Dec 17, 2008

The Risk of Having a Roof Over Your Head

An interesting idea, from the TODAY newspaper:

Risk profiling for home buyers?
Such checks would minimise impact of sudden economic downturn on investors
Wednesday •

December 17, 2008

Letter from Ee Teck Siew

MANY Singaporeans who bought properties during the boom years have since been caught up by the sudden financial turmoil and found themselves in a bind as the property market has taken an about-turn and some banks have frozen lending.

Such investors stand to lose a lot of money should they sell in this declining market. The problem is compounded for “flippers” who are stuck with properties bought under deferred payment schemes, which they had every intention of selling as soon as prices went up. At its worst, economic turmoil can bring about the collapse of the property market, causing severe consequences to the economy at large.

Many people do not consider whether they can truly afford a long-term asset such as property when prices skyrocket, and blindly jump into the market hoping to get a good bargain — either to buy a dream home while it’s available, or to make a windfall by flipping the unit.

As with the financial advisory and insurance industries, maybe it is time that the Government and the relevant industry body implement a fact-finding process for potential home buyers. Under the Financial Advisers Act/Financial Advisers Regulations, the fact-finding process is mandatory before any investment product can be sold. The objective is to ensure consumers buy what they can afford, taking into account their needs and risk profiles.

Buying a property involves substantial financial resources and, for the Average Joe, probably a lifetime of commitment to service the loans. Many could end up enslaved to their properties. They could face significant financial losses when a negative equity situation occurs, in that their outstanding mortgage loans could exceed the market values of their properties.

It is high time a more rigorous regulatory regime, one with a focus on educating consumers, be added to help Singaporeans in their financial decisions.

The law says that before a bank sells you a financial product, the salesperson should ask you many questions to ascertain your risk profile. Based on your risk profile, the salesperson should then recommend a suitable product, and explain to you what that product is all about.

These legal requirements don't apply to all types of financial products. For example, they don't apply to credit cards, fixed deposits or mortgage loans. In the TODAY letter above, the writer suggests that perhaps the law should require banks to profile and advise customers who are seeking a housing loan.

Actually, if you ask a bank for a housing loan, it will definitely study you quite carefully. In fact, the bank will study you much more carefully than if you were asking to buy a Lehman Minibond. That's because where housing loans are concerned, the bank will be giving you its money to buy the house; whereas in the Lehman Minibond scenario, you will be giving the bank your money to buy the Minibond.

How does the bank study you, before granting you a housing loan? Well, it will ask for your salary statements; your income tax assessments; and/or your CPF statements. It will want to know your occupation, and where you work (and it may even make discreet phone calls to find out whether you really work where you claim to work). It may run checks to see if you've ever been made a bankrupt or defaulted on your credit cards. And of course, it will check the market value of the property which you want to buy.

Note that the bank isn't doing all these things for your benefit. It's doing all these things for its own benefit. It certainly isn't under any obligation to provide you with financial advice on whether the housing loan is suitable for you or not.

So when a bank agrees to give you a housing loan, this does not mean that the bank thinks it's good for you to take the loan and buy that house. It only means that the bank thinks that it's good for the bank to lend you the money and earn your interest. There's a difference ... and if you can't see it, you'd better look again.

As my regular readers know, I've recently been doing some house-hunting myself. As part of that process, I've met and discussed with a bank salesperson. Through these discussions, I've learned a few things about how banks assess the credit risk of their mortgage customers.

Here's one thing I learned - if all other checks are satisfactory, this particular local bank will grant its customers a housing loan such that the monthly instalment works out to be not more than 60% of the customer's current monthly salary. For example, if you earn $10,000 a month, then the bank will give you a housing loan such that your monthly repayment instalment works out to be $6,000 or below.

However, for the customer, the more relevant questions remain unanswered. Should you commit yourself to spending 60% of your monthly salary on your mortgage repayments? Is that financially advisable for yourself? That's what the bank won't tell you. You'll have to figure it out for yourself.

32 comments:

Anonymous said...

Mr Wang,

Totally agree. The letter writer Ee Teck Siew is confused which side the money come from, hence he lumped it together with advisory for financial products sold.

But whatever side the money come from, it seems clients are left holding the short end of the stick, if they are unwise. Hence at the end of the day, the client still got to be educated and wise, whether it is housing loan or Lehman Minibond.

Unfortunately many were not. Hence the recent mass financial tragedy involving Minibond investors and the less publicised, but nevertheless mass and tragic housing loan defaulters. Tragic because you got evicted out of your home if you can't pay.

Anonymous said...

Aiyoh, Mr Wang no lah, no more regulations lah. If a person is mature enough to buy a property, he should be responsible enough to do his sums and accept the risk involved. The last thing we want to encourage is more Singaporeans to expect to be spoon-fed and hand-held and cry mother and father when things go wrong. Then we will get more of those mini-bond type of people making more noise because they will claim the fact-finding is misleading blah blah blah.

