulated mortgage industry

Two years ago I compared the mortgage business in Hong Kong with other jurisdictions and asked myself whether Hong Kong could expect a mortgage crisis similar to the one being experienced in the US, the UK and a few other places. My conclusion was that it was unlikely that we would see a mortgage led credit crisis in Hong Kong. This was largely due to the way in which mortgage lending is regulated.

In very simple terms:

(i) banks will only lend up to 70% of their valuation of the property (which may be less than the market price) without mortgage insurance (which is not often used). Put differently, you will normally need a 30% deposit in order to buy a property here;

(ii) no-doc or low doc loans (aka liars loans) are not tolerated;

(iii) provision for defaults is required promptly if a borrower falls behind in payments;

(iv) the repackaging of mortgages is permitted and does happen but (i) and (ii) means that the repackaging does not involve sub-prime loans.

Hong Kong has had zero bank failures since the credit crisis. There has been only one relatively trivial run on a bank (BEA due to rumoured losses on derivatives) which did not affect that bank's good standing. In fact even during the Asian crisis when Hong Kong property prices fell by 60+%, there were no bank failures and only one run on a bank (IBA which survived with some support). IIRC, the last bank failure in Hong Kong was BCCI in the 1980s which failed for reasons that had nothing to do with regulatory deficiencies in Hong Kong.

Honestly - how hard is it to properly regulate a mortgage industry?

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