If you ask me, it's not about ignorance but greed. Many are caught because of greed, especially the flippers. I am sure they know their sums inside out.

Onlooker said...

Actually the recession now have woken a lot of people(esp those in retirement) to the grim reality that nothing in life is certain.(monetary security is only an illusion that can be easily destroyed by careless/corrupted monetary custodian)
So Instead of buying into the fallacies of someone taking care of a common interest,people start to realize the fact That someone can also take away the principles of the interest.Or worst protect their own interest over the well being of the people with principle.
However with the recession,the familial ties that have been neglected will be reinforced due to the fact that they may need to liquidate their assets to prevent a potentially crippling Bankruptcy that will limit their option.Thus parent and children will have to share a common living quarters and learn to get along.
Opinion:- The real fallout of This recession is the fact that many will need to begin all over again due to the failure of the exploitative system for the ever elusive PROFITs.(The cake is a lie)
Which is not the original goal of providing housing to the masses whose interests have been hijack with or WITHOUT Risk assessment.

Anonymous said...

60% !!!
The standard elsewhere is a lot closer to 30%.
Singaporeans have been pushed to buy more and pricy hdb; land cost set by the govt replaced taxes.
I am amazed that few of my acquaintances know how much their loans cost them (a lot)

Anonymous said...

no one believe in being loan free??
Flippers are taking a investment risk and these are sophisicated investors... more home work will be done in the assets, payment, returns etc than bonds and stock buyers.

fatsolow

Anonymous said...

I think that the 60% ratio applies to customers who have already crossed a certain minimum salary threshold (ie customers who already earn big bucks like Mr Wang). A lower ratio will probably apply to customers who earn less.

Reason is that a higher percentage of a lower-income customer's salary needs to go towards basic essentials like food & transport.

High earners have more spare money to play with, therefore banks will apply a higher instalment-to-salary ratio.

Anonymous said...

I wonder what's the point of having our youngsters being the top in maths and science, when they can't do simple addition and subtraction for their purchases in life.

ArtBoon said...

Buy whatever that I can afford. Only I know what I can afford and no one else can tell me...

Ghost said...

Sorry but I feel no sorrow for the flippers. They were making an investment looking to resell the property once the prices went higher. You can't say they don't know the prices can go down as well as up. If Singapore want to set-up a fact-finding process for potential home buyers, it should only help actual home-buyers like the first-time owners.
Hell, I don't even feel that sorry for the home upgraders either. They all thought things were good and can only get better; they were wrong, but that doesn't mean they were cheated. Crying about it now doesn't change that

Mr Wang Says So said...

Flippers play a necessary role in the overall scheme of things. They're like speculators in the stock market. Without them around, liquidity dries up.

You can think of them as parasites and flies in the ecosystem. They may look icky, but their existence is as important as anybody else's.

Anonymous said...

Whether flippers are important or not depends on what kind of market we want and who actually benefit from the liquidity.

Flippers create artificial demand/supply and invoke extremes in the market. Who suffers from their presence? Important as they may be, they are not desirable in certain categories of investments.

Neither should we allow our country's scarce resources be subject to manipulation by opportunists, especially foreign ones.

In the end, the people suffer.

Mr Wang Says So said...

Hey, I benefit from flippers ... I'm a genuine buyer in a sinking market.

In my desired district, I shall be most happy to discuss with desperate flippers holding a property that they can't afford to hold ... if the property is suitable for my needs, of course.

bryan said...

can someone explain what is flipper? thanks

Anonymous said...

However, for the customer, the more relevant questions remain unanswered. Should you commit yourself to spending 60% of your monthly salary on your mortgage repayments? Is that financially advisable for yourself? That's what the bank won't tell you. You'll have to figure it out for yourself.

What? Expecting Singaporean to think for themselves?

Wow that's new!

Anonymous said...

Haha Mr Wang, wait till you want to sell your house and it is worth pittance than you know. Or if you need a home to set up family and the prices are ridiculous, then go shake hands with flippers.

But I really do not wish that for you :D

kayangmo said...

60% of your salary to finance your home? Over in Europe it is more like 30%.

I am astounded that detailed credit checks are not yet performed in Singapore, sure or not?

darth said...

based on my experience working as temp staff in mortgage loan dept, DSR around 50% were scrutinized very closely. Mostly declined. And this was at the height of the property boom last yr.

Mr Wang Says So said...

Hmmm. 60% could be for the customers regarded as very high earners.

The other possibility is that the bank is more lax with its ratio when it is also financing the developer for the construction and is the bank which the developer is recommending to its customers. Something's a little dubious about that.

Mr Wang Says So said...

Another reason may be that the bank is looking at the value of the collateral (the property). The developer may be selling significantly below the valuation price, but the bank is still extending loans on the basis of the valuation.

Ghost said...

You are right in that flippers are like speculators in the stock market, Mr.Wang. There's nothing wrong in that. I too contra on the stock market at times, but the difference is that I (and most contra players) don't go round looking for the government to help us when our bets turn bad. And that is why I don't understand why anyone expect the government to help the flippers. You make a bad bet, you take the loss.

Chew Ern said...

I don't quite agree that Sg banks will thoroughly vet through a property loan application. If I am not mistaken, sg banks can still pursue the mortgagee for further losses AFTER forced selling a property.

I think only in no-recourse mortgage loans will we see the gold standard in banks's assessment of affordability.

Mr Wang Says So said...

I think you're quite mistaken, Chew Ern. It's precisely in the situation of "no-recourse" mortgages that the bank doesn't bother to check affordability. We saw that in the US, didn't we? It was one of the causes of the subprime crisis.

If I were a bank, why would I bother to check your credit worthiness, if I were giving you a non-recourse mortgage? Whether you earn $4,000 a month, or $4,000,000 a month, it still doesn't help me in any way. All I would look at is the value of the property you plan to buy.

Mr Wang Says So said...

Ghost:

I don't think that the flippers are asking the government for help. I haven't heard anything to that effect, anyway.

In fact, the main concern now seems to be the unknown number of flippers who are currently stuck ... and what will happen to the general market when the flippers' properties collectively starting TOP'ing in mid-2009.

Chew Ern said...

Mr Wang, my mistake, non-recourse will only ensure that banks will be more dilligent in making sure that the collateral is more than sufficient to cover the loan.

I am thinking if we combine non-recourse feature with credit-worthiness checks, would the system be better?

Non-recourse feature by itself did not cause the sub-prime problems. Sub-prime problem is because of banks' ability to sell 100% of risk.

Anonymous said...

Singapore says 10,000 homes bought via deferred payment
Reuters - Friday, December 19 SINGAPORE, Dec 19 -


Singapore said on Friday there were 10,450 uncompleted private homes
purchased under the country's deferred payment scheme, revealing for the
first time the potential number of homes that may be returned to developers.


About 4,560 of these homes are scheduled for completion next year while
another 2,540 will be ready in 2010, the Urban Redevelopment Authority said
in a statement.


Singapore introduced the deferred payment scheme in 1997 in a bid to boost
the then-moribond property market. The scheme, which was withdrawn in 2007,
allowed buyers to buy property under construction without lining up bank
financing in advance so long as they made a downpayment of 10-20 percent.


The recent fall in Singapore home prices, coupled with the financial crisis
that has made banks reluctant to lend, has led to concerns about a jump in
the supply of unsold homes due to the failure of buyers to get loans.


"The data is provided to enable the public to make a better informed
assessment of the private housing market," URA said.

lelongagent said...

Property lelong coming soon. Lai ah, don't miss out!

ArtBoon said...

My analysis here

Mr Wang Says So said...

More data:

Size of the DPS Behemoth - from Business Times 20 Dec 2008

10,450 deferred payment homes weighon prices - ST 20 Dec 2008.

Anonymous said...

Dear Mr Wang:

I am presently working in a bank and with the recent credit crunch, it is really VERY HARD to get a loan if one's DSR (Debt Servicing Ratio) is close to 60%.

In fact, the credit officers' eyebrows start to twitch a little when the DSR reaches 40%. (But there are instances where customers get amazingle high DSR. Not just because they earn a lot but also because they have been my bank's long "serving" customer)

Mr Wang Says So said...

Dunno. I was told about the maximum loan that I could get, based on my current monthly salary. It works outs to a DSR of about 60%.

I think that the banks are more generous with their ratios, when it's a new property launch, and the bank has tied up with the property developer for that new launch.

Makes sense to me that the bank would be even more generous with its ratios, if it is financing the developer for the purchase of the land, and the construction firm for the construction of the property (This was the case for the property I'm looking at). Reason is that the bank has a vested interest in making the whole thing work.

Mr Wang Says So said...

Dunno. I was told about the maximum loan that I could get, based on my current monthly salary. It works outs to a DSR of about 60%.

I think that the banks are more generous with their ratios, when it's a new property launch, and the bank has tied up with the property developer for that new launch.

Makes sense to me that the bank would be even more generous with its ratios, if it is financing the developer for the purchase of the land, and the construction firm for the construction of the property (This was the case for the property I'm looking at). Reason is that the bank has a vested interest in making the whole thing work.

Mr Wang Says So said...

Dunno. I was told about the maximum loan that I could get, based on my current monthly salary. It works outs to a DSR of about 60%.

I think that the banks are more generous with their ratios, when it's a new property launch, and the bank has tied up with the property developer for that new launch.

Makes sense to me that the bank would be even more generous with its ratios, if it is financing the developer for the purchase of the land, and the construction firm for the construction of the property (This was the case for the property I'm looking at). Reason is that the bank has a vested interest in making the whole thing work.